A U.S. and Vietnam trade deal has been reached that means Vietnam will avoid the most severe tariff rates\u2014set to go back up next week\u2014but there\u2019s a catch that could anger Vietnam\u2019s largest trading partner, China.<\/p>\n
The deal, announced Wednesday, will mean Vietnamese exports to the U.S. are tariffed at a 20% rate\u2014lower than the initial 46% \u201creciprocal\u201d 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\u2014a 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\u2019s country-of-origin in order to illegally skirt import levies.\u00a0<\/p>\n
In return, Vietnam agreed to drop all tariffs on U.S. imports, President Donald Trump said.<\/p>\n
\u201cIn other words, they will \u2018OPEN THEIR MARKET TO THE UNITED STATES,\u2019 meaning that, we will be able to sell our product into Vietnam at ZERO Tariff,\u201d the President posted<\/a> on Truth Social on Wednesday morning.<\/p>\n At the heart of Trump\u2019s deal with Vietnam\u2014and his talks with other major trading partners<\/a>\u2014has been an effort to counter what he sees as China\u2019s unfair trade practices. Trump\u2019s trade adviser Peter Navarro called Vietnam \u201cessentially a colony of communist China\u201d in an April interview on Fox News<\/a> while describing how nontariff barriers, including Chinese transshipments, contribute to U.S. trade deficits. \u201cVietnam 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 \u2018Made in Vietnam\u2019 label on it and they send it here to evade the tariffs,\u201d he said.<\/p>\n 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.<\/p>\n But restrictions on transshipments could tick off China, which is a larger trading partner for most Asian countries than the U.S.<\/p>\n Here\u2019s what to know about what the deal means for Vietnam and China.<\/p>\n What does the deal mean for Vietnam?<\/p>\n Vietnam has been keen to be on Trump\u2019s good side since he announced his \u201creciprocal\u201d tariffs in April.<\/p>\n Vietnam was the sixth-largest importer<\/a> to the U.S. last year, supplying almost $137 billion worth of goods and fuelling a $124 billion trade surplus<\/a> with the U.S.\u2014the third largest trade gap with the U.S. after China and Mexico. The country\u2019s share of imports to the U.S. was bolstered during Trump\u2019s first term, when trade tensions with China pushed firms to move production to Southeast Asia.<\/p>\n Vietnamese officials have been in talks with the Trump Administration for weeks and even signed deals to purchase more American goods ahead of Thursday\u2019s trade agreement. The country has promised to buy more aircraft, liquefied natural gas<\/a>, and agricultural products<\/a> from the U.S. Vietnamese officials have also backed the Trump Organization\u2019s plans for a $1.5 billion luxury resort and golf club development outside Hanoi. Vietnam\u2019s agreement, according to Trump, to remove all levies on U.S. imports is indicative of the country\u2019s push to maintain close trading ties with the U.S., even as Trump has retreated from the relationship<\/a> in other areas, such as through the shuttering of USAID<\/a>.<\/p>\n 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\u2019s not clear how much domestic demand there is for American cars.<\/p>\n Vietnam also pledged to crack down<\/a> on fraud and illegal transshipments even before the deal was cut. Thailand<\/a>, South Korea<\/a> and Taiwan<\/a> have also implemented or stepped up similar measures since April.<\/p>\n 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\u2019s economy: Bloomberg Economics estimates<\/a> 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.<\/p>\n How does China use transshipments?<\/p>\n 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<\/a> during the U.S.-China trade war in Trump\u2019s first term.<\/p>\n Earlier this year, ahead of Trump\u2019s tariffs in April, Chinese exports to Vietnam and Thailand rose sharply<\/a>, 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.<\/p>\n Chinese shipments to Southeast Asian rerouting hubs like Vietnam, Malaysia, Indonesia and Thailand, also surged shortly<\/a> before trade talks between China and the U.S. in May even as direct exports from China to the U.S. fell\u2014suggesting that China was able to continue its flow of goods to the U.S. through transshipments even as countries touted crackdowns.<\/p>\n It\u2019s too soon to tell how effective the transshipment clause and other measures will be in cracking down on fraud. \u201cWhile the exact criteria for defining transshipment remain unclear, it is evident that Vietnam\u2019s role as a potential connector for Chinese exports to the U.S. will diminish,\u201d Su Yue, Principal China Economist at the Economist Intelligence Unit, told the South China Morning Post<\/a>.<\/p>\n 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.<\/p>\n \u201cThe 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,\u201d Caroline Freund, an expert on international trade at the University of California at San Diego, told<\/a> the Washington Post in May. \u201cIt\u2019s like a river. You can keep putting rocks in, but the water\u2019s going to keep flowing down.\u201d<\/p>\n Ash Monga, who runs China-based supply chain management company IMEX Sourcing Services, tells TIME that in the wake of Trump\u2019s tariffs, he noticed a rise in Chinese companies offering \u201cDelivered Duty Paid\u201d 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 \u201cimporter of record,\u201d 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.)<\/p>\n \u201cThey are doing it because people are looking for solutions to lower the tariff,\u201d Monga says. \u201cBusinesses were at risk of not surviving so they were desperate to find any solution\u201d even if those solutions are fraudulent.<\/p>\n China sees move as attack on interests<\/p>\n \u201cThe looming question now is how China will respond,\u201d Bloomberg Economics analyst Rana Sajedi wrote<\/a> in a research note. \u201cBeijing 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 \u2018transshipped\u2019 through Vietnam may fall in that category.\u201d<\/p>\n China vowed that it will retaliate if its interests are hurt by the U.S.-Vietnam trade deal.<\/p>\n \u201cWe 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\u2019s interests,\u201d Chinese Commerce Ministry spokesperson He Yongqian said at a Thursday press conference, reiterating earlier comments<\/a> warning countries against signing deals with the U.S. that shut out China. \u201cIf such a situation arises, China will firmly strike back to protect its own legitimate rights and interests.\u201d<\/p>\n 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<\/a> 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.<\/p>\n \u201cThe \u2018China quotient\u2019 in U.S. negotiations with other Asian economies is arguably evident in the deal with Vietnam,\u201d Vishnu Varathan, macro research head for Asia at Mizuho, wrote<\/a> in a Thursday note. \u201cThe U.S.\u2019s intent is quite obviously to not disincentivize Vietnam\u2019s role as a substitute for China at a lower 20% tariff.\u201d<\/p>\n Vietnam may soon find itself caught in a balancing act between two economic superpowers. Varathan wrote: \u201cOther Asian economies will be particularly vulnerable to a two-sided geoeconomic squeeze given that their reliance on both China and U.S. are significant.\u201d<\/p>\n And some experts suggest that the U.S. wants to go beyond stopping illegal transshipments\u2014it wants to shut China out of global supply chains entirely.<\/p>\n The U.S. has also been in talks with India that could involve an agreement requiring a higher minimum amount<\/a> of a product\u2019s value to be added locally in order to qualify as \u201cMade in India\u201d\u2014the U.S. is asking for that amount to be 60%, while India wants to bring it down to around 35%.<\/p>\n The U.K. also signed a trade deal with the U.S. in June that included commitments<\/a> around export controls that could encourage British firms to exclude Chinese products from their supply chains. China\u2019s foreign ministry criticized<\/a> the move, telling the Financial Times: \u201cCo-operation between states should not be conducted against or to the detriment of the interests of third parties.\u201d<\/p>\n \u201cThe 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,\u201d Deborah Elms, the head of trade policy at Asia-based global trade research organization, the Hinrich Foundation, told<\/a> the New York Times. \u201cAsian governments are being asked to redefine supply chains to something that might be decades in the making in exchange for what? It\u2019s a little unclear.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"A U.S. and Vietnam trade deal has been reached that means Vietnam will avoid the most severe tariff…\n","protected":false},"author":3,"featured_media":38114,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6],"tags":[64,69,9880,30809,130,67,132,68],"class_list":{"0":"post-38113","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business","8":"tag-business","9":"tag-donald-trump","10":"tag-news-desk","11":"tag-overnight","12":"tag-trade","13":"tag-united-states","14":"tag-unitedstates","15":"tag-us"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@us\/114795114324157959","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/38113","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/comments?post=38113"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/38113\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media\/38114"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media?parent=38113"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/categories?post=38113"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/tags?post=38113"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}