U.S. President Trump’s trade war has Peter Chang scrambling. Sixty components makers that supply Foxconn Technology Group and Samsung Electronics Co. have come knocking at his industrial park northeast of Hanoi in the past three months. They’re looking to skirt U.S. tariffs on Chinese products. “They need to get into Vietnam now—immediately,” says Chang, deputy general director of Shun Far Land Development Co., which operates the Thuan Thanh II Industrial Park, about a 45-minute drive from Hanoi. “We have our building team waiting.”

Chang is hastily negotiating with neighboring landowners to convert rice fields into assembly lines to take advantage of the sudden boom in business. He realizes, though, that it may not last. Even as foreign companies are lining up at Vietnam’s industrial parks, the Trump administration is increasing pressure on the country’s communist leaders to curb its growing trade surplus with the U.S.

Vietnam is caught between contradictory forces unleashed by the U.S.-China trade war: The country of 96 million people is benefiting so much from the impasse that it, too, is at risk of being hit with punitive American duties. Its leaders are trying to convince the Trump administration that they’re fair traders as they seek to protect exports to the U.S., which equaled 20% of gross domestic product last year and almost 26% in the first half of 2019.

The country’s young and comparatively cheap labor force, stable government, and business-friendly environment have turned the Southeast Asian nation into an appealing alternative to China. Intel Corp. and Samsung were early to spot its promise for manufacturing: Today they employ more than 182,000 workers combined at factories that assemble chipsets and smartphones. Makers of sneakers and video game consoles, among others, are looking to shift production to Vietnam in order to evade American tariffs on Chinese goods. Nintendo Co. and Sharp Co. are the most recent technology multinationals to announce plans to relocate operations there. On Aug. 1, Trump unveiled a new round—10% on $300 billion worth of Chinese imports—to take effect at the start of September.

Vietnam’s government granted investment licenses to more than 1,720 projects in the first six months of the year, up 26% from the same period last year. The country expects economic growth in 2019 of as much as 6.8%, among the fastest rates in the world. Yet its dependence on exports makes it particularly vulnerable to the surge in protectionism.

Its annual trade surplus with the U.S. had already been growing at a rapid clip, reaching $40 billion in 2018. It totaled $25.3 billion in the first six months of this year, 39% higher than the same period last year, according to U.S. Census Bureau data. The Trump administration has seized on the worsening imbalance as evidence that some companies are funneling made-in-China products through Vietnam to avoid tariffs, a practice known as transshipment. In July the U.S. slapped duties of more than 400% on steel imports from Vietnam that it says originated in South Korea and Taiwan.

Washington is dialing up the pressure on Hanoi in other ways. In May, Vietnam was added to the U.S. Treasury Department’s list of possible currency manipulators, a designation that could result in punitive measures. A month later, Trump, in an interview on Fox Business Network, described Vietnam as “almost the single worst abuser of everybody” when asked if he wanted to impose tariffs on the nation. “The United States has been clear with Vietnam that it has to take action to reduce the unsustainable trade deficit,” said U.S. Trade Representative Robert Lighthizer in a written communication with the Senate Finance Committee released on July 29.

The threat of new duties against Vietnamese products is real, says Sian Fenner, a Singapore-based economist at Oxford Economics, noting that the nation’s textile, computer, and seafood exports to the U.S. are especially at risk. The Americans’ increasingly hostile rhetoric has some companies rethinking their Vietnam strategy. Eclat Textile Co., a Taiwanese company that manufactures sportswear for Nike Inc. and Lululemon Athletica Inc., says it needs to shift work out of Vietnam to hedge against the possibility of the country getting caught in Trump’s tariff assault.

Unlike China’s response to tariffs, Vietnam’s reaction most likely would be conciliatory for one simple reason: It needs the U.S. much more than the U.S. needs Vietnam. The U.S. shipped less than $10 billion worth of goods to Vietnam last year. The country says it’s committed to buying more American goods, from Boeing Co. jets to energy products—possibly liquefied natural gas—to help narrow its trade surplus. To further placate Trump, Vietnamese leaders could offer to expand market access to its service sectors, such as telecommunications, finance, and insurance, Fenner says.

Prime Minister Nguyen Xuan Phuc, meanwhile, has directed officials to increase efforts to crack down on Chinese exporters that are rerouting products through the country. Vietnam is willing to engage in regular communications with the U.S. to “promptly resolve any issues that arise,” Nguyen Phuong Tra, Vietnam’s deputy foreign ministry spokeswoman, said in an emailed statement. The country’s leaders have been working to diversify its trade relationships, which in time will ease its dependence on the U.S. Vietnam has inked more than a dozen free-trade agreements in roughly the past two decades, including a just-signed deal with the European Union that will eliminate almost all customs duties.

Meanwhile, the industrial parks are besieged by companies looking to flee the U.S.’s China tariffs. At Bau Bang Industrial Park, north of Ho Chi Minh City, factory walls rise up from land where rows of rubber trees once stood. Housing for thousands of workers is being completed, as is a hospital. There’s a Taiwanese restaurant nearby. One of the enterprise zone’s operators gets visits from about 18 overseas suppliers a week. That’s triple the normal rate last year, according to Rose Chang, chief financial officer of DDK Group, which is involved in a joint venture with Warburg Pincus-backed Becamex IDC to operate a 200-acre section of the industrial park that will be home to Taiwanese companies making products such as headphones, baby strollers, and swimming pool and patio furniture.

Kinh Bac City Group, which operates similar parks across the country, has hosted visitors from 90 foreign companies this year that are exploring moves into one of its northern Vietnam industrial parks, says Phan Anh Dung, deputy general director. On a recent morning, he was taking a break after meeting with representatives of a Chinese company looking to set up operations in one of the group’s parks, about 45 kilometers (28 miles) from Hanoi. GoerTek Inc., an Apple Inc. supplier based in China, has begun construction on a $260 million factory expansion there. “I have never seen anything like this before,” Dung says.

By Xuan Quynh Nguyen & Nguyen Dieu Tu Uyen with Nguyen Kieu Giang & Mai Ngoc Chau & John Boudreau - Bloomberg - August 5, 2019