Vietnam has become the first country to strike a trade deal with the Trump administration to avoid extra punitive “reciprocal tariffs” otherwise due to come into force next week. Vietnam had amongst the most to lose, facing potential US tariffs of 46% if no deal had been reached, and with its economy heavily reliant on exports to America.
Details are scant. US President Donald Trump says tariffs on Vietnam will now be 20%, not 46%. However, 40% tariffs will be applied on the “trans-shipping” of goods, a measured squarely aimed at China, which the Trump administration says is using Vietnam as a backdoor for rebadged exports to the United States. In return, Vietnam will drop its own tariffs on US products to zero, something it offered to do almost immediately after Trump’s initial reciprocal tariffs announcement on 2 April.
What should we make of the deal at this point?
Vietnamese exporters will bemoan the 20% tariffs, but the reduction from the threatened 46% rate seems a pretty good outcome for Vietnam. This is only 10% higher than the baseline tariff Trump is applying to all countries, aside from Mexico and Canada. We will have to see what reciprocal tariff rates competitor economies such as India and Thailand get. But since this has to be above the 10% baseline, there isn’t a lot of scope left for them to get much lower tariffs.
All up, Vietnam’s manufacturing industry is hyper competitive and can likely do very well even if it ends up facing slightly higher US tariffs than its main competitors.
Vietnam is only one country and the Trump administration’s negotiating approach is too ad hoc for this to serve as much of a signal.
The other important comparison is with China. China is currently facing an average US tariff rate of 50% plus. By lowering the tariffs on Vietnam to 20%, Trump has in effect more than restored the tariff advantage Vietnam previously enjoyed over China after the first US-China trade war during Trump’s last term. Those tariffs triggered supply chains to begin shifting to Vietnam, delivering a surge in Vietnam’s exports to America (and feeding into today’s trade tensions).
For that reason, Vietnam’s deal might just signal some degree of acknowledgment from the Trump administration that decoupling with China means accepting a shift in US supply chains and import sources towards countries like Vietnam instead. With tensions with China even worse now, this could provide important reinforcement for more supply chains to keep moving Vietnam’s way, to the country’s great benefit.
A big question mark still hovers over the announced 40% tariffs on trans-shipped goods. Existing estimates (see here and here) suggest there is only a few billion dollars’ worth of trans-shipped Chinese goods via Vietnam to America. It seems likely however that the Trump administration could take a broader definition. US Trade Representative Jamieson Greer has previously suggested imposing higher tariffs where imported goods contain Chinese parts and components exceeding a certain threshold and if the exporting firm is Chinese owned.
Together with a colleague, I have previously estimated that Chinese content accounts for about 28% of the value contained in Vietnam’s exports. This is sizeable but will also vary from product to product. A lot will therefore depend on how the 40% tariffs are ultimately applied. If the Trump administration keeps its approach targeted, then this should be manageable for Vietnam and encourage alternative supply chains to gradually develop. If the approach is too broad and blunt, then it could quickly prove much more damaging for all involved.
What does the Vietnam deal mean for other countries? We will find out soon the specific tariff rates that others will get. Vietnam is only one country and the Trump administration’s negotiating approach is too ad hoc for this to serve as much of a signal – especially for larger economies, including the European Union and Japan, where Trump has a more acrimonious history.
For other developing Asian economies, it’s a mixed bag. As fellow exporters, they can take solace in the Trump administration’s willingness to lower its tariffs, despite Vietnam’s large trade surplus with America, and without being forced to offer much in return. As competing exporters, however, there will be some disappointment that hyper competitive Vietnam may have just come through relatively unscathed.
