Has China found a trade war loophole?

Bonded areas could provide shelter for manufacturers hit by US tariffs – if China can convince its southern neighbour to get the plan moving.

A spiralling trade conflict between Beijing and Washington is an unwelcome development for China, but officials in Guangxi – where seven “cross-border trade zones” with Vietnam are planned – see an opportunity.

The border has sheltered Vietnamese nationalists trying to overthrow the French in the 1930s, and Ho Chi Minh’s guerilla soldiers fighting the US army in the ’60s. Parts of the 1,300km frontier became battlefields in a brief yet bloody war between China and Vietnam in 1979. Four decades on, it could be about to play a role in a very different kind of war.
Washington and Beijing on Friday fired the opening shots in a trade row that looks set to escalate, slapping 25 per cent tariffs on US$34 billion of each other’s goods.
In the Guangxi region, home to museums dedicated to late Vietnamese communist leader Ho, officials are now touting with renewed vigour the idea of the cross-border zones, where exporters from China could assemble products and label them as “made in Vietnam”. The bonded zones are part of a wider cooperation plan signed by Beijing and Hanoi last year, under China’s belt and road trade and infrastructure strategy. If they go ahead, they could provide shelter for manufacturers hit by US President Donald Trump’s tariffs.

One of the zones is in the border town of Pingxiang, administered by the city of Chongzuo. The city’s deputy mayor, Lu Hui, said they wanted to create a cooperation zone with Vietnam that had “a free flow of workers, capital and materials”. Lu, promoting the plan to media on a government-organised tour, said products made in the zone could be labelled either as “originating in Vietnam” or “originating in China”. Wang Fanghong, the Communist Party boss of Pingxiang, also said the dispute with Washington could give the trade zones plan a boost. It “could be a chance” for his small town to speed up development, Wang said.
Exporters trying to ship products made in China “will find it difficult to send them to the US directly, and some will be transported via Asean members”, he said. Wang suggested places on the border with Vietnam like Pingxiang could go the extra mile and turn this “transfer trade” into “local processing and manufacturing”.

Officials trying to sell the plan to export-oriented businesses in the country’s manufacturing heartland, Guangdong province, and the Yangtze River Delta say it will give them access to cheap labour from Vietnam and a wide range of preferential policies offered by both sides of the border. Those policies, according to the promotional materials for the zones plan, would reduce logistics, staffing and tax costs. 
Significant savings could be made on wages, according to the Chinese officials, who said local manufacturing workers were paid about a third of the salary of those in the Pearl River Delta. Factory workers in Shenzhen and Guangdong are paid an average wage of 5,000 yuan a month (US$750), compared to a daily average of 80 to 100 yuan (US$12 to US$15) earned by those in northern Vietnam. Factories in the cross-border zones would also be shielded from the regular threat of protests and strikes faced by Chinese businesses operating in Vietnam, the officials said.

Last month, demonstrators set fire to police vehicles, defaced government buildings and brought Chinese-owned factories to a standstill across Vietnam. It was the worst flare-up of anti-Chinese sentiment since 2014, as workers protested over the government’s plan to set up three new special economic zones where investors will be able to lease land for up to 99 years. Demonstrators fear they will be dominated by Chinese interests. These zones are separate to the ones planned on the border with China, but this growing unease over the country’s powerful northern neighbour is one of many hurdles the Chinese officials will have to overcome. Another is convincing Beijing to give them greater autonomy in trade zones like the one in Pingxiang, under a “two countries, one free-trade zone” special administrative set-up.

“Even in very difficult political times with China, still we export to them. This is why there is a great need for officials from the neighbouring Chinese region of Guangxi and officials from Vietnam to sit down and talk more about how to cooperate, especially about trade and how it will benefit both sides,” Nguyen said.

Roger Chau also said there was opposition to the cross-border zones on the Vietnamese side. “Many Vietnamese are concerned about the growing number of Chinese investments in the country. They see Chinese factories as bringing serious pollution, they worry about bribes and problems with the land,” Chau said.

The cross-border zones could be a good testing ground for export-oriented businesses wanting to ship through other countries, or even to relocate their operations elsewhere in the region.

​But the problem is, whether the Vietnamese government says yes.