Exporters must level up to avert barriers

February 15, 2025 | 14:00

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Vietnam may benefit from the new US tariff policies. However, it must meet infrastructural development and production capacity to comply with the trade requirements of the US market in the long term.

President Donald Trump’s tariff policy will likely impact Vietnam’s export market, as foreign-invested enterprises (FIEs) from South Korea, Taiwan, and Japan potentially relocate more production stages to Vietnam. These are all close allies of the United States in the Asia-Pacific and account for more than half of Vietnam’s export turnover to the US.

Most large enterprises from these regions are still importing more than half of all components from China to Vietnam. If the new US president tightens controlling origin traceability, these enterprises may have to continue to move some production stages to Vietnam.

Other multinational corporations may also move production to Vietnam. The upcoming trade conflict may push large companies to move production out of China to reduce risks. This trend may not be as strong as the 2018-2022 period with typical cases like Apple, Intel, Foxconn, Lego, and Sumitomo, but it is still ongoing.

Moreover, the main export items of foreign-invested enterprises are expected to have growth opportunities. Electronic consumer goods, high technology, and equipment were not subject to tariffs in the 2018 trade war. These items received tax incentives during both the first Trump and Biden terms.

Some key export items of Vietnamese enterprises, especially textiles and garments, can increase their competitiveness with Chinese goods exporting to the US. Although the US may impose a tariff of 10-20 per cent on Vietnamese textiles, the actual impact will not be too worrying compared to the current tariff (8-25 per cent). However, this benefit will be shared with other countries with strong processing capabilities.

However, there are some risks for Vietnam. Specifically, the activities of FIEs from China (accounting for about 20-30 per cent) may slow down. The increase in trade tensions will make it difficult for Chinese firms to maintain exports to the US. And foreign investment flows from China may also decline.

The exchange rate may increase with the strengthening trend of the US dollar. Tariff measures on imported goods and fiscal support policies will boost the US dollar’s upward momentum. In the short term, a stronger US dollar will increase the risk of depreciation for the VND.

Although there may be some opportunities, the risks from the current US administration’s tariff policy are unpredictable. Vietnamese policymakers and businesses should take advantage of the opportunities caused by the trade conflict, as well as closely monitoring, analysing, and forecasting to come up with appropriate responses.

The independence and competitiveness of the economy and export activities should be enhanced to optimise the advantages and minimise the risks from new US tariff policies. This is based on maximising multilateralisation of economic relations by new-generation free trade agreements and preventing the domination of both supply and demand of the Vietnamese economy.

Besides this, Vietnam should closely monitor the movement of the trade conflict to provide appropriate response policies, especially the list of goods subject to sanctions from both sides, to build appropriate market responses for each industry and product, support measures on technical barriers, tariffs, and quality control.

Trade activities should innovate and focus on in-depth support activities, like providing information and consulting widely on issues related to trade wars, including the list of sanctioned goods, and exchange rate fluctuations. This helps enterprises in proactively adjusting production; searching for new markets, or considering using or dealing with domestic and foreign trade defence measures.

The government should speed up improving policies and solutions related to the market and exchange rate, as well as provide solutions to maintain traditional markets such as the EU, and Eastern Europe, while exploiting areas with significant promise.

Vietnamese exporters should strengthen their knowledge of tariff protectionism, trade wars, and trade defence. Of these, trade competition is an inherent attribute of the market economy. Enterprises should stay calm and proactively update information, manage risks, take advantage of integration, and seize new markets.

Businesses should quickly and proactively diversify, and improve product standards. Although the US is a key market, Vietnamese firms must expand to other regions such as the EU, Japan, and ASEAN to not depend on a single market and avoid risks from changes in US trade policies. In addition, compliance with international quality standards, especially sustainability and food safety standards, will enable Vietnamese goods to overcome non-tariff barriers and raise competitiveness in the US market.

Furthermore, exporters should exploit the new generation of free trade agreements, which include key and potential markets for exports. This can make up for any decline caused by the trade war, as well as help Vietnam receive modern technologies to improve competitiveness.

Vietnamese exporters should improve their competitiveness and consider this the most effective measure to respond to all economic and trade incidents. The quality and added value of export products should be enhanced with diverse designs and reasonable prices, in addition to reforming the production, financial structure, organisational structure, and improving technical potential to boost products not subject to tariffs.

This aims to seize the opportunity quickly, capture market share, and cope with the worst-case scenario of a global trade crisis.

Frederic Neumann, chief Asia economist, HSBC

It appears that the only certainty regarding global trade nowadays is massive uncertainty. While the new US president announced a 30-day delay to sweeping 25 per cent tariffs on Mexico and Canada, China still finds itself on the receiving end of a 10 per cent tariff imposition, which led it to retaliate with narrowly focused tariffs and export restrictions against the United States.

Looking further ahead, how will China approach its trade and economic relations with the US under a second Donald Trump presidency?

Drawing on Japan’s experience during the 1980s, a case study that Chinese policymakers famously study over closely, we anticipate that China will replace some direct exports to the US with more overseas investment, deepen trade with emerging economies, cement its centrality in global supply chains through component exports and high-tech manufacturing, avoid major currency realignment, and gain a prime opportunity to roll out more forceful stimulus measures and structural reforms.

ASEAN stands to benefit enormously from these trends. The region has already surpassed the US and EU as China’s top export destination and has seen its own production capabilities improve – in industries ranging from electric vehicles to consumer electronics – with the support of Chinese investment.

The current president’s inclination to reduce America’s imports may also inadvertently provide the impetus for Asia to update its growth model, which has historically relied heavily on exporting to the US market. So-called “decoupling” would not entail a wholesale retreat from trade, or even turning away from the US as an important trade partner, but rather offers an opportunity for Asia to charge up new growth engines.

There are two main pillars to Asia’s internally focused growth strategy. Firstly, the region must resolve the imbalance between its savings and investments. While thriftiness is a virtue, high savings can hurt growth when it perennially exceeds what can be profitably invested.

Although raising investment could offset excess savings, this option could be ineffective if profitable investment opportunities have already been exhausted. Higher investment would also result in more goods being churned out that would eventually need to be absorbed somewhere.

The answer to this problem lies in unleashing domestic consumption. If Asia consumed more, it would become less reliant on overseas demand, while also elevating the living standards of its households. Of course, Asia’s households – long accustomed to high savings – will need to be incentivised to consume. Policymakers can help by bolstering incomes and providing stronger social welfare support.

Even if excess savings in some parts of Asia cannot be readily reduced, the region can at least reallocate capital more effectively from high savings economies (for instance, China, South Korea, Singapore, and Japan) to markets that still require more capital investment (for example, India, Indonesia, the Philippines, and Bangladesh).

This is where the second pillar of Asia’s decoupling comes into play. While plenty of supply chains and investment do criss-cross across Asian borders, much of this activity is geared towards serving Western markets. By fostering greater regional integration, Asia can expand markets within its own neighbourhood instead of shipping ever more goods to the US or Europe, where trade barriers are rising.

Asia can enhance intra-regional trade and investment by building on agreements such as the Regional Comprehensive Economic Partnership, which includes ASEAN and Northeast Asia, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, comprising eleven economies from Asia and the Americas. Adding South Asia to these trade agreements would mark significant progress towards building stronger regional resilience in the age of decoupling.

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