U.S. Leadership and Vietnamese Resilience Both Require the CPTPP

Vietnam has had a continual trade deficit with China since 2001. It heavily depends on the latter for capital and intermediate goods, which creates vulnerabilities in Vietnam’s entire production chain. At the same time, the United States has had a prolonged trade deficit with Vietnam since 2000, which became a point of friction during the Trump administration and could reemerge as such again. Vietnam can solve the first problem and potentially mitigate the second by purchasing substantially more U.S. goods. But facilitating that, and exercising strategic leadership in the region, will require the United States to reengage with free trade in the Indo-Pacific.

Vietnam’s trade deficit with China increased more than 150-fold between 2001 and 2019—from $211 million to $32 billion. The 12th annual meeting of the Steering Committee for Vietnam-China Bilateral Cooperation in July 2020 pointed to Vietnam’s deficit with China as one of the outstanding issues in bilateral relations.

More important, Vietnam has relied heavily on China for capital goods (machinery, equipment, vehicles, and tools used to make finished products) and intermediate goods (inputs used to produce final products), which is problematic for two reasons. First, it constrains Vietnam's economic potential because it disincentivizes Vietnamese businesses from strengthening their manufacturing capabilities. Second, if supplies from China were disrupted, Vietnam would face serious economic consequences.

In contrast, Vietnam has enjoyed a substantial trade surplus with the United States, which has surpassed $20 billion since 2014. From $369 million in 2000, the U.S. trade deficit with Vietnam grew 127-fold to $47 billion in 2019. It increased by 41 percent between 2018 and 2019 alone, as the U.S.-China trade war escalated. To avoid tariffs, many Chinese exporters have rerouted their products to Vietnam, where they are repacked and relabeled, before shipping them to the United States. In addition, some companies are moving their production from China to Vietnam, which will further widen the U.S. trade deficit with Vietnam.

During his presidency, Donald Trump repeatedly complained about Vietnam’s large trade surplus with the United States and once described Vietnam as "the single worst abuser of everybody." In February 2020, his administration removed Vietnam from the list of self-declared developing countries that receive preferential trade benefits under the World Trade Organization. The decision appeared to be motivated by the trade deficit.

As tensions in the South China Sea escalate, Vietnam sees its trade dependence on China as a security vulnerability. Hanoi has made deliberate efforts to diversify its markets by signing a series of free trade agreements (FTAs). Under the Obama administration, the United States had participated in the negotiation of the Trans-Pacific Partnership (TPP), a high-standard FTA between 12 countries in the Asia-Pacific region. By joining the TPP, Vietnam hoped to lessen its trade dependence on China. However, the Trump administration withdrew from the TPP in January 2017, leaving Vietnam disappointed and squandering an opportunity for the United States to counter China’s influence in the region.

In response to U.S. complaints about the trade imbalance, Hanoi pledged to import more U.S. goods, including coal, natural gas, meat, fruits, and other agricultural products. In March 2020, Vietnamese companies also agreed to buy about $3 billion of farm products from the United States over the next two to three years. Nevertheless, the U.S. trade deficit with Vietnam grew to $47 billion in 2019. A $1 billion increase in imported farm products each year would not reduce that deficit in a meaningful way. In addition, buying more U.S. farm produce will not mitigate Vietnam’s dependence on Chinese capital and intermediate goods, which is the source of the vulnerabilities in its production chain.  

The best scenario would be for Vietnam to substitute some of the products it imports from China with U.S. counterparts. In 2019, the top five categories of Vietnam’s imports from China included machines and electronics ($36.05 billion), capital goods ($35.73 billion), intermediate goods ($26.60 billion), consumer goods ($12.19 billion), and textiles and clothing ($10.36 billion). Vietnam should focus on increasing imports of some of these products from the United States. 

However, replacing Chinese products with U.S. products is not simple for several reasons. First, Vietnam shares a long 812-mile border with China, which makes importing from China comparatively easy. On the other hand, the United States and Vietnam are over 8,000 miles apart, making shipping much more difficult and costly. Geographic proximity together with the relatively low price of Chinese products, gained from economies of scale and well-developed supply chains, captures the interest of Vietnamese importers.

Furthermore, Vietnam, as a member of the Association of Southeast Asian Nations (ASEAN), has signed two FTAs with China. The first one is the ASEAN-China Free Trade Area, established in 2010. The second is the Regional Comprehensive Economic Partnership (RCEP), signed in November 2020 between the 10 ASEAN members plus China, Australia, New Zealand, Japan, and South Korea. That agreement will further facilitate trade between China and Vietnam. The United States and Vietnam, by contrast, do not have any FTAs since the former withdrew from the TPP.

To help Vietnam reduce its supply chain vulnerabilities and advance U.S. strategic interests in helping set twenty-first-century trade rules along the lines preferred by the United States, the Biden administration should pursue entry to the TPP’s successor, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The CPTPP would face opposition from certain elements in both Democratic and Republican parties and would be difficult to get ratified by the U.S. Congress, especially after Trade Promotion Authority (which allows a simple majority to approve trade agreements) expired on July 1, 2021. But the U.S. government needs to convince domestic constituents of the far more serious challenge posed by uncontested Chinese economic leadership in the Indo-Pacific.

It is unclear if the CPTPP would reduce or widen the U.S. trade deficit with Vietnam. But even the latter would not necessarily be a bad thing. Despite the politicization of trade deficits by the Trump administration, they are only problematic if they introduce supply chain vulnerabilities or result from unfair trade practices. Neither seems true of the United States’ trade deficit with Vietnam. While the Office of the United States Trade Representative launched a Section 301 investigation into alleged Vietnamese currency manipulation near the end of the Trump administration, the agency determined in January that “no action . . . is warranted at this time” because the State Bank of Vietnam “[provided] a satisfactory resolution of the matter subject to this investigation.”

If the United States joined the CPTPP, Hanoi would have to promote the trade agreement with Vietnamese businesses while reminding them of the risks of overdependence on trade with China. If Vietnam could substantially substitute imports from China with those from the United States, it would reduce its supply chain vulnerabilities and possibly its surplus with the United States, insulating U.S.-Vietnam relations from the potential re-politicization of trade deficits by future administrations.

Bich T. Tran is an adjunct fellow (non-resident) with the Southeast Asia Program at the Center for Strategic and International Studies in Washington, D.C.

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Bich Tran
Adjunct Fellow (Non-resident), Southeast Asia Program