US-Vietnam trade deal sows new China uncertainty

HANOI - Vietnam’s trade deal with the United States averts the most punishing of US President Donald Trump’s “reciprocal” levies but analysts warned it could provoke a fresh stand-off between Washington and Beijing.

The South-east Asian nation has the third-biggest trade surplus with the United States of any country after China and Mexico, and was targeted with one of the highest rates in the US president’s “Liberation Day” tariff blitz on April 2.

The deal announced on July 2

is the first full pact Mr Trump has sealed with an Asian nation, and analysts say it may give a glimpse of the template Washington will use with other countries still scrambling for accords.

The 46 per cent rate due to take effect next week has been averted, with Vietnam set to face a minimum 20 per cent tariff in return for opening its market to US products, including cars.

But a 40 per cent tariff will hit goods passing through the country to circumvent steeper trade barriers – a practice called “transshipping”.

Washington has accused Hanoi of relabelling Chinese goods to skirt its tariffs, but raw materials from the world’s No. 2 economy are the

lifeblood of Vietnam’s manufacturing industries

.

“From a global perspective, perhaps the most interesting point is that this deal again seems in large part to be about China,” said Capital Economics.

It said the terms on transshipment “will be seen as a provocation in Beijing, particularly if similar conditions are included in any other deals agreed over coming days”.

‘The looming question’

Shares in clothing companies and sport equipment manufacturers - which have a large footprint in Vietnam - rose on news of the deal in New York.

But they later declined sharply as details were released.

“This is a much better outcome than a flat 46 per cent tariff, but I wouldn’t celebrate just yet,” said Hanoi-based Dan Martin of Asian business advisory firm Dezan Shira & Associates.

“Everything now depends on how the US decides to interpret and enforce the idea of transshipment,” he added.

“If the US takes a broader view and starts questioning products that use foreign parts, even when value is genuinely added in Vietnam, it could end up affecting a lot of companies that are playing by the rules.”

Vietnam’s government said in a statement late on July 3 that under the deal the country had promised “preferential market access for US goods, including large-engine cars”.

But the statement gave scant detail about the transshipment arrangements in the deal, which Mr Trump announced on his Truth Social platform.

Bloomberg Economics forecast Vietnam could lose a quarter of its exports to the United States in the medium term, endangering more than two per cent of its gross domestic product as a result of the agreement.

Uncertainty over how transshipping will be “defined or enforced” is likely to have diplomatic repercussions, said Bloomberg Economics expert Rana Sajedi.

“The looming question now is how China will respond,” she said. “Beijing has made clear that it would respond to deals that came at the expense of Chinese interests.”

“The decision to agree to a higher tariff on goods deemed to be ‘transshipped’ through Vietnam may fall in that category,” added Ms Sajedi.

“Any retaliatory steps could have an outsized impact on Vietnam’s economy.” AFP