The Impact of Further Trade Tensions on the Vietnamese Economy - A Double-Edged Sword?
There is a palpable excitement in Vietnam at the prospect of heightened protectionist measures from the US against China (as well as Mexico and Canada). The country had been perceived as a beneficiary of the 2018-2019 trade tensions and many expect that new protectionist measures against China could lead Vietnam to enhance its role as a manufacturing hub. However, the question remains: Is the path ahead as simple as it seems?
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Historical Context: previous tariffs unquestionably boosted Vietnam’s manufacturing rise
In 2018, the U.S. imposed significant tariffs on a range of Chinese products, leading to market disruptions. Concurrently, the US withdrew from the Trans-Pacific Partnership (TPP), further altering its trade landscape.
This period corresponds to an acceleration of manufacturing production and exports from Vietnam, with total exports soaring from $260 billion in 2018 to $385 billion in 2022 (Exhibit 2). Notably, Vietnam’s share of U.S. imports rose dramatically, increasing from 1% to 4% during this period, which seems to confirm that the growth of made-in-Vietnam products has been boosted by the protectionist context. The trade deficit incurred with China (~60 Bn USD in 2022) tends to confirm the evolution of global supply chains, where some “Made in China” products are becoming “Made in Vietnam from Chinese inputs”. The evolution of trade flows between China, Vietnam and the US also confirms that the dip in China exports to the USA in 2015-2020 corresponds to a rise in both Chinese exports to Vietnam and Vietnamese exports to the US. Chinese firms, who represent close to 30% of FDIs in Vietnam in 2024, seem to have taken advantage of this situation. As long as a product reaches the rate of 30% localization within Vietnam, it can legally be exported as “made in Vietnam”, with duties of 15% maximum (often less, depending on its category).
It is however reasonable to conclude that Vietnam used this favorable context to make substantial progress in its competitiveness globally, and not just in its trade with the US. The trade tensions do not explain all the growth in Vietnam. For instance, exports to Europe increased from $45 billion in 2018 to $54 billion in 2022. Such advancements suggest that the trade tensions acted more as a catalyst than a primary driver for Vietnam’s already strong export trajectory.
The current momentum is still strong
Global companies have taken notice of Vietnam's growing stature in the manufacturing landscape. Executives have expressed optimism about moving operations to Vietnam, citing its competitive labor costs and improving infrastructure. Companies have begun diversifying their supply chains to mitigate risks associated with single-country dependencies (Exhibit 3).
Another cause for optimism in the fact that the country has entered into 17 free trade agreements with 50 countries across all continents, including strategically important partnerships such as the EU–Vietnam Free Trade Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, all favoring lower tariffs to boost trade value. This has contributed to attract significant FDI that locate their production capacities in Vietnam: in 2024, more than 70% of Vietnam’s export value has been generated by foreign-owned manufacturers.
Looking ahead, the scenario for Vietnam appears optimistic but rife with uncertainties: Current U.S. statements regarding future tariff implementations remain largely declarative and not yet substantiated by concrete actions. The scale of change anticipated may be less significant compared to past experiences, especially as large corporations have diversified their operations, while smaller players face funding challenges and may not be able to follow suit. Most manufacturers we speak to also highlight the need to have a balanced footprint (i.e., not a single country, even within ASEAN). Lastly, the trade imbalance between Vietnam and its trading partners (114 Bn USD surplus with the US, 31 Bn USD surplus with the E.U. in 2022) may bring enhanced scrutiny, and put Vietnam under more pressure from future Tariffs. For example, the vice-president-elect in the US has explicitly taken a position in the past against granting Vietnam market economy status, and could make further efforts to create additional barriers to its exports. The decision in mid-2024 to keep classifying Vietnam as a non-market economy (while recognizing significant reforms) also highlighted the caution of Americans when it comes to accepting large quantities of imports.
The impact of tariffs is not without nuances. Some industry leaders have pointed out that while large corporations are successfully adapting, smaller enterprises struggle with capital expenditure (CAPEX) requirements and may not benefit similarly. As the country continues to grow, it is also important to assess how much “capacity” Vietnam has left to absorb more manufacturing from the near-100-million Chinese manufacturing workforce.
The future ahead: Significant potential, but bottlenecks on the horizon and a looming productivity challenge
Vietnam is undoubtedly set to attract significant foreign investment in manufacturing over the next decade, driven by its competitive labor costs, proximity to global supply chains, and growing reputation as a hub for high-tech production. Major recent announcements highlight this trend, such as Nvidia’s plans to build two AI centers in Vietnam and Samsung’s ongoing $3.3 billion expansion of its semiconductor production. Additionally, significant investments into industrial parks (Korea Land and Housing Corporation, Warburg Pincus) showcase investor’s confidence. However, we argue that there are two significant hurdles in the horizon that Vietnam will need to address if it wants to stay on this parth: in the short run, it will need to solve immediate bottlenecks to expansion. In the long term, significant efforts into productivity enhancement will be required.
The first challenge for Vietnam is to resolve its current bottlenecks. To continue to expand its manufacturing at the current pace, Vietnam will require 5 million factory workers, 30 additional GW of energy, about 25bn USD investments in infrastructure investments each year, and 10-15k Ha of industrial land in the next 10 years. Of those four main factors, only the last one appears to be easily mobilized in sufficient quantity, the other three will face some limitations in the next decade. (Exhibit 4). A waning demographic dividend, insufficient infrastructure investment, or increasingly scarce electricity (where power outages in Northern Industrial parks in 2023 impacted some of the major investors in the country like FoxConn and Samsung) are all likely to limit the growth of Vietnam’s manufacturing base - at least in terms of quantity. The case of Intel’s investment in the country are a testament to this situation: the American chipmaker has consistently developed its manufacturing operations in Vietnam for more than a decade, but ultimately chose not to expand further in 2021, reportedly driven by concerns over the power supply (Exhibit 5).
Conclusion: an ever-pressing productivity Imperative and several bottlenecks to resolve
Vietnam's manufacturing sector is growing rapidly but faces long-term challenges that could limit its expansion.This is unlikely to be a major blocker in the immediate term as the appetite for the country’s production capacity remains strong. However, the more Vietnam progresses in its journey to grow in global supply chains (and the more it gains the spotlight among import countries), the more the limitations to its model will become apparent.
A first-order concern is low labor productivity, which lags behind regional competitors like China and Thailand. If unaddressed, this gap threatens Vietnam’s cost-competitiveness as wages rise.
However, a more important concern is the set of bottlenecks that start to appear in the “engine” of Vietnamese exports. Infrastructure challenges, including electricity shortages and congested logistics hinder efficiency and inflate production costs. Moreover, a skills mismatch in the workforce limits Vietnam’s ability to attract advanced manufacturing investments, as many workers lack the specialized training needed for high-tech industries.
Without significant improvements in education, infrastructure, and technology adoption, Vietnam risks stagnating as a low-cost assembly hub rather than evolving into a leader in high-value manufacturing. While global trade conditions currently favor Vietnam, they cannot offset the need for structural reforms. Boosting productivity remains critical for Vietnam to capitalize fully on its opportunities and address these challenges.
By Matthieu Francois, Valerie Van Tran, and Aimee Dam, Delta West
