US-China Trade War Leads to Rise in Illegal Trade

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The surge in Vietnamese exports to the United States as shippers seek to escape the effects of the US-China trade war appears to include illegal rerouting of goods by some Chinese exporters.

This cottage industry came to light in June when Vietnam accused Chinese firms of deploying illegal ‘Made in Vietnam’ labels to sidestep US tariffs. Vietnam officials stated that Chinese shippers had imported “dozens” of goods – ranging from agriculture to textiles and steel – through Vietnam, where they were relabeled and re-exported.

Vietnam trade with the United States has certainly benefited from the US-China trade war, which has seen US tariffs imposed on $250 billion of Chinese goods, while Chinese tariffs have been levied on $110 billion of US goods.

Vietnam’s exports to the United States have surged since the launch of the tariffs: in May 2019 Vietnam exports to the US East Coast jumped 34 percent compared to May 2018, according to ClipperData container analysis.

Indeed, while exports to the US East Coast from other Asian countries have increased since the start of the trade dispute, Vietnam took the No. 2 spot, after Malaysia with its increase of 36.7 percent, but ahead of:

  • Thailand to USA: up 20.9 percent
  • Taiwan to USA: up 5.7 percent
  • Indonesia to USA: up 23.9 percent

This growing trade is in contrast to China’s trade flow to the US East Coast, where trade losses year-on-year in May were around 337,000 twenty-foot equivalent unit, or about 6.4 percent lower.

The same pattern emerged on the US West Coast. Vietnam’s exports to the West Coast shot up by 15.2 percent y-o-y in May, leading the surge of exports to the US from other Asian countries, including:

  • Taiwan: up 11.2 percent
  • Thailand: up 11.1 percent
  • Japan: up 9.1 percent

In contrast, China has exported approximately 570,000 TEU less to the United States, representing a month-on-month drop of 12.3 percent in May.

While there is no doubt that Vietnam’s surge in exports is due to legitimate changes in supply chains to avoid tariffs, Vietnam’s statement that officials found fake product-origin certificates and illegal transfers suggests that illegal transfers by Chinese exporters looking themselves to avoid tariffs is behind some of this growth.

Trade flows from China to Vietnam suggest that diversifying trade to avoid US tariffs is growing. Chinese exports to Vietnam jumped by 34.3 percent y-o-y in May, a huge step ahead of the growth of Chinese exports to other Asian countries, which includes:

China to Malaysia: up by 27.8 percent

China to Philippines: up by 16.8 percent

China to Indonesia: up by 7.3 percent

China to Thailand: up by 3.7 percent

Vietnam has also benefited from trade the other way, with US East Coast trade to Vietnam jumping 32.5 percent y-o-y in May. In contrast, US East Coast exports to China only inched up by a tiny 0.3 percent. US West Coast exports to Vietnam, meanwhile, soared by 24.2 percent versus a slump of 5.7 percent in exports to China.

While there are fears that illegal trade diversification from China to Vietnam could grow, the lengths that some Chinese exporters have gone to in an effort to avoid tariffs could be curtailed as Vietnam will be desperate to avoid any tariffs itself. This was especially the case in June, when US President Donald Trump hinted that penalties could be imposed on Vietnam if the country does not clamp down on this illegal trade re-exporting.

Indeed, Vietnam has pledged to increase penalties on trade-related fraud. Vietnam’s foreign minister, Pham Binh Minh, said in a report on the government’s website that “We will increase the punishment to deter cases of goods claiming to be Vietnamese goods entering other markets.”

Whether China’s illegal trade will be stymied or not, there is no doubt that Vietnam’s legitimate export trade with the United States will continue to flourish as the trade war rages on. Indeed, several announcements show that major exporters are shifting production to countries outside of China.

For example, according to media reports, Apple is planning to launch a trial production of its AirPods wireless earphones in Vietnam. China-based Apple contract manufacturer Goertek is reported to begin the trial at the company’s audio factory in northern Vietnam this summer, marking the first production of this product outside of China.

This comes on the back of reports that companies that make Yeti beer coolers, Crocs shoes, Roomba vacuums and GoPro cameras are all producing products in other countries to avoid US tariffs.

Vietnam is a strong alternative to China, due to its geographical proximity to the country, as well as offering a low-cost but skilled workforce. But both illegal and legal trade to the United States could face challenges if fears that an increased shift in production to Vietnam could lead to labor shortages and a hike in production costs are realized.