SSGA: Tariffs, transshipping, and the trouble with Vietnam
Many investors were surprised by the level of tariffs announced on April 2 for countries like Vietnam and Taiwan. The conversation since then has largely focused on the trade deficit the US runs with these countries and on the regional influence China exerts. But other concerns about currency manipulation and the role of countries like Vietnam in transshipping may have substantially factored into the US administration’s thinking.
Few countries have ever been deemed outright currency manipulators (South Korea and Taiwan in 1988, Taiwan and China in 1992, China again in 1994 and 2019), but a limited number have consistently appeared on the so-called “monitoring list.” Three criteria must be met for a country to be deemed a currency manipulator.
1. Significant bilateral trade surplus with the United States ($15 billion or larger)
2. Material current account surplus (3% of GDP or larger)
3. Persistent, one-sided currency intervention
Meeting any two of the three places a country on the monitoring list, which in 2024 included China, Japan, Korea, Taiwan, Singapore, Vietnam, and Germany. The third criterion requires “net purchases of foreign currency, conducted repeatedly, in at least 8 out of 12 months, totaling at least 2% of an economy’s GDP.”
Not since China’s rise on the global manufacturing scene has another country made such impressive inroads into the US market as Vietnam. Since the signing of a bilateral trade agreement with the US in 2000, its market share in US imports went from essentially zero to 4.2%, closing in on Japan’s share (Figure 6).
The US bilateral trade deficit with Vietnam was $500 million in 2000; last year, it topped $123 billion. US exports to Vietnam totaled $13 billion last year, against roughly $136 billion in imports.
Beyond currency management, the US has a valid concern about so-called transshipping. This refers to third-party countries using Vietnam (or others) as a production base for exports to the US, to avoid direct US tariffs. Low labor costs make Vietnam attractive as a manufacturing production base in its own right; but given the disproportionate role foreign investment has in driving Vietnamese exports (Figure 7), trans-shipping appears to be a justifiable concern.
