A U.S. and Vietnam trade deal has been reached that means Vietnam will avoid the most severe tariff rates—set to go back up next week—but there’s a catch that could anger Vietnam’s largest trading partner, China.
The deal, announced Wednesday, will mean Vietnamese exports to the U.S. are tariffed at a 20% rate—lower than the initial 46% “reciprocal” tariff announced in April, but double the 10% universal tariff. Goods that are deemed to be transshipped, however, will be tariffed at a 40% rate—a policy that seems aimed at China which has used the method to get around U.S. levies. Transshipping involves transferring cargo from one vessel to another while in transit to the destination country and is often done to disguise a product’s country-of-origin in order to illegally skirt import levies.
[time-brightcove not-tgx=”true”]In return, Vietnam agreed to drop all tariffs on U.S. imports, President Donald Trump said.
“In other words, they will ‘OPEN THEIR MARKET TO THE UNITED STATES,’ meaning that, we will be able to sell our product into Vietnam at ZERO Tariff,” the President posted on Truth Social on Wednesday morning.
At the heart of Trump’s deal with Vietnam—and his talks with other major trading partners—has been an effort to counter what he sees as China’s unfair trade practices. Trump’s trade adviser Peter Navarro called Vietnam “essentially a colony of communist China” in an April interview on Fox News while describing how nontariff barriers, including Chinese transshipments, contribute to U.S. trade deficits. “Vietnam sells us $15 for every $1 that we sell them and about $5 of that is just Chinese product that comes into Vietnam, they slap a ‘Made in Vietnam’ label on it and they send it here to evade the tariffs,” he said.
The higher tier of tariffs on transshipments will impact goods that have components originating in one country, such as China, but are routed through Vietnam then exported to the U.S. China supplies much of the components and raw materials to Vietnam and other Asian countries that are then used to make finished goods, but it also ships some finished goods through Vietnam or mostly finished goods that go through a minimal final assembly in Vietnam with their county-of-origin misrepresented as Vietnam, which is considered illegal.
But restrictions on transshipments could tick off China, which is a larger trading partner for most Asian countries than the U.S.
Here’s what to know about what the deal means for Vietnam and China.
What does the deal mean for Vietnam?
Vietnam has been keen to be on Trump’s good side since he announced his “reciprocal” tariffs in April.
Vietnam was the sixth-largest importer to the U.S. last year, supplying almost $137 billion worth of goods and fuelling a $124 billion trade surplus with the U.S.—the third largest trade gap with the U.S. after China and Mexico. The country’s share of imports to the U.S. was bolstered during Trump’s first term, when trade tensions with China pushed firms to move production to Southeast Asia.
Vietnamese officials have been in talks with the Trump Administration for weeks and even signed deals to purchase more American goods ahead of Thursday’s trade agreement. The country has promised to buy more aircraft, liquefied natural gas, and agricultural products from the U.S. Vietnamese officials have also backed the Trump Organization’s plans for a $1.5 billion luxury resort and golf club development outside Hanoi. Vietnam’s agreement, according to Trump, to remove all levies on U.S. imports is indicative of the country’s push to maintain close trading ties with the U.S., even as Trump has retreated from the relationship in other areas, such as through the shuttering of USAID.
Trump boasted that the zero tariffs will drive sales of American SUVs in Vietnam, although an American-made car, even with no duties, may still be more expensive than cars produced elsewhere, and it’s not clear how much domestic demand there is for American cars.
Vietnam also pledged to crack down on fraud and illegal transshipments even before the deal was cut. Thailand, South Korea and Taiwan have also implemented or stepped up similar measures since April.
The U.S.-Vietnam deal, however, does not currently address industry-specific tariffs, including a 25% tariff on cars and auto parts and a 50% tariff on steel and aluminium, that are subject to pending Commerce Department investigations. It could also still dampen Vietnam’s economy: Bloomberg Economics estimates that Vietnam could lose a quarter of its exports to the U.S. in the medium term under the deal, affecting more than 2% of its annual economic output.
How does China use transshipments?
The higher tariff on transshipments indirectly targets Chinese exports. China has routed its goods through other countries, including Vietnam, to bypass U.S. import levies, a practice that became more frequent during the U.S.-China trade war in Trump’s first term.
Earlier this year, ahead of Trump’s tariffs in April, Chinese exports to Vietnam and Thailand rose sharply, which Brookings analysts suggest is unlikely to reflect a rise in domestic demand in those countries and is instead more likely to reflect transshipments to the U.S.
Chinese shipments to Southeast Asian rerouting hubs like Vietnam, Malaysia, Indonesia and Thailand, also surged shortly before trade talks between China and the U.S. in May even as direct exports from China to the U.S. fell—suggesting that China was able to continue its flow of goods to the U.S. through transshipments even as countries touted crackdowns.
It’s too soon to tell how effective the transshipment clause and other measures will be in cracking down on fraud. “While the exact criteria for defining transshipment remain unclear, it is evident that Vietnam’s role as a potential connector for Chinese exports to the U.S. will diminish,” Su Yue, Principal China Economist at the Economist Intelligence Unit, told the South China Morning Post.
But some experts say at least some businesses may be willing to take the gamble, especially if the benefit of manufacturing in China outweighs the risk of getting caught.
“The thing about trade is when there are huge arbitrage opportunities, people are going to find a way to take advantage of them, legally or illegally,” Caroline Freund, an expert on international trade at the University of California at San Diego, told the Washington Post in May. “It’s like a river. You can keep putting rocks in, but the water’s going to keep flowing down.”
Ash Monga, who runs China-based supply chain management company IMEX Sourcing Services, tells TIME that in the wake of Trump’s tariffs, he noticed a rise in Chinese companies offering “Delivered Duty Paid” fraud services to U.S. importers, which involves underpricing goods in order to pay a lower duty. Suppliers in China would set up shell companies that would act as the “importer of record,” creating the perception among U.S. importers of lower risk. (Monga cautions that U.S. customs can still go after the U.S. businesses purchasing the goods from China and it can carry severe penalties.)
“They are doing it because people are looking for solutions to lower the tariff,” Monga says. “Businesses were at risk of not surviving so they were desperate to find any solution” even if those solutions are fraudulent.
China sees move as attack on interests
“The looming question now is how China will respond,” Bloomberg Economics analyst Rana Sajedi wrote in a research note. “Beijing has made clear that it would respond to deals that came at the expense of Chinese interests and the decision to agree to a higher tariff on goods deemed to be ‘transshipped’ through Vietnam may fall in that category.”
China vowed that it will retaliate if its interests are hurt by the U.S.-Vietnam trade deal.
“We are happy to see all parties resolve trade conflicts with the U.S. through equal negotiations but firmly oppose any party striking a deal at the expense of China’s interests,” Chinese Commerce Ministry spokesperson He Yongqian said at a Thursday press conference, reiterating earlier comments warning countries against signing deals with the U.S. that shut out China. “If such a situation arises, China will firmly strike back to protect its own legitimate rights and interests.”
On top of that, China will likely view the relatively lower 20% tariff on Vietnamese goods as an effort to encourage firms to produce their goods in Vietnam over China. The U.S. and China said they reached a framework agreement in June that will set U.S. tariffs on Chinese imports at 55% and Chinese tariffs on U.S. imports at 10%, alongside other export controls.
“The ‘China quotient’ in U.S. negotiations with other Asian economies is arguably evident in the deal with Vietnam,” Vishnu Varathan, macro research head for Asia at Mizuho, wrote in a Thursday note. “The U.S.’s intent is quite obviously to not disincentivize Vietnam’s role as a substitute for China at a lower 20% tariff.”
Vietnam may soon find itself caught in a balancing act between two economic superpowers. Varathan wrote: “Other Asian economies will be particularly vulnerable to a two-sided geoeconomic squeeze given that their reliance on both China and U.S. are significant.”
And some experts suggest that the U.S. wants to go beyond stopping illegal transshipments—it wants to shut China out of global supply chains entirely.
The U.S. has also been in talks with India that could involve an agreement requiring a higher minimum amount of a product’s value to be added locally in order to qualify as “Made in India”—the U.S. is asking for that amount to be 60%, while India wants to bring it down to around 35%.
The U.K. also signed a trade deal with the U.S. in June that included commitments around export controls that could encourage British firms to exclude Chinese products from their supply chains. China’s foreign ministry criticized the move, telling the Financial Times: “Co-operation between states should not be conducted against or to the detriment of the interests of third parties.”
“The United States seems to be arguing that anything that comes from China is by default transshipment, so you tar and feather every single product that comes from China,” Deborah Elms, the head of trade policy at Asia-based global trade research organization, the Hinrich Foundation, told the New York Times. “Asian governments are being asked to redefine supply chains to something that might be decades in the making in exchange for what? It’s a little unclear.”
