Michael Kokalari, Chief Economist at VinaCapital, described the April 2 announcement of ‘reciprocal tariffs’ as “completely unexpected”. “Based on our analysis, these tariffs will make it difficult for Vietnam to achieve its 8% GDP growth target,” he said.
Markets had anticipated a tariff of around 10%, and VinaCapital had forecast an even lower figure. Kokalari noted that such a high rate runs counter to U.S. interests and may trigger inflationary pressure that could influence upcoming midterm elections.
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At a garment manufacturing factory for export |
The 46% tariff figure is based on the U.S. Council of Economic Advisors (CEA) claim that Vietnam imposes a 90% tariff on U.S. imports - a figure derived from a simplistic analysis of the bilateral trade deficit.
However, the U.S. Trade Representative (USTR) contradicted this claim in a report published on April 1, stating that “the majority of U.S. exports to Vietnam face tariffs of 15% or less”. Analyses from Bloomberg and other sources also suggest that Vietnam’s average tariffs on U.S. imports are only about 7 percentage points higher than U.S. tariffs on Vietnamese imports. When adjusted for trade-weighted flows, the two countries’ effective import taxes are roughly equivalent.
Kokalari emphasized that the President Donald Trump administration seems to have based its entire trade and tariff strategy – or at least its entire opening negotiation position – on the numerical trade balances.
“It is extremely urgent for Vietnam to immediately start importing a lot more from the U.S.,” he stressed.
“We have heard from secondary sources that Trump administration officials appreciate the initial efforts Vietnam is making to cooperate with efforts to reduce the numerical trade balance between the two countries, but U.S. trade officials will not be assuaged by promises to make purchases at some future date,” he said.
He added that executives in the energy sector have indicated Vietnam could begin importing up to USD 35 billion worth of liquefied natural gas (LNG) annually by using floating storage regasification units (FSRUs) ships, as building permanent LNG terminals would take years.
Trade experts believe the 46% tariff represents an opening position for negotiations, with intense discussions expected between the two countries in the coming weeks. However, there is little consensus on what the final rate might be. Given how high this initial negotiating position is, it is hard to see a final figure of anything less than 25%, which would represent a material hit to Vietnam’s GDP growth.
Market impact
Kokalari said the announcement shocked investors, sending the VN-Index plunging nearly 7%. But the selling was fairly uniform across-the-board, indicating that market participants will need more time and information to digest the likely impact of all of this on the economy and earnings growth. Even companies not directly affected by tariffs, such as IT outsourcing giant FPT, saw their shares drop by the daily limit of 7%.
He noted that the reaction in the currency market was relatively muted, with the USD/VND exchange rate depreciating by less than 1% on the day, and by less than 2% year-to-date.
Historically, currencies of countries targeted by tariffs tend to depreciate by about half the tariff amount, he said, citing examples from Mexico during Trump’s first term. However, many tariff details remain unclear, including potential exemptions for specific Vietnamese exports.
Despite the uncertainty, some investment funds see opportunities.
“We are currently assessing the impact of the tariffs on the scenarios we have in place for our various portfolios and are looking for buying opportunities to take advantage of any short-term weakness against the backdrop of the potential longer-term impact on both the Vietnam and global economies,” Kokalari said. “The sell-off gives active fund managers an opportunity to buy stocks that are fundamentally sound and will not be overly impacted by the tariffs at cheaper valuations.”
Shock to key export sectors
Vietnam’s top export sectors, including textiles and garments, electronics, footwear, seafood, and furniture, rely heavily on the U.S. market. The proposed tariffs represent a shock, and businesses are urging the Government to negotiate for a more reasonable rate.
Pham Xuan Hong, Chairman of the Ho Chi Minh City Association of Garment, Textile, Embroidery, and Knitting (Agtek), highlighted that the U.S. accounts for 40% of the industry’s total exports.
Currently, Vietnamese textile and garment products exported to the market are subject to a 16% tax. If an additional 46% is imposed, they will be unable to compete, he said.
Agtek members hope that the strong bilateral relationship and negotiation efforts from the Vietnamese Government will help reduce the proposed tariff rate. In the meantime, businesses will continue to diversify their markets to reduce their dependence on the U.S. market, he said.
Nguyen Dinh Tung, Vice Chairman of the Vietnam Fruit and Vegetable Association and general director of Vina T&T Group, noted that most Vietnamese fruit and vegetable exports to the U.S. currently face minimal tariffs, except frozen durian, which is taxed at 16%.
He warned that higher tariffs could undermine the competitiveness of Vietnamese produce, prompting U.S. importers to shift to suppliers in countries like Thailand.
The woodworking industry faces similar risks.
Ngo Sy Hoai, Vice Chairman and General Secretary of the Vietnam Timber and Forest Product Association, described the new tax as “terrifying”, adding that the industry is still reeling from the news. He expressed hope that Vietnam will soon begin formal negotiations to address the issue.
Source: VNA