Trump’s China +1, or really?

Vietnam’s export-driven economy would face two major changes in 2025. Firstly, the arrival of Trump at the White House. Secondly, sluggish domestic demand in China would likely not show signs of drastic abatement.

While Trump had been vociferous on China, Mexico, and the EU over the question of trade deficits, he has also criticized Vietnam during his first term in office, describing the country as the “single worst abuser of anybody” in 2019.[1] It is likely that a 10-20% blanket tariff would be applied upon his second administration, and Vietnam is likely to further be subject to additional penalties as it currently has the 4th largest trade deficit with the US.

Fig 1. Vietnam’s exports has exploded ever since Trump’s trade war with China. Source: The Economist

These tariffs would likely be targeted, fulfilling the fundamental criteria for reviving the U.S manufacturing industry. Preliminary research therefore suggests a high likelihood of tariffs specifically targeting electronics and machinery, which also constitutes the largest component of Vietnam exports. This is because there is an existing domestic industry of competing US manufacturers such as Intel, Texas Instruments, General Electric, and Caterpillar. Compare this to the apparel/furniture industry, which has largely been outsourced and current domestic markets are too supply-inelastic to sufficiently raise production at affordable prices. As of 2023, over 97% of clothes shoes sold in the U.S. are imported, meaning that tariffs would do little to domestic manufacturing, which has already been offshored.[2] Additionally, end-consumers are relatively insensitive to price changes in machinery and electronics because these costs take longer to filter through the supply chain. Percentage increases in high-cost goods are also less noticeable than significant hikes in cheaper items like apparel, making policy decisions in these sectors more politically feasible due to their lower demand-elasticity. This might indicate being more overweight on textiles/apparel/furniture in portfolio allocation despite lower revenue growth, since they tend to be income-inelastic and blur the line between Consumer Discretionary and Consumer Staples.

Fig 2. Vietnam’s (2022) export composition to the US, charted. Electronics, Machinery, Textiles, and Apparel dominate. Source: The Observatory of Economic Complexity

Therefore, even though Vietnam has benefited enormously from supply chain reorientation since the first Trump administration, the looming threat of industry-specific tariffs will be a downside risk that needs to be priced in. Given that electronics occupy roughly 45% of Vietnam’s exports to the US, export growth would likely suffer in the short run as Vietnam would struggle to find substitutes. Government targets for 2025 export growth also hover around 6%, an 8% YoY decrease from the projected 14% export increase in the first 11 months of 2024.[3] [4]

This would, however, be mitigated by the continued friend-shoring policy to Vietnam with a 60% tariff in China. This will provide a boost to Vietnamese exports as the two countries share an extremely high export similarity index of 0.796 (2021).[5] Geopolitical considerations would thus come into play. China is a “strategic competitor”, and Vietnam’s “bamboo diplomacy” has borne fruit by elevating the US-Vietnam relationship to “Comprehensive Strategic Partnership.”[6] Even if Trump wants to protect American manufacturers, the comparative advantages of Vietnam—its well-developed supply-chain infrastructure in low-end electronics and low labor cost—would amortize the possibility of drastic tariff actions by the United States.[7] [8] Additionally, diplomatic pressures would favor Vietnamese exports, which remain the most cost-effective and convenient alternative to Chinese exports. Therefore, while exports might suffer, the probability of a drastic drop is low. This is due to the numerous barriers in place, namely geopolitical incentives and friction costs involved in stringent tariff regimes. It is therefore logical to slightly trim positions on export-related industries such as consumer discretionary and industrials, but they shall still have an overweight allocation in portfolio composition due to their importance to Vietnam’s economy (trade to GDP ratio being 184%, one of the highest in the world).[9]

The deceleration in the Chinese economy might be a potential risk for Vietnamese exports to its second largest trading partner (16%). However, data analysis has indicated that conclusions of a definite slowdown are premature, especially when we widen the time horizon and smoothen out irregularities.

          Fig 3. Contrary to intuition, China’s slowdown did not affect Vietnamese Export volume. Source: LSEG Workspace

Additionally, poor domestic outlook in China has incentivized greater R&D in foreign jurisdictions to reap better returns. This includes Vietnam, where it has leapfrogged to become the sixth-largest investor in 2023 and has led the number of new FDI projects in 2024. [10] [11] The upcoming Trump tariffs would encourage greater Chinese investment—especially in fields like EVs, Energy, and electronics—into Vietnam as manufacturing firms seek to escape the hefty 60% penalty. This has a two-fold benefit by increasing both Vietnamese export capacity and variety as the country seeks to veer from its traditional low value-add export model of textiles and apparel.

In summary, the outlook on Vietnam’s export situation in 2025 would be slightly pessimistic. A potential slowdown in trade with its largest export partners is likely, but will not drastically hit Vietnam’s export engine. Safe to say that the situation remains balanced, for now.

References

[1] Hannon, P. (2024, December 17). Vietnam Won Big in Donald Trump's First Trade War. Now, It's a Target. The Wall Street Journal.

[2] American Apparel & Footwear Association. (2024). ApparelStats and ShoeStats.

[3] Jumaway, J. (2024, December 6). Vietnam Achieves Outstanding Export Growth in 2024. International Trade Council.

[4] Xinhua News Agency. (2024, December 12). Vietnam sets 6-pct export growth target for 2025.

[5] Fan, L. (2023, March 24). Chart of the Week: Rising Prominence of "Made in Vietnam". ACI Perspectives.

[6] The White House. (2023, September 10). FACT SHEET: President Joseph R. Biden and General Secretary Nguyen Phu Trong Announce the U.S.-Vietnam Comprehensive Strategic Partnership.

[7] CEIC Data. (n.d.). Vietnam - Monthly Earnings.

[8] Reuters. (2024, November 12). Vietnam expands chip packaging footprint as investors reduce China links.

[9] Trading Economics. (n.d.). Vietnam - Trade (% Of GDP).

[10] Vietnam News. (2024, August 19). China leads in number of FDI projects in Việt Nam in seven months.

[11] Hiep, L. H. (2024, November 13). China’s Increased Investment in Vietnam: Opportunities and Challenges. FULCRUM.