US-Vietnam trade pact aims to push China out of Southeast Asian supply chains

US-Vietnam trade pact aims to push China out of Southeast Asian supply chains

In a dramatic turnabout of US trade policy, President Trump has secured a preliminary trade agreement with Vietnam that aims to restrain China's control of world supply chains. The deal, released on Wednesday, imposes a 20 percent tariff on Vietnamese imports to the United States—short of the 46 percent that had been threatened—but imposes a high 40 percent tariff on "transshipments," or goods sent through Vietnam that originated elsewhere, said the New York Times.

The action is directly targeted at China, which has come under fire for using countries like Vietnam to avoid US tariffs. The officials say that the agreement can serve as a model for subsequent agreements with other Southeast Asian nations as Washington redoubles its effort to reduce reliance on Chinese manufacture.

Tariff threat forces trade realignment

The agreement comes after months of bravado by President Trump, who had threatened to slap strict tariffs on Vietnamese goods if transshipment methods were not contained. Industry groups like electronics, textiles, and footwear—corestays of Vietnam's export-oriented economy—have been under a shadow. While the 20 percent tariff is still a shock, many in the business community see it as a better outcome than the worst case.

Tran Quang, a manager at a Vietnamese home fragrance exporter, characterized the final product as "not so bad" and welcomed the stricter punishment for transshipment. "There are many little Chinese guys who just come to Vietnam to re-label," he said, adding the new rules would level the playing field for domestic makers.

The Trump administration is now calling on the other regional powers like Thailand, Indonesia, and Malaysia to sever Chinese content from their supply chains and increase surveillance of Chinese investment. In Thailand, where a 36 percent tariff looms over them, the government has already strengthened export controls and vetoes investments in rapidly expanding industries like electric vehicles, into which Chinese firms have recently invested.

Malaysia and Indonesia have also improved their export certification systems, batching certification to meet US needs. Such steps reflect a broader acceptance of Washington's push toward what trade experts term "strategic decoupling."

"This is pushing China out of the supply chain," said Deborah Elms, director of trade policy at the Hinrich Foundation.

Enforcement and compliance remain a challenge

Even with the aggressive US posture, enforcement would be difficult. Understanding what share of Chinese content constitutes finished goods is a complicated endeavour, especially for customs systems that never had to monitor input sources so closely. Experts warn that if compliance becomes too burdensome, US companies will abandon Vietnam altogether or fall back to China for economies of scale.

"There's a very real fear that American businesses won't open up their sourcing in Vietnam if it's too restrictive," Footwear Distributors and Retailers of America CEO Matt Priest said.

The uncertainty is also creating parallel supply chains for US exports, with some countries considering setting up alternate facilities just to meet American standards.

China threatens countermeasures

China reacted bitterly to the deal. The Beijing commerce ministry stated on Thursday that it was "making a review" of the deal and warned that it would take action if the pact harmed Chinese interests. It comes amid rising fears the US is pressuring the region to economically boycott Beijing.

Southeast Asian countries these days have to tread the thin rope of augmenting trade with the US while retaining strongly rooted economic connections with China. Chinese investments continue to be the decisive factor in regional development, and Beijing has already demonstrated a propensity to reciprocate—by trade barriers, boycotts, or shifting to dominate strategic resources like rare earth metals.

Politically we must balance the two superpowers," said Pavida Pananond, a professor of international business at Thailand's Thammasat University.

A gamble with global implications

Though the final impact of the US-Vietnam deal is unknown, this is certain: The Trump administration has launched a sea change in the global trade system. Countries across Southeast Asia are being forced to rethink their economic affiliations, weighing against the price of upsetting China the value of opening up to the American market.

It's a gamble on both sides to see how the US, China and companies in your country respond," Elms said.

With increasing trade deals on the negotiating table, the region prepares for more profound changes that could redesign not just supply chains, but the geopolitical landscape of Asia for decades.