Vietnam Navigates the Tariff Trap: Diplomacy, Manufacturing, and a Balancing Act Between Superpowers

Vietnam’s recent trade agreement with the United States marks a pivotal moment in its economic and diplomatic trajectory. As only the third country—after the UK and China—to strike a deal with President Donald Trump following his shock announcement of sweeping “reciprocal tariffs” on April 2, Vietnam has once again shown the speed and pragmatism that have defined its economic policy in recent years.

Originally slapped with a 46% tariff—one of the steepest among the tariffs announced—Vietnam has now managed to reduce that burden to 20%, with a higher 40% reserved for goods suspected of being “transshipped” from other countries, particularly China. While questions remain about how “transshipment” will be defined and enforced, this diplomatic success is no small feat.

At the heart of this maneuvering lies an essential truth: Vietnam’s economy cannot afford to alienate the US, which accounts for nearly a third of its total exports. In 2024 alone, Vietnam recorded a $123 billion trade surplus with the US. This overwhelming dependency meant that any extended trade disruption would risk serious domestic economic consequences—just months before the Communist Party of Vietnam (CPV) holds its five-yearly Congress.

For General-Secretary To Lam, ensuring uninterrupted access to the US market is not just a matter of trade policy—it is a political imperative. His development vision for Vietnam, which includes deepening private sector reforms and shelving the CPV’s previous anti-corruption dragnet, hinges on sustained economic growth. Achieving the goal of becoming a high-income country by 2045 requires 8% annual growth. That target is ambitious, and one key to reaching it is keeping export engines running at full speed.

But this deal is not without costs.

In agreeing to lower its own tariffs and offer preferential treatment to US products—such as large American SUVs, oddly out of place in Vietnam’s narrow urban streets—the Vietnamese government is making painful trade-offs. These concessions, while diplomatically strategic, will do little to erase the core imbalance: a $10 billion purchase commitment versus a trade surplus over 12 times that size.

At the business level, Vietnamese manufacturers are scrambling to respond. A recent PwC pulse survey revealed that 86% of companies—many without even direct exports to the US—expressed serious concern about the fallout. Whether it’s cost inflation, reduced demand, or fears of supply chain disruption, the anxiety is real.

In response, companies are adapting with admirable agility. Many are diversifying supply chains beyond China, automating operations to cut costs, and exploring new markets to reduce overreliance on the US. Some are renegotiating supplier terms, while others are investing in leaner operations or even considering moving part of their production elsewhere. It’s a full-court press to preserve competitiveness in a volatile landscape.

Yet much remains unclear. Will the 20% tariff replace existing duties or be added on top? What precisely constitutes transshipment? These questions carry significant financial weight, especially for sectors like garments, electronics, and footwear—Vietnam’s strongest export performers.

The stakes are even higher in the long term. If these tariffs persist, Vietnam’s position as the go-to alternative to China in global manufacturing could weaken. While the current deal avoids the worst-case scenario, prolonged uncertainty could lead investors to reassess Vietnam’s value proposition. Companies that relocated from China to Vietnam to hedge against US-China tensions might not be keen on relocating again—but if production costs rise sharply or market access erodes, they will have no choice.

Vietnam’s leadership understands this. That’s why Hanoi has been aggressive in addressing US concerns—cracking down on counterfeit goods, promising multi-billion-dollar purchases, and even floating the idea of buying American fighter jets, a dramatic shift for a country long cautious of US military entanglements.

But in threading the needle between Washington and Beijing, Vietnam is walking a diplomatic tightrope. Closer ties with the US can’t come at the cost of antagonizing China, Vietnam’s giant neighbor and an increasingly important economic partner. Chinese firms are investing heavily in Vietnamese assembly lines as part of broader supply chain diversification, bolstered by the Regional Comprehensive Economic Partnership (RCEP), which both countries are part of.

For Beijing, the US-Vietnam agreement brings mixed feelings. On one hand, Chinese exporters can continue to use Vietnam as a partial assembly hub. On the other, the 40% transshipment penalty signals Washington’s determination to plug what it sees as loopholes in trade flows. There may also be discomfort in Beijing over the potential for deeper US–Vietnam security cooperation—even if Hanoi remains publicly non-aligned.

This balancing act is now part of Vietnam’s economic DNA: open to all, aligned with none. Hanoi wants to be a hub, not a pawn.

Europe and other multipolar actors could play a stabilizing role in this unfolding dynamic. But their support should come with expectations. Vietnam’s backsliding on environmental commitments—building new coal and gas plants, for example—and its failure to curb illegal migration to Europe are legitimate concerns. If Hanoi wants to benefit from open trade, it must also deliver on its broader obligations under EU and UK free trade and partnership agreements.

Still, none of this should distract from the broader story: Vietnam is doing what many countries cannot. It is managing a high-stakes power struggle between two giants while keeping its eye firmly on economic development. The new US-Vietnam trade deal, flawed as it may be, is a symbol of Vietnam’s maturity as a global economic player—ambitious, adaptable, and keenly aware of its strategic importance.

If implementation is handled well, and if both sides commit to transparency and stability, this agreement could become a blueprint for how mid-sized economies can survive and even thrive amid great power competition. Vietnam has earned a temporary reprieve from the tariff threat—now comes the hard part: proving it can sustain growth without losing balance.

As Vietnam steps into this uncertain new phase, one thing is clear: economic diplomacy is no longer a sideshow. It is the main event.