What The Trade Deal Means for Vietnam and Asia

From being a poster child of how to win in a trade war, on 3 April, Vietnam’s growth model was on life support. The US slapped 46% reciprocal tariff rate on the country – amongst the highest in the world. Vietnam is the most trade exposed country in Asia – exports are 84% of GDP and US shipment made up a staggering 30% of GDP in 2024.  Vietnamese exports to the US are not just by Vietnamese firms but also are foreign direct investments in Vietnam. Thus, the prohibitive level would not only impact Vietnam’s export market but also domestic demand. Thus, Vietnam has been the most motivated country to ensure better access to US markets.Details of the deal remains murky as they are still being negotiated. So far, based on President Trump’s comments, Vietnam secured 20% tariff level, which is much lower than 46% on reciprocal tariff day but higher than the UK’s 10% level, and lower than China’s tariff level. At the same time, the US will impose 40% on transshipment of goods through Vietnam. How that will be defined remains unclear. On US side, President Trump suggested that Vietnam had opened wide its markets to the US. According to a Harvard Business School, at maximum, about 16% of Vietnam exports are due to rerouting at the product level and much lower at a firm level.What does this mean for Vietnam? Other than the China truce, it is the second country to secure a deal. At 20%, it is a much lower level than US tariffs on China, which currently faces 20% on fentanyl and 10% of reciprocal tariff until 12 August. Adding together tariffs from previous US administrations (25% tariffs), Vietnam is still a relatively cheaper place to do business, considering rising tensions between the US and China. Trade liberalization policies allow it to have access to markets such as the EU via EU FTA. Most importantly, manufacturing remains the most important sector for the Vietnamese government, which means it will do everything to ensure favorable market access and improving both soft and hard infrastructure to remove bottlenecks to industrialization, especially in sectors such as electricity.What it gains is certainty in tariff level and that will lead to continued investment inflows for firms diversifying from China supply chains. FDI inflows in 2025 have accelerated despite tariff threats. Registered FDI rose 66%YoY from Jan to May to USD18.4bn while disbursed FDI increased 7.9%. Many companies have reshuffled their supply chains to Vietnam, especially those that want to export to the US, and certainty on relatively lower tariffs compared to China will ensure that Vietnam remains a favored destination to diversify supply chains.The 40% rate on trans-shipment is still murky in details of implementation. But what it shows is that it will push Vietnam to do two things: a) be more stringent in inspecting rules of origin to avoid higher friction to trade with the US; Already, Directive 09/CT-BTC of the Ministry of Finance is increasing inspection and supervision of goods' origins; and b) move up the value chain to boost localization and diversify supply chains, especially imports from China.What are the risks for Vietnam? By being a first mover in Asia and second in the world to secure a deal, Vietnam risks setting the benchmark for others. Meaning, it could end up with a higher tariff rate than others. So far, the deal allows Vietnam to have the 4th lowest tariff rate in Asia, but still higher than the Philippines without securing a deal. Indonesia indicates it may secure a lower rate. The second is the 40% trans-shipment rate and how that will be implemented, risking retaliation from China. But that is unlikely as China also needs Vietnam given its deflated PPI and higher friction to trade with not just the US but also elsewhere. The case of the US imposing 400% tariff on Vietnamese solar shows that the costs of allowing rerouting is being shut out of US markets. Meaning, Vietnamese solar companies, as well as Chinese companies rerouting to Vietnam now face the same tariffs. It is in Vietnam’s interests to ensure that it avoids allowing rerouting of goods, which has zero value add for the country but has significant costs. If importing Chinese intermediates for production is not part of this, Vietnam can manage with its bamboo diplomacy. The third risk is domestic fallout, which is low for Vietnam given stable politics, and consensus that it needs to lower tariff for survival.What does this mean for the rest of Asia? The deal shows that the US needs trade partners if it wants to shift supply chains out of China, but tariffs are expected, with a 10% minimum threshold; and that means US tariffs are higher, but not as high as reciprocal tariff day. Transshipment is also an issue with step up tariffs. Vietnam high exposure to US markets, stable politics and limited exposure to sectoral tariffs as well as fallout from agriculture makes a US deal much easier. Others such as Thailand where domestic politics are troubled, India where agriculture is a thorny issue, Japan and South Korea where auto tariffs are a challenge will make a deal much more difficult. But we think more EM Asia deals are coming, most likely India and Indonesia.