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Daily Intelligence Briefing

Thursday, February 1, 2024

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Vietnam Exports Surge Amid ASEAN Manufacturing Rebound, Ongoing Diplomacy Drive With US

Summary: The latest GDP figures out of Southeast Asia, as well as trade and PMI datahave painted an optimistic portrait for ASEAN nations at the start of the new year. Though these countries’ manufacturing industries struggled throughout the latter part of 2023, largely due to extensive ties with the softening Chinese economy, the prospect of increasing trade and diplomatic relations with western nations could help them overcome some of the uncertainty emanating from China.


Vietnam, in particular, has been vying for new status with the US government, establishing a comprehensive strategic partnership with Washington and appealing its status as a non-market economy. Vietnam is seen as a top target for billions of Dollars of investments from a number of US firms and could soon break off a sizeable portion of funding included in the US CHIPS Act to boost semiconductor production.


Related ETFs: Global X FTSE Southeast Asia ETF (ASEA), VanEck Vietnam ETF (VNM)

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New GDP data shows the Philippines was the Association of Southeast Asian Nations’ (ASEAN) fastest growing economy in 2023, surpassing Malaysia and Vietnam, which took second and third place among the bloc’s members, respectively. All three of these economies expanded by more than 5.0% in the full year period. S&P Global’s manufacturing purchasing managers’ index (PMI), for ASEAN increased to 50.3 in January from 49.7 in December, rising above the breakeven mark of 50 for the first time in five months. Though the ASEAN union is made up of 10 member states, S&P’s gauge captures data from manufacturers in Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.


A period of collective contraction in these countries’ manufacturing activity was likely related to emergent softness in China’s economy. As MRP noted earlier in the week, World Bank data indicates China is a particularly critical economic driver of many other emerging market nations in Asia. In particular, China is the top trade partner of Vietnam, Singapore, Malaysia, and others. Though Beijing continues to face a bevy of political and economic headwinds, southeast Asia could increasingly benefit from improving trade and diplomatic ties with Western nations.


Vietnam has had its GDP expansion bolstered by particularly strong trade growth, which is expected to continue. The value of Vietnam’s exports increased by 42% YoY in January, easily surpassing the median estimate for a 31% increase in a Bloomberg survey of economists, and expanding the country’s growing trade surplus to $2.92 billion. Reuters reports that Vietnam could soon increase its ties to the US with up to $8 billion in investments from fifteen American companies. The production of semiconductors and chip components in the country is an area of particular focus and could be kick-started with the utilization of funds from the US CHIPS Act, as $500 million of funds from that legislation has been allocated for improving semiconductor training, cybersecurity and business climates globally. The Financial Times has reported that top European chipmaker Infineon, as well as American chip design software maker Synopsys, have each expanded their presence in Vietnam and will soon have hundreds of employees and engineers operating within the country.


The value of US trade with Vietnam could soon increase significantly, depending on the results of an ongoing review of the country’s economic status. The US currently categorizes Vietnam as a non-market economy, subjecting it to greater tariffs and duties than if it was considered a market economy. Only 12 countries currently carry this designation from the US government. A request to reconsider Vietnam’s status was granted on October 24, 2023, with a decision to be handed down within 270 days. That timetable puts the deadline in mid-July. President Biden upgraded bilateral ties between the countries in September, establishing a “comprehensive strategic partnership” during a visit to Hanoi. A White House press release describing the new partnership noted that the US “recognizes Vietnam’s potential to play a critical role in building resilient semiconductor supply chains.”


One eventual problem Vietnam may have to reconcile with, however, comes back to its close ties with Chinese enterprise and the country’s supply chain. Voice of America reports that Vietnam was the top exporter to the US of products covered by the Uyghur Forced Labor Prevention Act (UFLPA) in 2023, which blocks the import of products made with Uyghur forced labor. The Uyghurs are members of a group of ethnic minorities primarily residing in western China that have been subject to exploitation and abuse. Per the text of the UFLPA, “the Government of the People’s Republic of China has, since 2017, arbitrarily detained as many as 1.8 million Uyghurs, Kazakhs, Kyrgyz, and members of other Muslim minority groups in a system of extrajudicial mass internment camps” where detainees are subjected to forced labor in the agricultural and manufacturing sector. The rejection of more shipments of Vietnamese-made goods than Chinese under the UFLPA may indicate that Chinese firms are pushing more components made with Uyghur forced labor through Vietnam’s economy in an attempt to skirt sanctions. Since 2021, the US has completely barred imports from a number of Chinese companies suspected of being complicit in forced labor practices involving Uyghurs and other minorities. The portion of Vietnam’s exports to the US that have been subject to the UFLPA is relatively small, but it is growing, which could complicate trade and diplomatic relations with the US in the future if not addressed.


Investors can gain exposure to Southeast Asia and Vietnam via the Global X FTSE Southeast Asia ETF (ASEA) and VanEck Vietnam ETF (VNM), respectively.


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