Vietnam In Trump’s Trade War

Vietnam’s economy has made impressive strides and is now nearly a third larger than it was on the eve of the pandemic. In 2024, it grew just above its potential rate—7% versus a 10-year pre-pandemic average of 6.5% per annum. That said, the best may be behind it. In Q1 2025, growth moderated to 6.9% year-on-year, down from 7.6%, with consumption, investment, exports, and imports—an important lead indicator of domestic demand—all softening.

Yet, the economy has held up better than both the dong and the stock market. Vietnamese equities plunged 17% after Trump’s April 2nd “Liberation Day” tariff announcement. But following the subsequent 90-day pause on reciprocal tariffs, the market not only recovered all its losses but rallied further.

In the Trade War Crossfire

Vietnam ranked lowest in our assessment of trade war vulnerability, which included 16 countries spanning the EU, BRICS, Canada, and Mexico. Unless Vietnam negotiates a trade deal that satisfies Trump within the 90 days pause period, its exports risk being hit with the second-highest effective tariff rate—46%—after China.

Vietnam is on the hook, and its room for manoeuvre is limited. Its trade surplus with the U.S. was the fourth-largest in 2024, after China, the EU, and Mexico, and has been trending higher for four consecutive years. Nearly one-third of its exports were bought by U.S. consumers last year—making it the third-most dependent exporter to the U.S. after Mexico and Canada.

This reliance exposes the broader economy. With gross exports accounting for 88% of GDP—higher than any of the other 16 countries—the fallout from tariffs would not be confined to the export sector but would have economy-wide ramifications.

Trump’s main grievance with Vietnam is encapsulated in trade flow asymmetries (Figure 2). Vietnam exports far more to the U.S. than it imports—only 4% of its total imports come from the U.S., compared with nearly 40% from China. This disparity has led to concerns that Chinese exporters may be circumventing tariffs by routing goods through Vietnam.

Figure 3 shows Vietnam’s export cycle is in an upswing, with U.S. demand as the primary driver. This underscores Vietnam’s vulnerability to both a U.S. economic slowdown and to higher U.S. tariffs.

Who Holds the Leverage?

While it may seem the U.S. holds all the trade leverage, options are limited for both sides. Trump can pressure Vietnam to lower its tariff rates, agree to fairer trade terms, and perhaps increase energy and industrial imports from the U.S. However, from a cost perspective, exporting U.S.-made goods remains unviable—Vietnam’s production costs are nearly 47% lower.

Vietnam also has little to offer that aligns with Trump’s broader goals of reshoring high-value manufacturing and job creation. Unlike Korea, Japan, Taiwan, or even China, Vietnam’s exports are concentrated in low-value, labor-intensive sectors—garments, footwear, agricultural goods, and simple manufactured items. These sectors do not create high-paying jobs nor contribute meaningfully to U.S. national security or strategic interests.

The Domestic Economy

Vietnam may be the worst-positioned in the current trade war, but it remains a high-impact, moderate-risk scenario. First, it has every incentive to negotiate. Second, while exports are important, domestic demand remains a key growth driver. Consumption accounts for 55% of GDP and investment another 34%, together making up 99% of economic activity.

Still, there are signs that growth may continue to slow. Corporate profits are in a downcycle. Although balance sheets are solid, they lag behind regional peers. Notably, free cash flow per share has been negative for two years, and liquidity conditions are tightening. This, combined with weaker profitability, points to a likely further slowdown in investment spending.

For now, domestic credit growth is holding up, led by construction and household borrowing. But credit to trade and manufacturing sectors has softened (Figure 5). PMI surveys show manufacturers growing more cautious, lowering selling prices, and tempering expectations—not just due to weak external demand, but also lacklustre domestic conditions.

Headline and core inflation have risen, signalling two key concerns. First, higher living costs are likely to weigh on discretionary spending. Second, monetary policy is likely to remain on hold until there’s more clarity on growth and inflation. Since March 2023, the central bank has cut its discount rate by 150bps to 3%, where it has remained since June 2023.

Vietnam’s Only Option

In this U.S.-led tariff war, Vietnam’s only real option is to concede. For Trump, a revised trade agreement would be a symbolic win. But the tangible gains for the U.S. would be limited.

• Are Vietnamese firms going to relocate to the U.S.? No. • Will they create high-paying jobs for Americans? No. • Are any Vietnamese industries strategically important to U.S. national security? No. • Will Americans stop buying low-cost goods from Vietnam? Unlikely.

U.S. firms cannot compete with Vietnam’s cost base, and any large-scale shift would come at a cost to U.S. consumers.

At home, Vietnam’s growth is likely to moderate as slowing investment and a murky global outlook begin to affect broader economic activity. That said, a recession is not on the cards.

Bottom Line: Overweight Vietnamese Equities

Despite trade war risks, Vietnam’s structural growth story remains intact. The domestic economy provides a cushion, and market valuations remain attractive. For long-term investors willing to ride out volatility, Vietnam remains a compelling opportunity.