Strategic Misfire? The U.S.-Vietnam Tariff Paradox and their Role in U.S.-China Interdependency

By Nikolas Lund-Hansen

As the globe awaited the so-called “Liberation Day Tariffs,” ASEAN countries braced for repercussions from their largest source of Foreign Direct Investment (FDI): United States.  While American influence has arguably declined in its own hemisphere, the U.S. has asserted itself in China’s backyard. ASEAN nations have proven to be a promising success story particularly with regards to trade volume, FDI, and humanitarian aid. My analysis argues Vietnam in particular is positioned to capitalize on American tariffs imposed on Chinese goods, however the economic advantage is contingent of strengthened trade and diplomatic ties between Hanoi and Washington.

In efforts to de-risk from China, the U.S. has increasingly turned to strategic partners like Vietnam to maintain national security while supporting global economic growth. De-risking in this context can be defined as an effort to minimize the risky nature of being overly dependent on another country to produce goods for critical sectors. However, if the United States commits to a path of de-risking, simultaneously addressing a global trade deficit is counterintuitive and harmful to relations between otherwise strategic partners and allies. 

Vietnam has emerged as a prime alternative to China due to its young, skilled population, and strategic coastline. The paradoxical flaws of tariffs on Vietnam lies in undermining the gradual absorption of Chinese trade by Vietnam since the Trump 1.0 Trade War, Vietnamese historical distrust of China’s expansionism, and painstaking efforts from both the United States and Vietnam to move from hostile to normalized relations post-Vietnam War.

Since China joined the World Trade Organization in December 2001, its trade relationship with the U.S. has been marked by U.S. firms' high reliance on China's industrial and logistical advantages. Therefore, de-risking and re-shoring from a U.S.-China bi-lateral trade relationship appears to be a more probable option than advocating for a complete de-coupling. Re-shoring relates to the act of strategically directing previously established supply chains to geographically closer or politically aligned nations.

Analysis based on U.S.-Vietnam-China trade reveals a strong correlation: as U.S. imports from China decrease, imports from Vietnam increase. U.S. imports from China peaked at 21.9% of US total imports in 2017 but has been in a gradual decline, dropping to 14.5 % in 2023. The import share from China has declined, coinciding with a rise in Vietnam’s share—from just 0.43% in 2000 to 3.92% in 2023. This trend is primarily driven by Vietnam’s overlapping export sectors with China, most notably in, electronics, machinery, textiles and furniture. Had Vietnam not been impacted by tariffs, the American global trade deficit may have remained unchanged, but the U.S. would have made strides in diversifying away from China.

On “Liberation Day”, the Donald Trump administration placed a 46% reciprocal tariff on all Vietnamese goods. The justification of such policies may appeal to a consequentialist logic. In other words, the consequentialist argument claims that short-term economic hardship for American consumers is justified by long-term strategic gain for American companies. However, in a world of entangled supply chains and cross-continental investment, blanket tariffs fail to strengthen bilateral trade and do quite the contrary. Moreover, tariffs on allies and adversaries alike undermines the overarching goal of reducing U.S. reliance on China.  Vietnam stands out as optimal partner not only because of their promises towards “green” supply chain practices and bureaucratic reform but also the geopolitical context shaped by complex Vietnam-China relations.

Despite a “crusade” of ideological differences during the Vietnam-War, the relationship between the United States and Vietnam is less surprising when contextualized historically. The historical belligerence by Chinese dynasties to invade the Dai Viet and Champa kingdoms on several occasions fostered general Vietnamese distrust of China. In the post-Vietnam-War era, this has evolved into strategic collaboration between the U.S. and Vietnam in the form of foreign aid, arms deals, and FDI. After President Bill Clinton lifted the trade embargo on February 3rd, 1994, humanitarian aid played a crucial role in addressing the destruction from the war, generational damage and trauma. The current underestimation by U.S. government to realize the scope of painstaking efforts necessary for the normalization of post-war U.S. relations with Vietnam erodes the humanitarian connection unique to this bilateral relationship.

While global tariffs may open opportunities for increased U.S. exports to Vietnam’s growing consumer class, they fail to address the root issue of Chinese dependence. Additionally, global competitiveness for Vietnam’s industrial capabilities is only increasing. Private firms from Europe (Pandora), Taiwan (Nvidia), and South Korea (Hyundai) already have begun to invest heavily in Vietnam as part of their respective China de-risking and re-shoring strategies.  The U.S. is the largest market for Vietnamese goods and Vietnam may scramble to provide concessions in the short term. However, Vietnam’s diverse spread of export partners coupled with brazen tariffs from the U.S. on Vietnamese goods will likely only expedite Vietnam’s export-partner diversification and chip away at the bi-lateral trade progress made in the last three decades. 

Ultimately, as mentioned previously, a current full decoupling from China by the United States is improbable. This is given the deep integration of Western firms and products into Chinese supply chains. De-risking and re-shoring, not decoupling, is the more realistic objective. In committing to de-risking more U.S.-aligned countries with industrial capabilities for reshoring such as Vietnam, should remain at the forefront of economic strategy not in the same boat as China when it comes to reciprocal tariffs.

While Vietnam remains the prime candidate for absorbing displaced supply chains, a broader diversification strategy across ASEAN is necessary. This may include assessing other nations with large manufacturing potentials such as Indonesia, Malaysia and the Philippines and nations in the Western Hemisphere. Vietnam is emerging to be a nation that would absorb most of the reshoring if their manufacturing capacities are scalable, ports improve in efficiency as well as domestic issues are tackled.

U.S. policymakers must prepare for this shift by strengthening global trade norms and establishing new avenues of cooperation. These avenues of cooperation in education, research and development and sustainability, may prove fruitful if invested in. Preferably if tariffs are rescinded from Vietnam, the U.S. must also work towards identifying patterns of Chinese companies subcontracting through Vietnam to circumvent tariffs. Ultimately, Vietnam will continue to benefit from U.S. tariffs on China but only if the U.S. avoids undermining its most promising partnership in the region.