Transshipment risks for steel makers

As transshipment has reared its head as a major cause of the US-China tensions, Vietnamese steel makers are advised to pay close attention to product origin requirements. Photo: Le Toan

Businesses around the world are doing whatever they can to avoid tariffs from the US-China trade war. As moving entire production lines can be time-consuming and costly, some firms choose to shift their goods to countries such as Vietnam to disguise the true origin of their products. These businesses hope that with a “Made in Vietnam” label, their products will be free from tariffs.

The process, known as transshipment, requires manufacturers to set up a plant in Vietnam or collaborate with Vietnamese factories. This year, transshipment has reared its head as a major cause of the US-China tensions, and Vietnam is now caught in the middle. The Americans have publicly accused Chinese steelmakers of evading US tariffs by sending their half-finished goods to a third country, particularly Vietnam, for completion.

US steel manufacturers said that after the US carried out anti-dumping and anti-subsidy investigations in 2015, steel imports from South Korea and Taiwan decreased, while imports from Vietnam increased rapidly, prompting the US Department of Commerce (DOC) to investigate unsubsidised steel products imported from Vietnam. In May, the DOC slapped 256 per cent tariffs on Vietnamese steel products that supposedly include Chinese materials. This is on top of the new 25 per cent levies on Chinese products, thus significantly reducing the competitiveness of Vietnam’s products in the US.

Moreover, the world’s largest steel producer China experienced years of plunging prices and factory shutdowns due to oversupply. Chinese steel firms are moving to set up operations abroad, including in Vietnam, and have even agreed to sell their output at a loss in order to win orders and cover their fixed operating costs. China’s steel surplus poses a threat to the global steel industry, thus many countries have introduced anti-dumping measures against Chinese steel products and products using substrate originating from China.

At last week’s seminar discussing the US-China trade dispute held by the Vietnam International Arbitration Centre, experts noted that transshipment issues are not unique to the steel industry or Chinese manufacturers. For example, Chinese mangoes can be re-branded as products from Dalat in Vietnam, and US lobsters are now labelled as Canadian produce to avert import tariffs in China. Analysts believed that transshipment is indeed a significant issue for Vietnam in the trade war era. In the short term, Vietnam’s export volume and inbound investments may increase thanks to transshipment attempts, but the country benefits little in terms of technology transfers. As a result, Vietnam’s production capabilities will not be improved, which is a huge disadvantage for the country in trying to move up the global supply chain.

How to avoid the blame

Nguyen Van Sua, deputy head of the Vietnam Steel Association, acknowledged that Vietnam runs a risk of becoming a “transshipment hub” for products from other countries. According to him, Vietnamese producers should prove that their products are genuinely made in Vietnam, without using materials from China or other countries that are subject to tariffs.

“We recently petitioned to stop a Chinese steelmaker named Yongji Metal from setting up a factory in Vietnam. We believe that this investment, or rather transshipment activity, poses a risk for both Vietnamese steel products in the domestic market, as well as the reputation of Vietnam’s steel industry overseas,” said Sua, noting that the petition has been approved by the government.

In addition, foreign investors that hope to move their production from China to Vietnam may also need to be mindful of transshipment issues. Experts advised domestic steel makers to pay close attention to product origin requirements, as their products may be subject to tariffs if customs officers detect the use of Chinese materials.

As one of the larger exporters of steel products to the US, Nam Kim Steel JSC, said to avoid the effect of the anti-dumping investigation and tariffs levied by the US due to concerns that steel products are originated from China, Nam Kim has diversified its raw material import markets. Similarly, Hoa Phat Group said it will not have to import hot-rolled steel for its products thanks to the upcoming Dung Quat steel complex. Besides, it will become the first steel maker to achieve a closed production chain that will help them improve their competitiveness and minimise the backlash of these policies.

Nguyen Xuan Thanh, Economist and lecturer at Fulbright University Vietnam

The biggest risk for Vietnam from the US – China trade war is attempts at transshipment from the Chinese side. Some Chinese manufacturers can move their almost-finished products to Vietnam for some minor retouching, then shipping them to the US with the “Made in Vietnam” label to avert the tariffs. If Vietnam does not take care of this problem immediately, our products may become the next target for US tariffs, as is the case of steel products in May.

It’s important to note that once US customs officers suspect a few Vietnamese firms of using materials from China, the entire industry in Vietnam will be taxed with no exceptions.

These tariffs also negatively impact the image of Vietnam’s products in international markets. Moreover, as Vietnam has a huge trade surplus with the US, transshipment conflicts may put Vietnam on the US’s list of countries for another trade war. These tariffs also negatively impact the image of Vietnam’s products in international markets.

Tran Du Lich, Vice Chairman of the Vietnam International Arbitration Centre

Vietnam should not let transshipment activities undermine the reputation of our products on global markets.

First, Vietnamese businesses should not agree to participate in transshipment activities, such as re-branding Chinese mangoes as Dalat fruits. Transshipment may bring in profits for the short term, but it will harm Vietnam’s reputation in the long run and reduce the competitiveness of Vietnamese products.

Second, Vietnamese authorities should have stricter rules on the origin of products. The goal is to prove that Vietnam’s products are indeed made in Vietnam, should foreign buyers inquire about the origin.

Third, Vietnam should build up a strong supply chain to boost domestic products and increase the localisation rates of manufacturing. This is not only to compete against Chinese products, but also other countries in the region too. In short, Vietnam should take proactive steps to avoid transshipment conflicts, which can damage our long-term trade prospects on international markets.

Pham Sy Thanh, Researcher at the Vietnam Economic and Policy Research

The US set up this trade war not to collect taxes from other countries, but mostly to reiterate its position on global markets and protect US’s interests. The US may extend tariffs to third countries besides China, if it suspects that these countries are involved in transshipping activities with China.

For example, any products that use Chinese materials, or have been re-routed from China to the US, will be subject to taxes. Vietnam’s steel products are one prominent example.

If tariffs like these are slapped on other product categories, Vietnam may be grouped into the same “offender list” as China. This is very bad news for Vietnam’s exports and Vietnam’s manufacturing sector.

In general, I believe that transshipment risks are one critical aspect that Vietnam should keep in mind when negotiating trade deals, to make sure that the country can actually move up the global supply chain following these agreements.

By Phuong Thu Van