- We highlight several reasons to remain optimistic on Vietnam despite tariff risks, even as we continue to expect Vietnam to be in the crosshairs of the Trump 2.0 administration due to its large and rising trade surplus with the US.
- For one, Vietnam has been gaining global export market share not just in the US but also across the rest of the world since the trade war started. While US tariffs on China have played a role, our analysis shows that Vietnam was able to export more of those same tariffed products to countries outside the US, pointing to some inherent economies of scale and comparative advantages in Vietnam’s manufacturing sector. In addition, Vietnam also gained market share in the US even in products which did not experience higher US tariffs on China. Put differently, Vietnam’s rising exports likely reflects structural factors predating Trump and his tariffs, even if they were a key catalyst driving the country’s exponential manufacturing growth till date.
- Second, Vietnam has been moving up the value chain, raising its domestic value added and complexity of its export basket. If this can be sustained, this should cushion against possible tariffs by Trump 2.0 on Vietnam. As of today, Vietnam remains dependent on China for intermediate inputs, and its product complexity is low in absolute terms. The good news is that Vietnam is starting off with a good foundation including decent educational and STEM skills.
- Third, we expect US tariffs on China to remain higher and rise at a faster pace than US tariffs on Vietnam in Trump 2.0.
- We forecast USD/VND to rise close to 26,000 in 2025, GDP to slow modestly to 6.4% (from 7.1%), and interbank rates to remain sticky at around 5% in 1H2025 to help maintain FX stability before easing in 2H2025.
- Our FX and macro forecasts chart a modest path for Vietnam which reflect these factors above on tariffs, even as we acknowledge the left tail risks. Key risks to our forecasts include a sustained rise in the US Dollar, aggressive tariffs targeted specifically at Vietnam, coupled with a sharp slowdown in global growth impacting Vietnam’s exports.
- The important local development we are watching for is the government’s recent move to restructure and streamline its bureaucracy. News reports suggests that anywhere from 4%-20% of total public sector employees may face employment changes, while US$7bn (1.5% of GDP) in social support may be needed to help workers in the transition. The good news however is that the domestic economy seems to be on a nascent recovery path as we speak.
Vietnam – Microcosm of supply chain shifts
If there is one country that is the microcosm of the diversification of supply chains in Asia, it is Vietnam. This process was already in place before Trump given fundamental drivers of supply chain shifts, but was certainly catalysed and accelerated by US tariffs on China.
Fast forward to today, foreign value added from China embedded in Vietnam’s exports surged from 12% in 2016/17 up to 18%1, the highest amongst any Asian countries, indicating the central role of Vietnam in the China+1 supply chain (see Chart 3 below). With that, Vietnam’s bilateral trade surplus with the US has more than tripled to US$120bn, and the US is now the most important market of end-demand for Vietnam making up more than 10% of its GDP. While Vietnam is not the country with the largest trade surplus with the US relative to the likes of say Mexico, the Euro zone and China, it is disproportionately large relatively to the size of Vietnam’s own economy. Looking at product-level exports, there is evidence that Vietnam’s exports have been (partially) filling the gap from the decline in China’s exports to the US, with the US importing more of the same products from Vietnam that China is exporting less to the US of 2 (see Chart 6 below).
Trump 2.0 to increase scrutiny on Vietnam’s exports and the Chinese-linked supply chains
Overall, our assumption is for Trump 2.0 to increase scrutiny on Vietnam’s exports and the Chinese-linked supply chains, even as he is likely to focus on other countries – and chiefly China – in terms of his trade policy.
We expect some sector-specific tariffs on Vietnam and for his administration to tie tariffs to stricter rules of origin for Chinese products and exports from Chinese-headquartered companies. A sustained broad-based 10% tariff either on Vietnam or across all countries is a key risk that we are not building in right now in our base case assumption, but is a meaningful scenario we are cognizant of.
The ultimate (stated) aim would be to decouple the US from the Chinese supply chain, but in practice the most egregious practices to be targeted would be the plain diversion of trade to avoid US tariffs. We note that evidence in the academic literature estimating plain trade diversion from China through Vietnam is quite mixed, and depends on whether one uses macro level data or firm-level enterprise surveys. This ranges anywhere from 2% to 16% of Vietnam’s total exports (see Iyoha, Malesky, Wen et al 2023 – Exports in Disguise link and Chart 8 below).
Ultimately, we are inclined to think that plain trade diversion from China only makes up a minority of Vietnam’s exports, with our analysis showing a relatively weak relationship between Vietnam’s imports from China and US imports from Vietnam (see Chart 7 below), coupled with the fact that domestic value added has also been increasing in Vietnam over time (see next section).
We highlight reasons to remain optimistic on Vietnam despite tariff risks from Trump 2.0
Ultimately, we are hesitant to be overly bearish on Vietnam’s economy and VND despite these tariff risks highlighted above from Trump 2.0 for at least four key reasons.
First, Vietnam has been gaining significant global export market share not just in the US but also across the rest of the world since the trade war started. Vietnam’s share of US imports has risen from 2% in 2017 to around 4% currently. Meanwhile, its import shares to China and the Rest of the World have risen to 3.6% and 1.4% respectively as of 2023 (from 2.7% and 1.2% in 2017) (see Chart 1 above). Just as importantly, Vietnam has been one of the few countries in our region which has been able to raise import market share across the US, China and the Rest of the World 3 (see Chart 9 below).
While tariffs between US and China since 2017 have no doubt played a role, our analysis showcases two additional factors underpinning Vietnam’s increasing global export market share.
First, Vietnam was able to increase its global market share of tariffed products to countries outside the US, and not just to the US (see Charts 10 and 11).
Second, Vietnam also gained export market share in the US even in products which did not experience higher tariffs by the US on China (see Chart 11).
The academic literature provides some evidence for these points above. For instance, it highlights that Vietnam’s export elasticities to US-China tariffs for both the US and the Rest of the World are positive, pointing to some evidence that Vietnam’s exports are not just good substitutes for China’s exports (as opposed to complements), but also that Vietnam’s manufacturing sector has been able to scale to meet global demand as more manufacturers invested in the country (see Fajbelgaum et al 2023 – US China Trade War and Global Re-allocations link).
In addition, the research also points to having more Free Trade Agreements as a key positive driver of supply chain shifts. Since the trade war, there are also signs that countries (including Vietnam) have benefited from spillovers to similar non-tariffed products, coupled with economies of scale in exporting beyond the US as companies increase supply chain investments in a specific country (see World Bank – Is US Trade Policy Reshaping Global Supply Chains link, Dang et al 2023 – Winners and Losers from US China Trade War link).
Ultimately, we think these key points above – Vietnam’s rising exports to the rest of the world, and in both tariffed and non-tariffed products – point to some inherent economies and scale and comparative advantages in Vietnam’s manufacturing sector, structural factors which predates Trump and his tariffs. For instance, Vietnam’s multitude of free trade agreements have likely played some role in supporting its exports and supply chain shifts. As such we believe these factors are unlikely to change and should continue to support Vietnam’s exports notwithstanding tariff risks from Trump 2.0.
The second reason why we remain optimistic on Vietnam’s export prospects is that the country has been moving up the value chain, raising its domestic value added and complexity of its export basket (see Charts 13 and 14 below). As of today, Vietnam remains dependent on China for intermediate inputs, and its product complexity is low in absolute terms. The good news is that Vietnam is starting off with a good foundation including decent educational and STEM skills (see Chart 15).
If these shifts can be sustained, they should cushion against possible tariffs by Trump 2.0 on Vietnam. The net impact to Vietnam and VND will ultimately also depend on the relative cost of shifting production to other countries versus further agglomerating within Vietnam.
Third, we expect US tariffs on China to remain higher and rise at a faster pace than US tariffs on Vietnam in Trump 2.0. Our assumption is for US to raise effective tariffs on China by an additional 20 percentage points in aggregate. While the US could certainly impose broad-based tariffs including on Vietnam and the rest of the world, our expectation is that the focus of the Trump 2.0 administration will still very much be on decoupling the US from Chinese supply chains.
Lastly, Vietnam’s relationship with Trump and the US business community has historically been quite good, and so we think negotiation is more likely than not.
We forecast modest VND weakness and growth slowdown - local factors bring some risks
Overall, we forecast USD/VND to rise close to 26,000 in 2025, GDP to slow modestly to 6.4% (from 7.1%), and interbank rates to remain sticky at around 5% in 1H2025 to help maintain FX stability before easing in 2H2025.
Our FX and macro forecasts chart a modest path for Vietnam which reflect these factors above on tariffs, even as we acknowledge the left tail risks. Key risks to our forecasts include a sustained rise in the US Dollar, aggressive tariffs targeted specifically at Vietnam, coupled with a sharp slowdown in global growth impacting Vietnam’s exports.
The important local development we are watching for is the government’s recent move to restructure and streamline its bureaucracy. News reports suggests that anywhere from 4%-20% of total public sector employees may face employment changes, while US$7bn (1.5% of GDP) in social support may be needed to help workers in the transition. The good news however is that Vietnam’s domestic economy seems to be on a nascent recovery path as we speak, with some improvement as well in the real estate sector. We see some signs that government spending is starting to improve, even if it remains soft in public infrastructure, and this could point to some pickup in the speed of project approvals.
Footnotes
1 We have calculated this based on ADB’s Multi-Regional Input Output Tables (see link here)
2 See Alfaro and Chor (2023) – Global Supply Chains – The Looming Great Allocation (link)
3 Note there are some discrepancies between global exports and global imports, and this is more pronounced in China’s case. Nonetheless, the key messages remain the same, that China has been exporting less to the US and more to the rest of the world, and that Vietnam has been a key conduit through which supply chain shifts have occurred
