How will Donald Trump 2.0’s tariff policy impact Vietnam?

If Donald Trump’s proposed new tariffs are implemented, Bloomberg estimates that the average tariff could rise to 20%, which would boost government revenue but indirectly lower US GDP by 1.3%. This could also exacerbate inflation, posing risks to the U.S. economy, which has only recently emerged from a period of instability.

Over the past decade, the U.S. has actively pursued the "pivot towards AsiaPacific" strategy, fostering strong relationships with key allies, particularly South Korea and Taiwan—two of the top three countries with the largest FDI in Vietnam. These countries are currently leading exports to the US, which will be analyzed further below. Moreover, Vietnam has established a comprehensive strategic partnership with the US since late 2023.

Given these factors, KBSV believes the likelihood of Trump imposing stringent and wide-ranging tariffs on imports from Vietnam is low. Instead, US tariffs will likely be more "flexible," primarily focusing on curbing China's growth and targeting products that directly compete with US manufacturing.

Looking back at the 2018 trade war

The US-China Trade War (2018) prompted a shift in supply chains towards Vietnam. As a result, Vietnam's exports to the US experienced significant growth during the 2019–2022 period. However, imports from China, which constitute over 35% of Vietnam's total imports, also saw substantial growth. This was particularly evident in product categories where growth mirrored the rise in exports to the US, including computers and components, machinery and other parts, plastics, steel, and wood. Additionally, during this period, the US initiated a higher number of trade investigations into Vietnam.

From 2018 to 2022, Vietnam's exports to the US grew at an average annual rate of approximately 19%, significantly outpacing the overall export growth rate of 11%. Notably, 70% of this export value came from the FDI sector. Among the key product categories, "Computers, electronic products, and components" and "machinery, equipment, tools, and other parts" saw remarkable export growth to the US, averaging 50-60% annually during this period. KBSV’s estimates suggest that these items are predominantly produced and exported by FDI firms from South Korea (30-40%), China (20-30%), and Taiwan (10-20%).

Positive impacts on Vietnam

On the bright side, the Trump’s tariff policy may benefit Vietnam economy.

First, FDI enterprises from Korea, Taiwan, and Japan may move more production stages to Vietnam. These are all close allies of the US in the Asia Pacific region and currently account for more than 50% of Vietnam's export turnover to the US. However, according to KBSV’s observations, the majority of large FDI enterprises from these countries are still importing a large number of components (>50%) from production facilities in China to Vietnam. If Trump wants to tighten origin tracing, these enterprises may have to continue to move some production stages to Vietnam.

Second, other multinational corporations may also continue to move production bases to Vietnam. The tension from the trade war urges large companies to move production bases out of China to lower risks. This trend may not be as strong as the 2018-2022 period with typical examples such as Apple, Intel, Foxconn, Lego, and Sumitomo Wiring Systems, but it still continues.

Third, the main exports of these FDI enterprises are expected to maintain their growth potential. Consumer electronics and hi-tech equipment were not subject to tariffs in the 2018 trade war. According to research by Peterson Institute for International Economics, these items have enjoyed tax incentives during both the Trump (2018-2021) and Biden (2021-2024) terms.

Fourth, some key export industries of Vietnamese enterprises, especially textiles and garments, can increase their competitiveness with Chinese goods when exporting to the US. Although the US may impose tariffs of 10% to 20% on Vietnamese textiles, the actual impact will not be too worrying compared to the current tariffs (8%-25%). In fact, a tariff of 10- 20% is still much more competitive than the 60% tariff that China faces—one of the main competitors of Vietnamese textiles. However, this benefit will be shared among a number of other countries that are strong in processing.

Negative impacts

However, Donald Trump’s tariff policy may have adverse impacts on Vietnam.

First, the activities of FDI groups from China (accounting for about 20-30%) may slow down. Escalating trade tensions will make it difficult for these businesses to maintain export activities to the US. In addition, new FDI disbursement from China may also be limited.

Second, the US may impose higher anti-dumping duties on imports from Vietnam. As the US trade deficit with Vietnam is growing, this is an obvious risk. The export activities of some domestic enterprises showing signs of Chinese goods evading origin may be affected. Some typical examples in this group are plastics, iron, steel, and wood. However, this is not a new risk as it has been noted in the last years.

Third, exchange rate risks increase with the appreciation of the USD. Tariff measures on imported goods and fiscal support policies will bring inflation risks, and the Fed may be more cautious with the rate-cut roadmap while the US government bond yield is high. All of these factors will strengthen the uptrend of the USD. In the short term, a stronger USD will increase the risk of depreciation for the VND. In addition, Vietnam's FX reserves are touching their lows of about USD87 billion (nearly equal three-month import value), which will cause many difficulties to the SBV’s exchange rate management.

As a result, with Donald Trump's trade policy scenario focusing on curbing China's growth and imports that directly compete with the US manufacturing industry, the impacts on Vietnam's economy will be exposed from many different angles. Overall, KBSV expects the benefits of increased exports and FDI inflows from the US's allies (especially South Korea, Taiwan, and Japan) to offset the decline in FDI from China and products with signs of origin evasion. In addition, it assesses that the level of impact will largely depend on foreign policy and measures to help reduce the bilateral trade deficit, such as the government's signing agreements to buy LNG and aircraft from US manufacturers.