Vietnam trade deal takes aim at back door for Chinese goods

A key provision of the Vietnam deal announced by President Trump Wednesday is that goods “transshipped" to the U.S. through Vietnam would be subject to a punitive 40% tariff, twice the 20% rate Trump said he is applying to regular imports from Vietnam.

The president didn’t mention China explicitly and the exact details of how such rerouting will be defined and policed are unclear. Nevertheless, analysts say the measure appears squarely aimed at making it harder for firms to use the southeast Asian nation as a staging post to ship goods to the U.S. from China while sidestepping the steep levies that Chinese imports would typically face.

These provisions of the Vietnam deal show that China remains the central focus of U.S. trade policy even after Washington and Beijing reached a shaky trade truce and discussions with other partners over trade drag on.

The agreement implies that other countries will also be expected to limit China’s presence in their economies if they want to keep selling to the U.S. The U.S. and U.K. agreed to provisions in their recent trade pact that require the U.K. to strengthen supply-chain security, which were similarly interpreted as targeting China.

“There does appear to be a more strategic intent here by the U.S. to essentially restrict Chinese exports entering the U.S. market via the backdoor," said Frederic Neumann, chief Asia economist at HSBC in Hong Kong.

Chinese Foreign Ministry spokeswoman Mao Ning on Thursday reiterated Beijing’s displeasure at the U.S. approach when asked about the pact, saying trade “negotiations and agreements should not target or harm the interests of third parties."

Vietnam was one of the main beneficiaries of the reordering of global supply chains in the wake of Trump’s first term and the tumult of the Covid-19 pandemic. Factories mushroomed around Hanoi and Ho Chi Minh City as Chinese and Western firms looked for ways to diversify their production base amid the strains of the pandemic and increasing geopolitical rivalry between Washington and Beijing.

For U.S. consumers, Vietnam’s entry into the top rank of exporting nations brought a bounty of affordable goods, as companies including Nike and Apple expanded production in the country. Shares of both companies rose Thursday after Trump said the trade pact was agreed.

Michel Bertsch, who runs a factory in Vietnam that sells baby furniture such as cribs to the U.S. and other Western countries, said the 20% tariffs will inevitably translate into higher prices for American consumers.

Still, he said he thought that Vietnam would remain a top destination for manufacturing. U.S. imports from China are subject to an average tariff of 40% to 50%, giving Vietnam an edge even with a 20% tariff, though whether it can keep that advantage depends on where tariff rates settle for alternative bases such as India or Indonesia.

“We need to wait and see what tariffs will be imposed on other countries but we don’t think that we will lose competitiveness," Bertsch said.

As recently as 2018, the U.S. deficit in goods trade with Vietnam was smaller than its deficit with Japan or Germany and a 10th the size of its deficit with China.

By the end of last year, the U.S. deficit with Vietnam had ballooned to more than $120 billion, putting Vietnam behind only China and Mexico in its share of the U.S.’s $1.2 trillion goods trade deficit.

Vietnam’s rise up the rankings in U.S. trade has also drawn scrutiny from the U.S. as a hub for simply rerouting China-made goods bound for the U.S. for firms wanting to dodge tariffs.

Chinese exports to the U.S. were about 10% lower in the first five months of the year than the same period a year earlier as tariffs bit into direct trade between the two economic superpowers, Chinese customs data show. Over the same period, however, Vietnamese imports from China were up 28% year over year, Vietnamese data show, while Vietnamese exports to the U.S. rose 26%.

Deepali Bhargava, regional head of research for Asia-Pacific at investment bank ING, said in a report Thursday there are “strong signs of transshipment" in sectors including machinery, electrical products and insulated wires and cables.

Vietnam has taken steps to crack down on such trade rerouting through tougher policing of rules of origin certification, which give customs authorities detailed information about where a product and its components were made to levy the appropriate duties.

Many different types of goods made in Vietnam, including clothing, furniture and electronics, use components made in China. Exactly how the U.S. plans to determine whether a product from Vietnam would qualify for a 20% tariff or a 40% tariff isn’t clear.

Still, “these provisions send a clear message to global firms: the recent fall in tariffs between the U.S. and China doesn’t weaken the argument for building supply chains outside China," Capital Economics economists Mark Williams and Gareth Leather said in a report Thursday.

Write to Jason Douglas at jason.douglas@wsj.com and Jon Emont at jonathan.emont@wsj.com