There’s a common saying within the C-suite that a trade war has no winners. But recent reports suggest maybe one victor is emerging from the U.S.-China trade spat: Vietnam.
According to data from Japanese investment bank Nomura, Vietnam is the largest recipient of product orders diverted from the feuding nations, as importers attempt to avoid trade war tariffs. The value of orders diverted to Vietnam in the first quarter of the year was equivalent to 7.9% of the Southeast Asian nation’s GDP. Meanwhile the second largest recipient, Taiwan, only took on additional orders equal to 2.1% of GDP.
President Donald Trump sees that shift as evidence the trade war is working. On Monday morning after Beijing revealed China’s slowest quarterly economic growth in 27 years—rising just 6.2% over the second quarter last year, when the trade war began—Trump tweeted out, “The United States tariffs are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving.”
In fact, manufacturers have been emigrating from—or, more often, expanding beyond—China for years. The trade war has added some impetus to that movement, but not every industry can afford to be so flexible.
Stanley Chao, managing partner of All In Consulting, which advises small- and medium-sized enterprises on how to do business with China, says there are a lot of smaller, specialized manufacturers that are stuck in China because nowhere else has an adequate supplier ecosystem.
“They’re waiting for bigger players to make a move so that they can piggyback off of the larger companies into new markets,” Chao says. “That’s exactly what they did in the past. They piggybacked into China.” Despite media reports, Chao adds, bigger companies aren’t rushing to leave China. It can take years to develop new supply chains and, ultimately, China will continue to be a valuable market.
For those that can expand, however, Vietnam is an attractive destination. Wages are low, education is relatively high, and Hanoi has struck Free Trade Agreements with most major economies, as both a sovereign state and as a member of ASEAN. The EU ratified a free trade agreement with the Southeast Asian nation just last month, which will see duties removed on 99% of Vietnamese imports over the next seven years.
At home, the government has invested heavily in promoting high tech manufacturing, opening three multi-billion-dollar science parks across Vietnam’s major cities—Danang, Hanoi and Ho Chi Minh—and is opening three new Special Economic Zones at port towns, to add to the 18 SEZs it already has. It should be noted, however, that the new trio of SEZs have seen stiff opposition from protestors who worry about Chinese industries snapping up land on Vietnamese soil.
“The pace of Chinese investment has definitely accelerated in recent months, to the point where there are buses of Chinese investors literally running around industrial parks and pointing at plots of land saying, ‘I want this, I want that,’” says Alberto Vettoretti, managing partner of Asia-focused consultancy Dezan Shire & Associates.
According to the consultancy, China rose from seventh to fifth place among Vietnam’s leading foreign direct investment contributors in 2018, pumping $2.4 billion into the economy. In the five months through May, China’s rank increased to fourth place; it would be a clear winner if its ranking incorporated investment from Hong Kong, which has injected over $5 billion of capital into Vietnam so far this year.
Entering the Sinosphere
The surge in Chinese investment has pros and cons for Hanoi. Some investors are bringing legitimate business, hiring opportunities and advanced tech. Others, however, are simply speculating on the real estate market as Vietnamese factory space reaches a premium. Worse yet, a number of buyers are opening tariff-dodging assembly plants where Chinese components are repackaged and exported to the U.S. in an illegal practice known as ‘transhipping.’
Vietnam’s customs agency vowed to crackdown on transhipment after finding “scores” of such cases in June, but the violation had already caught the attention of the “Tariff Man” himself.
“A lot of companies are moving to Vietnam, but Vietnam takes advantage of us even worse than China. So there’s a very interesting situation going on there,” Trump said in an interview with Fox Business on June 26. Trump went on to declare that Vietnam was the “single worst abuser of everybody.”
The U.S. commerce department slapped a 400% levy on Vietnamese steel imports at the beginning off this month, since it suspects the material has origins in other countries. Whether the U.S. will ratchet up more pressure on Vietnam is unclear. “No one has a crystal ball,” Vettoretti says. For now, the best thing or Vietnam to do is take advantage of its moment in the spotlight and put some of that increased investment to good use.
More must-read stories from Fortune:
—A Brexit architect sees opportunities in resignation of U.K.’s Trump-bashing ambassador
—Fashion retailers sidestepping Trump’s trade war with China
—Ford’s new plan for Europe: Fewer jobs, more SUVs
—The U.S. threatened France with China-style tariffs. The French didn’t blink
—Listen to our new audio briefing, Fortune 500 Daily
Catch up with Data Sheet, Fortune‘s daily digest on the business of tech.