With China and the U.S. as its largest export destinations, Vietnam is seeking ways to insulate itself from an escalating trade war between the world’s two biggest economies.

The National Center for Socio-Economic Information and Forecast has submitted a report detailing the potential impact of the trade war to the planning and investment ministry, Luong Van Khoi, deputy director general at the center in Hanoi, said in an interview.

“If the U.S. and China escalate the tension with tit-for-tat moves, it could reduce our exports and foreign investment inflow and hurt domestic production,” Khoi said. The report will help plan actions the government can take to defend the economy, he said.

Vietnam’s reliance on exports and foreign direct investment to power growth makes it vulnerable to the showdown between the U.S. and its trading partners like China and the European Union. The economy, much like other developing nations, is also under threat from financial volatility with the currency and stocks weakening while inflation is surging.

“It would be naive to think that Vietnam will remain unscathed from the global trade war,” said Eugenia Victorino, an economist at Australia & New Zealand Banking Group in Singapore. “Vietnam is well integrated into global supply chains. The government needs to carefully calibrate its external and domestic policy settings to offset these risks.”

Exports, which accounted for 102 percent of gross domestic product in 2017, are holding up. They gained 16 percent in January to June from a year ago, outperforming those in Singapore and the Philippines.

Manufacturing Giant

Vietnam has transformed itself into a manufacturing giant and shipments of Samsung Electronics Co. alone accounted for about a fourth of its $227 billion exports last year.

Vietnam would need exports to remain strong to support economic growth, which eased to 6.8 percent in the second quarter. The government has already forecast a further slowing in the second half of the year.

The central bank should consider devaluing the dong against the U.S. dollar to boost the competitiveness of Vietnamese products, the Vietnam Institute for Economic and Policy Research said this month. The dong, which has lost more than 1 percent against the U.S. dollar this year, is still performing better than most Asian currencies.

“Devaluing the dong can help exports, but it will also fuel inflation and increase costs in importing materials for domestic productions, therefore we must be very cautious,” said Can Van Luc, a senior economist at Hanoi-based Bank for Investment and Development of Vietnam. “A drop of about 2 percent for the dong for the entire 2018 will be suitable.”

China Threat

With the U.S. threatening more tariffs on Chinese goods, Vietnam is worried that Chinese products such as garments, leather and furniture will flood the local market. The trade ministry is working to prevent such an eventuality, Minister Tran Tuan Anh said this month.

Vietnam imported $57 billion of goods from China last year.

Ministries should work together to come up with some non-tariff measures to limit large inflows of Chinese products, both Luc and Khoi suggested. Authorities need to intensify quality check at border checkpoints and increase quality requirements, they said.

Reducing costs for exporters and producers by cutting the number of licenses and permits, as well as helping them find new markets would also help, said Nguyen Anh Duong, head of the macroeconomic policies department in the Central Institute for Economic Management, a government think-tank in Hanoi.