Most people seem to think of trade as happening between only two countries. If tariffs reduce U.S. imports from China, many -- including President Donald Trump -- seem to assume that the affected industries will move production to the U.S. But that’s not how things work, which is why other countries might actually benefit from the U.S.-China trade war.
Trade happens among a large network of countries, and this is even more true in the modern economy of fragmented global supply chains. Economists have long understood that in such a network, some countries could actually benefit from a reduction in trade between others -- a phenomenon known as trade diversion. Thus, U.S. tariffs on China are probably helping some third countries, as industries that used to export from China to the U.S. shift their production facilities elsewhere.
One candidate is Vietnam. With a relatively well-educated population, low wages, and government support for industry, Vietnam has many of the advantages that China enjoyed 20 years ago. Foreign direct investment in Vietnam has been increasing steadily for years, as multinational companies shift some of their production out of China to avoid rapidly increasing costs and to diversify their production bases.
Economist Brad Setser at the Council on Foreign Relations believes that the U.S.-China trade war is already accelerating Vietnam’s growth. Although the overall U.S.-China trade deficit hasn’t budged much since the conflict began -- imports from China and exports to China have both fallen -- the deficit in manufactured goods has shrunk a bit in recent months. And as U.S. imports from China fall, those from Vietnam are skyrocketing.
This trend is bound to annoy some Americans who had hoped that the trade war would result in more production being moved to the U.S. Already, U.S. authorities are considering whether to brand Vietnam a currency manipulator.
The increasing U.S. trade deficit with Vietnam will doubtless exacerbate the issue.
Attacking Vietnam over trade would be misguided. First of all, launching trade wars against country after country, in the hopes of eventually driving production to U.S. shores, is like playing a game of whack-a-mole. Instead, the government should accept that labor-intensive manufacturing is never coming back to the U.S., and that manufacturing supremacy can be achieved only through extensive automation -- a field in which the U.S. lags other advanced nations.
Another reason not to crack down on Vietnam, or on other low-wage production bases, is that they really need the business. Countries that are focused on boosting labor-intensive manufacturing, like Vietnam, Bangladesh, and Ethiopia, tend to be much poorer than China.
In these countries, much of the populace struggles to merely put food on the table and maintainadequate shelter and sanitation. Manufacturing is their best hope for escaping this penury. It provides mass employment, and even more importantly it initiates a process of industrial learning and economic diversification.
By allowing Vietnam and other low-wage manufacturing countries to run trade surpluses, the U.S. reduces risk for those countries’ entrepreneurs, assuring them that there will essentially always be a market for their goods. That boosts investment, which is far more powerful of a poverty-reducing force than any foreign aid, development assistance or governmental loans. The U.S. owes the developing world the favor of overlooking their trade surpluses and currency manipulation until their citizens have escaped absolute poverty.
Humanitarian concerns aside, the U.S. also has geopolitical reasons to help build up the economies of Vietnam and other poor Asian countries. Its chief rival in the region, China, has become increasingly assertive in claiming the South China Sea as its own. These claims put China in direct conflict with Vietnam, the Philippines and Indonesia. Right now, those countries are too economically and technologically weak to resist Chinese encroachment. But if their economies are allowed and encouraged to grow, that may change. By shifting manufacturing activity from China to its Southeast Asian allies and potential allies, the U.S. can blunt Chinese dominance in the region.
So U.S. authorities shouldn’t worry about manufacturing activity moving from China to Vietnam and other low-wage countries. Punishing one country after another in the hope that some low-wage manufacturing jobs will eventually make their way to Ohio or Michigan is a losing game. Instead, the U.S. should focus on high-productivity automated manufacturing, and let Vietnam and the others take the labor-intensive stuff.
Source: Bloomberg
Key words: look, winning, U.S, China, trade war
