US President Donald Trump announced Wednesday (July 2) that the United States and Vietnam struck a trade deal just a week before the July 9 deadline.
The agreement will see the US impose a 20 percent tariff on many Vietnamese exports, meaning Vietnam averted the threatened 46 percent levy. Additionally, transshipped goods, which are goods routed through Vietnam before being shipped to the US, will be subject to a 40 percent tariff. In his post, Trump said Vietnam agreed to allow the import of US goods at a 0 percent tariff in return.
The last-minute framework gives Washington a political win while preserving Vietnam’s vital access to its largest export market. Vietnam is America’s 10th biggest trading partner, and the US is by far its most important destination for manufactured goods.
However, details remain thin. It is still unclear exactly which products will fall under the 20 percent tariff, or how the 40 percent penalties on transshipped goods will be enforced.
While Vietnam’s state media did not confirm those tariff levels in its official statement, it said the two countries”Vietnam – US joint statement concerning a fair and balanced reciprocal trade agreement framework.”
The timing of the deal is also critical. Under Trump’s April-announced plan, tariffs on Vietnamese goods were due to rise to 46 percent, alarming businesses that have shifted manufacturing from China to Vietnam over the past five years.
Since 2018, Vietnam’s exports to the United States have nearly tripled, climbing from US$49.14 billion to US$136.5 billion last year, according to US Census Bureau data. American exports to Vietnam, meanwhile, rose about 30 percent to US$13.04 billion in the same period.
For Trump, the agreement with Vietnam is an important success as he races to conclude similar frameworks with other trading partners before the broader tariff hikes resume next week.
Talks with India are underway, while negotiations with Japan and the European Union have encountered complications.
Analysts say the Vietnam deal could set the tone for these upcoming talks, as Vietnam's dependence on US trade meant it had a weak negotiation position. “Other countries will feel they should be able to lock in a lower tariff rate than the 20 percent that President Trump says Vietnam has agreed to,” Mark Williams, chief Asia economist at Capital Economics, told CNBC.
Murray Hiebert of the Center for Strategic and International Studies meanwhile noted that had Trump insisted on the full 46 percent tariff, Vietnam risked losing out to other Southeast Asian rivals, damaging both its economic prospects and its willingness to partner with Washington.
“Had Trump stuck with 46 percent, much higher than the current tariff on China, Vietnam feared it would be disadvantaged by its competitors especially in Southeast Asia,” Hiebert told Reuters. “This likely would have dented Vietnam's trust in the US and it might have toned down some of its security cooperation with Washington.”
A new front in Washington’s push to isolate China
The framework with Vietnam also highlights how the US is using its trade leverage to pressure Asian countries to help block Chinese manufacturers from evading existing tariffs.
The 40 percent penalty on transshipped goods is designed to discourage companies from routing Chinese products through Vietnam to bypass American duties.
Trump’s team is applying similar demands on other nations such as Thailand and Indonesia, respectively urging them to monitor foreign investment and reduce the amount of Chinese content in their manufactured exports if they hope to avoid higher tariffs.
But enforcement of these new transshipment rules will be challenging. Many Southeast Asian customs authorities lack the resources to fully verify the complex origins of manufactured goods.
In the case of the Vietnam deal, it's still unclear if the 40 percent levy on transshipped goods will also be applied to Vietnam-made goods utilizing Chinese components, and if so what the acceptable percentage would be.
Experts warned that strict penalties of this sort could push US companies producing goods in Vietnam to leave the country altogether, or even shift production back to China if it becomes cheaper.
“If it’s too onerous or difficult to comply, companies won’t use the opportunity to grow sourcing in Vietnam,” Matt Priest, head of the trade group Footwear Distributors and Retailers of America, told the New York Times. “They may even head back to China if it’s price competitive.”
Vietnam itself faces a delicate balancing act. The country has benefited from billions of dollars of Chinese investment in its export sectors — especially textiles, electronics and automotive — while at the same time strengthening its security ties with the United States to counter China’s growing assertiveness in the South China Sea.
Neighboring countries are watching carefully. Thailand, for example, has estimated that stricter rules on transshipment could reduce its US exports by US$15 billion, nearly a third of its trade surplus with America last year. Authorities in Malaysia and Indonesia have already begun tightening their own export verification procedures ahead of any agreements with the US.
He Yongqian, a spokesperson for China's Ministry of Commerce, commented on the US-Vietnam agreement Thursday in a press briefing, Bloomberg reported.
“We’re happy to see all parties resolve trade conflicts with the US through equal negotiations, but firmly oppose any party striking a deal at the expense of China’s interests,” she stated. “If such a situation arises, China will firmly strike back to protect its own legitimate rights and interests.”
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Securities Disclosure: I, Giann Liguid, hold no direct investment interest in any company mentioned in this article.
