Trade concessions
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Source: IMF, Vietecon.com calculations
As we have talked about many times, the US and China are in a trade war. Now, we hear rumors all the time that a deal is close (I want to see it first, though). And one of the key items is that China will buy lots of US agriculture exports.
Why agriculture? Well, really, it’s because it is super easy to track and to monitor. While the other changes the US wants are much harder to monitor. Those include removing non-tariff barriers, which are generally amorphous.
Well it turns out that US wants a similar thing from Vietnam. They are going to start lowering tariffs on US agricultural goods, hopefully boosting exports.
This is in line with my long time view (see this post from June) that the Vietnamese authorities will try to placate the US on trade. For two main reasons. First, Vietnam and the US are now allies in confronting Chinese expansion, especially in the South China sea. Second, the ability of Vietnam to export manufactured goods that employ lots of people in the country. There are probably other reasons, but these are the first two to come to mind.
As you can see in the chart up to the right, Vietnam’s agriculture exports are still very positive, but they haven’t been growing like clothing and telecom.
Now, the US is actually asking for bigger reductions in tariffs (18.9% tariff on pork in 2020 and 0% by 2027). Plus, no tariffs on apples, grapes and wheat next year.
I wonder if Vietnam will hold the line. It’s not like, at least for apples, grapes and wheat, that Vietnam really competes there. And right this moment, it could probably use some cheaper pork imports, given problems around swine flu.
Where tariffs are now
Source: Vietnamese customs
I looked up a few of the Vietnamese tariffs (here, which is surprisingly easy to use) to get a sense of current levels. Tariffs on pork products can be as high as 30%, although if you are in certain ASEAN trade agreements, it could be much less.
In general, tariffs are very weird. In every country, not just Vietnam. As you look at the poultry tariffs there are some perverse incentives. Tariffs on live chickens could be as high as 10% (depending on the type of chicken and the trading partner). But tariffs on whole bird carcasses (fresh or frozen) are as high as 40%. But then again if you cut up that chicken and sell the parts, the tariff on fresh cuts are still 40% but frozen goes down to 20% for thighs, wings, livers, among other cuts. Same for turkey meat and other poultry.
So it is weird to look at these tables of tariffs and try to figure out what you should import. Like if you are going to bring in frozen chickens, probably best to cut them up, because the tariff would drop by half!
There might be very good reasons for the tariffs to be this way, but there is also a good chance that the frozen poultry lobby is less effective than the fresh chicken lobby. Et cetera. Et cetera.
Bonus tip: Duck tariffs are as high as 40%, but fatty duck livers (foie gras, in other words) is only 15%. So don’t tell me there’s not still a French influence in Vietnam!
Why Vietnam is resisting tariff changes
There are two main reasons why countries don’t want to lower tariffs:
Source: World bank data, chart by vietecon.com
First, they want to protect their own producers/farmers’ jobs and profits. Right now, the vast majority of people, even farmers, would likely benefit from a flood of pork imports, given the impact of swine flu. But a year or two from now, the farmers might be less happy about having to compete with these imports. And if they can’t compete, they lose their jobs.
This is a big demographic - according to the World Bank (see chart to the right), employment in agriculture is still around 40% of all employment. That’s down from 60% in 1991, but still a lot of people. (We talked about this in late July and early September when we looked at a recent ILO report - see this post and this post)
Second, the government may want to lower its import bill. If imports ratchet up, that will put pressure on the exchange rate, especially if these products are wildly desired. All fixed/managed exchange rates suffer from this problem. This is similar to China’s focus on savings. If they have tariffs and keep the exchange rate tilted towards exports, then consumption is curtailed and savings increase. Basically, Vietnamese consumers are funding exports. That’s good for the world, but not always great for the Vietnamese.
These are important issues, not something that can just be waived away. I think the West, and the US in particular, is realizing that it benefited greatly on the consumer side (significantly lower inflation, more investment) because of globalization and the lack of tariffs. But large numbers of people lost their jobs and were not compensated in any real way. It’s nice to have a 20% discount on a new shirt from Wal-Mart, but if you don’t have a job, then you can’t buy the shirt, no matter the cost.
The benefits of trade are diffuse, but the costs are highly concentrated. The solution is to distribute some of the gains through government spending on programs that address the people hurt. The US has been very bad at that, as has much of the Western world. And we are seeing a political response to that now with the election of Trump and Brexit.
The Vietnamese government is keenly attuned to political protests and undoubtedly doesn’t want to go down that road. That’s why I think there will be some concessions to the US, but there will still be a fair amount of tariffs left in place, in order to protect Vietnamese farmers.