As news broke that Vietnam would become the second country to reach an initial tariff agreement with Washington, optimism surged among clothing companies and manufacturers with significant operations in the region. Stock prices for these companies initially soared, reflecting a hopeful outlook. However, this optimism quickly turned into concern as the details of the agreement emerged, revealing that the implications of the deal might be more complex than anticipated, particularly in relation to Vietnam's powerful neighbor, China.
Under the new agreement, Vietnam successfully dodged the punitive 46% tariff that had been threatened in April. Instead, many goods exported from Vietnam will now face a 20% tariff. In exchange, American products entering Vietnam will be exempt from tariffs, marking a significant shift in trade dynamics. However, a 40% tariff will remain in place for items deemed “transshipments.” This provision targets Chinese companies that allegedly route their products through Vietnam to evade US tariffs, raising concerns among businesses about the potential for arbitrary enforcement of this classification.
“Transshipment” is a politically charged term, and experts warn that if the US adopts a broad definition, it could unjustly affect a wide array of goods. Dr. Nguyen Khac Giang, a visiting fellow at the ISEAS Yusof Ishak Institute, emphasized the nature of Vietnam as a manufacturing hub. He noted that it is unrealistic to expect that most Vietnamese products, apart from agricultural goods, would be wholly manufactured within Vietnam's borders. The key question now is: what percentage of a product must originate from Vietnam to avoid the transshipment tariff?
The agreement's enforcement and the precise definitions of transshipments remain uncertain, yet these factors could have profound ramifications for global trade and US-China relations. Stephen Olson, a former US trade negotiator, pointed out that the US is likely using these agreements to apply strategic pressure on China. Vietnam, a burgeoning manufacturing hub, has previously benefited from the trade tensions between the US and China, as many Chinese companies relocated their supply chains to Vietnam to circumvent tariffs.
However, this shift resulted in a surging trade surplus for Vietnam with the US, drawing criticism and accusations that Vietnam was serving as a conduit for Chinese goods seeking access to the American market. In response to these developments, China's commerce ministry expressed strong opposition to any agreements that might compromise its interests, warning of potential repercussions.
Vietnam's manufacturing industry is deeply intertwined with both the US and China. Exports to the US account for approximately 30% of Vietnam’s GDP, while China remains its primary source of imports, supplying essential raw materials for various sectors, including footwear, furniture, and electronics. This dependency creates challenges, especially in sectors like textiles, where profit margins are thin, making compliance with new regulations burdensome.
Despite the potential challenges posed by the higher tariffs on transshipments, some analysts believe that Vietnam may benefit if US policies encourage suppliers to establish operations within the country. However, many businesses are adopting a wait-and-see approach as they seek clarity on how the agreement will be implemented and enforced.
Policymakers in Hanoi find themselves in a delicate position, striving to maintain a balance in relations with both Washington and Beijing. While the US is seen as a crucial export market and strategic ally against China's assertiveness, there are fears that closer ties with the US could provoke Beijing. Analysts warn that if China perceives Vietnam as aiding the US in constraining its influence, it could retaliate economically or leverage its position in the ongoing disputes in the South China Sea.
As the situation evolves, aggressive retaliation from Beijing is currently deemed unlikely, with some suggesting that Vietnam may have provided China with signals regarding its intentions to secure a US trade deal. Recently, Vietnam has taken steps to display goodwill towards China while simultaneously courting US investment. President Trump has indicated that Vietnam will open its market to American goods, including SUVs, which he believes will thrive in the Vietnamese market despite the country's preference for motorbikes.
In conclusion, while Vietnam's new tariff agreement with the US presents opportunities for growth and trade, it also introduces a host of challenges that could impact its manufacturing landscape and international relations. The coming months will be crucial as stakeholders navigate the complexities of this agreement and its implications for global trade dynamics.
