Navigating tariff shocks: Vietnam’s path forward through diversification

Market diversification is not a choice but an urgent necessity for Vietnam to safeguard export growth and mitigate risks from global policy and market fluctuations, writes Huong Vu, general director of EY Consulting Vietnam Joint Stock Company and vice chairwoman of Vietnam's Association of Foreign Invested Enterprises (VAFIE).

The U.S. tariff shock in the new global economy context, marked by the rise of protectionism and non-tariff barriers, is posing major challenges for Vietnam - an economy deeply integrated to global supply chain in the with total import-export turnover averaging 1.5 times its GDP.

The world is changing, and Vietnam needs to rewrite its growth playbook. Market diversification is not only a risk mitigation solution, but also a long-term sustainable development strategy.

“New challenge” context

On April 2, 2025, the United States triggered a global shock by announcing a new policy on reciprocal import tariffs. Under this policy, a universal tariff rate at 10% was imposed on all imports into the U.S. starting from April 5, 2025. This rate was threatened to rise significantly depending on the specific country (e.g., Vietnam could face tariffs at 46%) as a deterrent to push countries into negotiations with the U.S. government.

Vietnam promptly initiated negotiations with the U.S. during three months and became one of the countries to reach an agreement on the new trade deal. On July 2, President Donald Trump announced via Truth Social that Vietnamese-origin goods would face a general tariff rate at 20% when imported into the U.S., giving Vietnam certain advantages compared to other exporting countries.

However, transshipped goods - those rerouted from third countries through Vietnam to the U.S. - will face tariffs at up to 40%, serving as a warning that Vietnam must immediately address and regulate transhipping activities. There are numerous uncertainties that may arise from this tariff shock, to which Vietnam must pay special attention.

According to public statistics, about 28-30% of Vietnam’s export turnover is currently directed toward the U.S. market. The 20% tariff applied to goods from Vietnam - while other exporting countries to the U.S. are facing even higher rates - combined with Vietnam’s continued advantages in low labor costs and a long coastline favorable for logistics, may not immediately impact the competitiveness of Vietnamese products in the U.S. market in the short term. However, all current advantages could be eroded in the future:

- Firstly, the new reciprocal tariff structure raises origin issues, as Vietnam’s manufacturing supply chains heavily rely on input materials from China. Goods that do not meet the Vietnamese rules of origin may be considered “transshipping” and subject to an additional 40% tariff when entering the U.S. market;

- Secondly, negotiations between countries are not limited to tariff matter only and may not be fully concluded as of July 9. Any country, where necessary, can kick-start new negotiation phases and potentially trade off more national sovereignty to secure a trade deal better than Vietnam (e.g., Indonesia recently reached an agreement with the U.S. with a reciprocal tariff of 19%);

- Thirdly, reciprocal tariffs are not the only additional import tariff. The U.S. currently conducts more short-term (Sections 201, 301, 232) and long-term (anti-dumping, countervailing duties, etc.) trade investigations than any country and applies more trade remedies than any country. This means the risk is increased for goods from countries not recognized as market economies, including Vietnam.

These three factors pose significant challenges, reduce demand for imports in the U.S., and put pressure on Vietnam’s growth targets. The new tariff landscape clearly highlights the risks of overdependence on a single major market.

In light of these developments, market diversification is not a choice but an urgent necessity for Vietnam to safeguard export growth and mitigate risks from global policy and market fluctuations.

One of the fastest and least disruptive solutions is to accelerate regional cooperation in Asia and interregional cooperation with Europe to redirect markets, strengthen supply chains, and attract “tax-neutral” FDI. This strategy not only helps cushion the impact of the tariff shock but also positions Vietnam as a vital bridge between the East-West corridor in the coming decades.

Expanding cooperation with Asia

The first and most important reason why Vietnam should deepen its ties with the Asian region is to mitigate the damage caused by the U.S. tariff shock. Intra-Asian markets already account for over 55% of Vietnam’s total trade volume and are growing faster than exports to North America.

Strengthening Vietnam’s presence in Asia and leveraging the network of the Regional Comprehensive Economic Partnership (“RCEP”) and Association of Southeast Asian Nations (“ASEAN”) helps maintain competitive costs.

The second reason is that Vietnam can take advantage of special preferential treatment under Free Trade Agreements (“FTA”) such as ATIGA, ACFTA, AJFTA, AKFTA, RCEP, etc., to enhance the competitiveness of its exports in international markets. For example, the 10 member countries of ATIGA currently apply an average tariff of 0% on gooods traded among ASEAN members, and the 15 RCEP member countries apply average tariffs below 5% on 92% of tariff lines.

The cumulation rules of these FTAs allow input materials originating from any member country to be counted toward the origin of products manufactured in Vietnam when exported to another member country, thereby increasing the regional value content of the products.

The third reason is that Vietnam can seize opportunities from the "China + 1" strategy. Although there have been reports that foreign investors are beginning to consider a “Vietnam + 1” strategy following the U.S. reciprocal tariff announcement in early April, Vietnam remains a highly attractive destination for major corporations seeking to diversify supply chains and reduce dependence on China. This is due to Vietnam’s long-term political stability, relatively low production costs in the region, and timely policies supporting businesses and improving the investment environment.

This presents an opportunity for Vietnam to expand its assembly operations in existing strong sectors (such as electronics, furniture, textiles, agriculture, and seafood) and open the doors for investors in future strategic industries (such as high-tech, semiconductors, nuclear energy, and green energy).

Finally, strengthening regional cooperation helps upgrade shared infrastructure such as cross-border railways, smart ports, and interconnected power grids, which reduce logistics and transportation costs for all ASEAN exporters and enhance the overall competitiveness of both the region and Vietnam.

Priority actions for Asian cooperation

To realize the strategy of deeper cooperation with Asia, Vietnam should focus on:

Firstly, to take advantage of the cumulation rules in determining origin with RCEP partners, Vietnam needs to:

- Balance between the flexibility and the substance of goods’ origin.

- Proactively study the trend of enhancing transparency and traceability of supply chain and origin certification process.

- Explore the integration of new standards such as digital technologies and electronic origin certification process.

Secondly, accelerate the implementation of joint industrial zone models and the development of “ASEAN Industrial Corridors”. For example, cooperation projects between Quang Ninh (Vietnam) and Guangxi (China), or Binh Duong (Vietnam) and Singapore, are typical examples of such linkages. These industrial zones aim to apply favorable mechanisms such as tariff-neutral treatment and shared pre-clearance customs procedures.

Vietnam should sign memoranda of understanding with Singapore, Thailand, and Malaysia to expand the concept of "Green Supply Chain Parks" with shared customs windows and Environmental, Social, and Governance (“ESG”) audits to enhance the efficiency and sustainability of regional supply chains.

Thirdly, build digital trade bridges. Vietnam should negotiate to pilot the use of electronic Certificates of Origin (e-CO) across ASEAN and implement mutual recognition of e-invoices to reduce transaction costs by 1-2%. The implementation of the ASEAN Single Window 2.0 sandbox, connecting Vietnam Customs with Indonesia and the Philippines, will enable real-time customs process of before the goods arrive at port.

Fourthly, establish a supply chain finance fund. Vietnam should collaborate with institutions such as the Asian Development Bank (ADB) and the Asian Infrastructure Investment Bank (AIIB) to co-create a regional insurance and factoring facility to mitigate tariff and transportation risks for small and medium-sized enterprises.

Cooperation with Europe

Although the Carbon Border Adjustment Mechanism (CBAM) poses a significant barrier for six industries under its scope, Europe remains a highly promising market that Vietnamese exporters should focus on. Strengthening relations with the European Union (EU), leveraging the roadmap of the EU-Vietnam Free Trade Agreement (EVFTA), and tapping into the EU’s “green incentives” can help Vietnam move up to a higher ladder in the global value chain.

Firstly, Europe is a “tax-friendly” market. The EVFTA offers superior tariff preferences compared to the current U.S. market. It has already eliminated 71% of tariff lines, and 99% of tariff lines will be reduced to 0% by 2030. Vietnam should proactively propose an accelerated tariff elimination schedule under EVFTA to boost its exports to Europe. This provides a significantly-higher competitive advantage for Vietnamese products in Europe market, compared to the U.S. market where high tariffs are expected.

Secondly, European importers are increasingly seeking to diversify their supply chains. Similar to American companies, many European importers and businesses want to reduce dependence on China and are looking for alternative sources. Vietnam is well-positioned to meet this demand, not only due to EVFTA but also thanks to its recent proactive improvements in ESG standards. Shifts in global trade dynamics have created opportunities for economic growth in both Asia and Europe as these regions seek new markets and partnerships.

Thirdly, Europe is the world’s pioneer in green and digital standards. The EU’s leadership in setting carbon regulations (such as CBAM) and data standards imposes compliance requirements on its trading partners. This significantly affects Asian countries, where production often does not meet EU’s green standards. Early compliance with these standards would help Vietnam maintain its market share in Europe and attract green FDI, which increasingly prioritizes sustainability.

Fourthly, the EU offers abundant investment capital. Initiatives such as the Global Gateway and the European Investment Bank’s (EIB) climate fund are ready to finance major infrastructure projects in Vietnam, especially in energy and logistics sectors like ports, gas power, and wind energy.

Despite these opportunities, cooperation with the EU also comes with challenges, notably the EU’s strict standards on quality, food safety, labeling, environment, social responsibility, governance, etc. These requirements can invisibly increase production costs and raise product prices, risking competitiveness. European consumers also tend to be frugal and prefer more circular, sustainable products than American consumers do. Additionally, the EU is also increasingly using trade remedies such as anti-dumping, countervailing, and safeguards, which may pose risks to Vietnamese exports.

Nevertheless, the EU remains a high-income market with strong purchasing power, diverse sourcing needs, and a preference for green, clean, and sustainable products - an opportunity Vietnam can seize through a strategy of transitioning agricultural and industrial production toward ecological models.

EU economies are relatively stable, with low political risk and consistent tax policies, allowing businesses to plan long-term without worrying about sudden changes. Countries like the Netherlands, Germany, France, Belgium, and Poland have strong demand for tropical agricultural products, handicrafts, textiles, and furniture - all of which are Vietnam’s strengths.

How to strengthen cooperation with Europe?

To overcome challenges and fully capitalize on opportunities in the European market, Vietnam should focus on the following:

Firstly, promote the implementation of the EVFTA. Vietnam could negotiate and propose that the EU prioritize continuing tariff reductions for goods affected by the Trump administration’s tariffs - bringing them down to 0% by 2026 instead of the original timeline of 2028 or 2030. To achieve this, a Vietnam-EU task force team should be established to accelerate EVFTA implementation and recognize digital documentation.

Along with that, Vietnam should develop dual-compliance export hubs and build industrial zones tailored to meet EVFTA and EU standards. These zones should include Greenhouse gas accounting and inventory systems in compliance with CBAM, Renewable energy sources (meeting RE100 standards), and Testing labs for CE marking (certifying compliance with EU health, safety, and environmental standards). A decree on “Pilot CBAM Zones” should be issued to provide a legal framework for these initiatives.

Thirdly, align strategic industries with European partners. Vietnam should encourage joint investments with major European companies in high-value supply chains that are less affected by U.S. tariffs - such as semiconductors, green hydrogen, and offshore wind power. This would help diversify Vietnam’s export structure and reduce reliance on traditional goods like textiles and furniture, which are currently subject to high U.S. tariffs.

Last but not least, The State’s support is essential for businesses to expand into tightly regulated markets like Europe. In the short term, the government can focus on developing transparent traceability systems to help businesses prove product origin and reduce the risk of being subject to anti-circumvention tariffs, offering tax incentives for businesses investing in green technologies, enhancing timely dialogue and information sharing, training high-quality export personnel with deep knowledge of European markets, legal frameworks, and technical standards to help businesses cope with upcoming fluctuations and, in particular, rapidly finalizing the legal framework for Vietnam's domestic emission trading system (ETS).