Vietnam can utilize Trump’s policies to enhance position in global supply chains: experts

Vietnam can take the advantage of protectionist economic policies by Donald Trump, the 47th president of the U.S., to strengthen its position in global supply chains, attract foreign investment, and drive sustainable economic growth, write Dr. Tran Ngoc Mai and Prof. Dr. Doan Ngoc Thang, lecturers at the Banking Academy of Vietnam.

On November 6, 2024, Donald Trump won the U.S. presidential election and will officially take office as the 47th president in January 2025, marking the beginning of Trump 2.0.

This new era is expected to create major fluctuations in international financial markets. Following his victory, both the stock and cryptocurrency markets surged, reflecting investor expectations of his new economic policies.

However, the global economy could face substantial challenges in the medium to long term due to the Trump administration’s protectionist measures.

Known for his unpredictable leadership style, Trump tends to prioritize pragmatic decisions over traditional political principles. During his campaign, he proposed a range of protectionist economic policies, including deep tax cuts and withdrawals from several international agreements.

These moves have raised concerns among countries, especially those heavily dependent on international trade, about potential changes in the global economic system. Risks include rising inflation, supply chain disruptions, and a decline in exports from nations reliant on the U.S. market.

Additionally, escalating trade tensions and retaliatory measures from international trade partners could weaken global economic growth. The return of Trump to the White House raises numerous questions about the impacts of policies that will shape the Trump 2.0 era.

Specifically, Trump has proposed widespread tax cuts, including reducing the corporate tax rate from the current 21% to 15%. He has also suggested a range of new spending programs aimed at boosting investment and economic growth.

While his goal is to protect domestic industries and create jobs for American workers, such extensive tax cuts could lead to a substantial increase in the federal deficit. Estimates suggest that his tax and spending plans could add up to $7.75 trillion to the U.S. national debt.

The rising national debt could force the U.S. to issue more government bonds, which would push up global interest rates. It is projected that global interest rates could rise by 0.5-1 percentage point due to U.S. fiscal policies.

Trump also plans to impose tariffs of 10-20% on all imports, with rates of 60% or higher on products from China. According to the UK’s National Institute of Economic and Social Research (NIESR), if implemented, this policy could reduce global GDP by 2% over the next five years, equating to a loss of about $1.5 trillion in global economic value.

Higher tariffs could also trigger inflation. As the price of imported goods rises, American consumers will face higher costs for an array of products, from electronics to clothing. The Federal Reserve may be forced to raise interest rates to control inflation, leading to higher borrowing costs for businesses and consumers.

Major exporters like China, Germany, and Japan would bear the brunt of these tariffs due to their heavy reliance on the U.S. market. The U.S. imposition of high tariffs could provoke retaliatory measures from trading partners, leading to a full-scale trade war. The previous U.S.-China trade war, for example, slowed global economic growth to 2.9% in 2019, the lowest rate since the 2008 global financial crisis.

The proposed tariffs could disrupt global supply chains. Increased shipping costs, fluctuating exchange rates, and rising uncertainty could affect businesses involved in global supply chains.

Companies reliant on raw materials and components from various countries may need to seek new suppliers or relocate production, leading to disruptions and higher costs. Although shipping rates are currently low, this could change if trade tensions escalate.

A report revealed that when Trump raised tariffs on China in 2018, global container shipping rates surged by more than 70%. Supply chain disruptions and reduced demand from major markets could lower economic growth in regions by 0.2-0.5%.

China, as the main target of Trump’s trade policies, will likely experience the most significant impact from high tariffs. The imposition of 60% or higher tariffs could reduce China’s exports to the U.S. by more than 4%, potentially cutting its GDP growth by around 2.4%. Given that China’s GDP in 2023 was about $17.7 trillion, a 2.4% reduction would result in a loss of approximately $424 billion in the country’s economic output.

Trump has also signaled his intention to withdraw the U.S. from multilateral trade agreements and international organizations like the World Trade Organization (WTO), claiming they are not beneficial for the U.S.

He prefers bilateral agreements over multilateral ones to maximize U.S. interests. This stance could severely affect the global trade system, leading to the collapse of international trade principles.

In the absence of an effective dispute resolution mechanism, countries may resort to unilateral protectionist measures, intensifying trade tensions. The uncertainty surrounding global trade could reduce investor confidence, dampening foreign direct investment (FDI) and slowing global economic growth.

Trump is also expected to take a different approach to the ongoing Russia-Ukraine conflict. Some analysts speculate that he could push for a resolution to end the war in the near future. If the conflict were to end, gold and oil prices might drop as geopolitical risks subside. However, such a shift could also alter the balance of power in Europe and affect international alliances, creating uncertainty in diplomatic and security relations.

Opportunities and challenges to Vietnam's economic sectors

Trump initiated the U.S.-China trade war, and Joe Biden has chosen to continue this strategy, which highlights that the two US presidents from the different political parties view it as a strategic policy.

In this context, Vietnam can be seen as a useful partner in helping the U.S. reduce its dependence on low-cost products made in China. Vietnam is able to produce goods that American consumers want but are too expensive to manufacture in the U.S. or are unwilling to import from China.

As such, Vietnam continues to benefit from advantages in trade with the U.S., as many Vietnamese products can replace China's cheap goods. Vietnamese products have high added value, align with consumer demands in the US, and are not overly affected by protectionist policies under the Trump administration.

Specifically, the Vietnamese textile and garment industry holds great potential to expand its market share in the U.S., particularly as Chinese products face high tariffs.

Currently, the U.S. accounts for 44% of Vietnam's total textile and garment export turnover. With tariffs as high as 60% on Chinese textiles, Vietnam can increase its market share in the U.S. due to its competitive labor costs and stable supply capacity. Vietnam's textile export share in the U.S. has reached 15%, and it could grow rapidly if these trade policies are maintained.

The U.S. market also presents opportunities for Vietnamese tra fish (pangasius), especially as it can replace Chinese tilapia, a major competitor that is heavily impacted by high tariffs. In 2024, Vietnamese pangasius became the most imported catfish in the U.S., surpassing tilapia.

The Vietnamese wood industry is also expected to benefit from high tariffs imposed by the U.S. on Chinese products. Vietnam is one of the major suppliers of wood to the U.S. and can take advantage of this opportunity to increase exports, particularly of processed wood products and furniture.

Vietnam stands to gain in the short term as businesses shift production from China to avoid tariffs, providing Vietnam with a competitive edge in FDI thanks to lower production costs and an abundant labor force.

In 2023, Vietnam's FDI inflow reached a record $36.61 billion (as of December 20, 2023), with disbursement amounting to $23.18 billion, a 32.1% increase compared to the same period in 2022 and a record high in the 2018-2023 period. This surge in investment is likely to benefit the industrial real estate sector, as demand for factories and production facilities rises.

The shift in manufacturing could also help Vietnam enhance its position in industries like electronics, information technology, and component manufacturing. With its proximity to China and competitive labor costs, Vietnam is becoming an attractive destination for tech companies seeking new locations to avoid trade barriers. Major global corporations such as Intel, Samsung, and LG have already shown interest in expanding investments in chip and electronic component production in Vietnam.

A notable example of this trend is Elon Musk's planned $1.5 billion investment through SpaceX in Vietnam. The presence of companies like Wistron NeWeb Corporation (WNC) and Shenmao Technology in Vietnam will further bolster the development of the semiconductor and high-tech sectors. WNC’s factory in the northern province of Ha Nam plans to double its workforce to 6,000, underscoring the growing demand for labor in this sector.

The investments from SpaceX and other large corporations will not only bring in substantial capital but also provide opportunities for technology transfer, promoting digital transformation, and creating growth opportunities for domestic companies, thus enhancing Vietnam’s global competitiveness.

In the short term, the logistics sector may benefit from a surge in U.S. imports before new tariffs are enforced. The increase in transportation volumes will create opportunities for logistics companies. Moreover, factors such as extended supply chains and high shipping costs will continue to benefit the maritime transport industry.

However, Vietnam's big trade surplus with the U.S. could draw the attention of the Trump administration. Vietnam may address this issue by increasing imports of large U.S. products, such as liquefied natural gas (LNG) and aircraft engines.

It also faces the risk of the U.S. imposing trade measures if it does not effectively control issues related to product origin and trade fraud. The U.S. has previously investigated Vietnam for currency manipulation and origin-related problems. If the Trump administration imposes sanctions on Vietnam, its exports could be severely impacted.

In the initial phase of the Trump’s previous tenure, the U.S.-China trade war helped attract investment flows from China to Vietnam. This trend may continue this time but not be as strong as before, as rising labor costs and infrastructure challenges could reduce Vietnam's attractiveness compared to other regional countries such as Indonesia.

Trump’s policy to increase fossil fuel production, along with a de-escalation of tensions in the Middle East, could result in greater supply of oil and gas, pushing prices down. This would put pressure on Vietnam’s oil and gas businesses, but it could help lower domestic inflation thanks to cheaper energy prices.

Leveraging opportunities

Despite the challenges posed by Trump’s protectionist economic policies, Vietnam can capitalize on these opportunities to improve its position in the global supply chain, attract investment, and promote sustainable economic growth.

Firstly, Vietnamese businesses should proactively and flexibly respond to new challenges while seizing potential opportunities. Diversifying export markets is key to mitigating risks when one market faces volatility and creating access to new markets with diverse demand. Vietnamese enterprises should look for opportunities to enter new regions such as the Middle East and West Asia.

In 2023, Vietnam’s exports to Middle Eastern countries reached around $15 billion, with trade between Vietnam and the UAE totaling $5 billion. The main exports to these markets include agricultural products and light industrial goods.

Expanding into this region will help reduce the risks of over-dependence on the U.S. and China markets. The Vietnamese government should enhance trade promotion efforts and sign free trade agreements with West Asian and Middle Eastern countries.

Secondly, Vietnam must invest heavily in infrastructure, energy, and human resource training to enhance its capacity to absorb FDI. Infrastructure improvement will facilitate business operations, reduce costs, and increase efficiency.

Vietnam needs at least $25-30 billion annually for infrastructure development over the next 10 years. Investment in education and training will improve the quality of the labor force, meeting the needs of high-tech and sustainable industries.

In addition, simplifying procedures and creating a favorable environment for both domestic and foreign businesses is crucial. Strengthening transparency and improving the efficiency of state management will improve the business environment, attract investment, and promote sustainable economic growth.

Thirdly, Vietnam must actively participate in international economic forums and comply with global trade regulations to build sustainable partnerships and avoid trade conflicts. The country should maintain transparency in its trade policies and well manage product origin issues.

* Dr. Tran Ngoc Mai and Prof. Dr. Doan Ngoc Thang are both lecturers at the Banking Academy of Vietnam.