June 13, 2019
Count unintended consequences and shifting business decisions as casualties in the U.S. trade war with China. An article in the Los Angeles Times published this past Sunday zeroed in on the Los Angeles area ports. We have written before about how many importers tried to rush their goods to U.S. shores before each tranche of tariffs went into force. The Times' article points out that this has caused import traffic jams at the ports and unexpected costs related to delays.
Then we got word about “Made in Vietnam” labels being substituted on goods made in China. This is clearly to avoid current and future tariffs. From a broader perspective, Vietnam has benefited greatly from the trade tensions with China.
Even prior to these tensions, in the last few years, large companies such as Ikea and Nike started to redirect parts of their supply chain to Vietnam, lured by the low labor costs and strong government support for industry. The current industrial environment in Vietnam mirrors that of China over 20 years ago. Now as China takes a big loss as a result of the trade war, Vietnam emerges as one of the leading beneficiaries of this “trade diversion,” jumping from 12th in U.S. imports in 2018 to seventh in the first quarter of this year.
To be sure, it's a bizarre realignment of alliances. Vietnam does not connote pleasant memories with those of my generation, but the geopolitics of Vietnam's history includes bad experiences with China as well. An emerging new global trade order may well take a series of strange twists. Such an environment makes forecasting by business owners all the harder as the state of trade is itself constantly evolving. Little wonder companies have a tough time deciding on future plans and supply chains.
Our View: Previous global world orders were fairly easy to define – the British empire, the Iron Curtain and the Soviet block. With the global supply chains increasingly getting spread out, the development of new alliances is no doubt in the cards. We are in for a lot more disruption in our understanding of the global business environment than previously anticipated by markets.
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