Vietnam expects more talks with US to finalise trade deal

New U.S. reciprocal tariffs on Vietnamese imports have taken effect, setting a 20% rate on general goods while imposing a 40% levy on items deemed illegally transshipped. Despite these new duties, which are a reduction from the initially proposed 46%, Vietnam confirmed ongoing discussions to finalize a broader trade agreement. This development occurs amidst Vietnam's strong July export performance, including a 26% year-over-year increase in exports to the U.S., underscoring the significant economic ties impacted by the evolving trade policy.

Analysis

The United States has implemented new reciprocal tariffs on Vietnamese imports, setting the rate at 20%, a significant reduction from the 46% initially proposed. This development provides a degree of clarity for businesses, though it introduces a critical caveat: a punitive 40% levy on goods deemed illegally transshipped from other countries via Vietnam. Details regarding the enforcement of this transshipment rule remain undisclosed, creating a significant point of uncertainty for supply chains. The backdrop to this policy change is Vietnam's continued strong trade performance. In July, total exports grew 16% year-over-year, while exports specifically to the U.S. surged 26% to $14.2 billion. Concurrently, imports from China rose 30.5%, highlighting the deep integration of Chinese components in Vietnamese manufacturing and underscoring the rationale behind U.S. transshipment concerns. While the Vietnamese government has confirmed ongoing talks to finalize a broader trade agreement and is developing an adaptation plan, the immediate focus for market participants will be on how the transshipment rules are defined and enforced.

Key Decisions for Investors

• Investors with exposure to companies manufacturing in or sourcing from Vietnam should prioritize monitoring for official guidance on the definition and enforcement of 'illegal transshipment' rules, as this represents the largest unquantified risk.
• The reduction of the tariff threat from 46% to a confirmed 20% removes a significant tail risk, potentially improving the investment case for assets exposed to the Vietnamese economy by providing greater policy certainty.
• Given the sharp increase in imports from China alongside robust exports to the U.S., it is prudent to conduct deeper due diligence on the supply chain integrity of portfolio companies to assess their vulnerability to the 40% transshipment penalty.