How Is Vietnam Navigating the New Trade War Era?

When U.S. President Donald Trump threatened Vietnam with a 46 percent tariff on April 2 – “Liberation Day” – he exposed a fundamental contradiction at the heart of the Southeast Asian country's economic miracle. For years, Vietnam had perfected the art of being indispensable to both the United States and China  – a nimble intermediary that helped both superpowers circumvent their own destructive trade war. Since 2017, its exports to the U.S. had nearly tripled, transforming it into a manufacturing powerhouse that seemed immune to geopolitical disruption.

But as a Vietnamese proverb warns: When buffalo and oxen lock horns, mosquitoes suffer.

As Trump doubles down on decoupling from China, “connector economies” like Vietnam are caught in the crossfire. With a ballooning trade surplus with the United States – third only to China and Mexico in 2024 – Vietnam has drawn accusations of acting as a transshipment hub for Chinese goods. Trump’s senior counselor, Peter Navarro, went so far as to call the country “a colony of communist China.”

Although the initial tariff was eventually suspended, the threat rattled Vietnam’s economy. Its Purchasing Managers’ Index (PMI) plunged to 45.6 in April – its sharpest contraction since the pandemic. While May and June brought marginal rebounds, the index remained below the critical 50 mark, pointing to continued weakness in export orders.

True to form, Vietnam responded with its trademark agility. Within days of the “Liberation Day” announcement, To Lam, the general secretary of the Communist Party of Vietnam (CPV) and the country’s powerful new leader, was on the phone with Trump offering concessions. A flurry of diplomacy followed: a meeting with Chinese President Xi Jinping, trips to Moscow and Central Asia, and trade overtures to France and Thailand.

Hanoi eventually reached a deal with the U.S., yet the compromise – a dual-tariff system of 20 percent on Vietnamese-made goods and 40 percent on those deemed “transshipped” from China – was just a Band-Aid on a bullet wound.

Vietnam’s deeper dilemma is structural. As the United States and China decouple, the room for profitable neutrality narrows. The country can no longer just plug into the highest-return circuit. Economic globalization, which has powered Vietnam’s rise, is fracturing. The challenge now is existential: can Vietnam adapt its economic model to this era of geopolitical fragmentation – or will it become collateral damage in someone else’s trade war?

From Pariah to Powerhouse

Vietnam's vulnerability today stems paradoxically from its own success story. When the CPV launched the Doi Moi (“Renovation”) reforms in 1986, the one-party state was an economic basket case. War-ravaged, isolated, and desperately poor, it ranked among the world's least developed nations. Rice farmers needed permits to sell their crop. Foreign investment was virtually banned. GDP per capita languished below $100.

The transformation that followed is among the world’s most dramatic economic turnarounds in the early 21st century. By embracing markets while maintaining one-party rule – what CPV theorists call a “socialist-oriented market economy” – Vietnam achieved three decades of 6.5 percent annual growth. The poverty rate shrank from 60 percent in 1990 to under 5 percent today. Its GDP per capita in 2024 was $4,700, a staggering 3,752 percent increase. More remarkably, Vietnam inserted itself into the heart of global manufacturing, becoming indispensable to supply chains from Seoul to San Francisco. Vietnam’s trade to GDP ratio is 165 percent, one of the highest in the world.

Samsung’s bet on Vietnam symbolized this ascent. The Korean giant invested $20 billion in northern Vietnam during the 2010s, creating the world’s largest smartphone factory. By 2024, half of all Samsung phones came from Vietnam. Intel, Foxconn, and Nike followed, drawn by a mix of disciplined workers, improving infrastructure, and a government eager to please foreign investors.

Then came Trump’s first trade war, and Vietnam hit the jackpot.

As U.S. tariffs pummeled Chinese exports after 2018, manufacturers scrambled for alternatives. Vietnam offered the perfect detour: cheaper labor than China, decent infrastructure, geographic proximity to the East Asian production nexus, and, crucially, friendly ties with both Beijing and Washington. The payoff was swift. Exports of tariff-hit goods to the United States soared by 40 percent. Foreign direct investment (FDI) surged, as furniture makers and chip assemblers alike decamped south of the Chinese border.

The shift was staggering in both speed and scale. In 2024 alone, Vietnam’s FDI disbursements reached a record $25 billion. And the quality of investment improved, too. No longer just a haven for T-shirts and trainers, Vietnam began drawing more high-tech heavyweights. In addition to Samsung, leading technology corporations such as Intel, Foxconn, Amkor, Qualcomm, and Nvidia have all established significant operations in the country.

By 2024, Vietnam had become one of the “super transistors” of global trade – an essential component that allowed the circuit to function even as its two biggest parts pulled apart. U.S. companies could claim they were reducing dependence on China. Chinese firms could maintain access to U.S. markets. Vietnamese workers got jobs.

Everyone won – until Trump returned to the White House a second time.

The Price of Success

Vietnam’s meteoric rise as a trading hub came with hidden liabilities – now unmasked by the Trump administration’s renewed tariff offensive. The proposed 46 percent levy on Vietnamese exports to the U.S. threatened to derail an economy where a third of outbound shipments are U.S.-bound, equivalent to 30 percent of Vietnam’s GDP. Although suspended amid a 90-day negotiating window, the threat laid bare the fragility of Vietnam’s export-led model. Washington's stringent demands, chiefly a decoupling of manufacturers in Vietnam from Chinese supply chains, are easier said than done.

The numbers speak volumes. In 2024 alone, Vietnam imported $144 billion of Chinese goods, almost equal to the $136 billion it exported to the United States. Roughly half of Vietnam’s manufacturing inputs come from its northern neighbor. While these figures reflect the complexity of the global supply chains, they also fuel suspicions in Washington that Vietnam is acting as a mere conduit. U.S. Commerce Secretary Howard Lutnick even claimed that 75 percent of Vietnamese exports were “Chinese in disguise.”

Much like when Trump accused Vietnam of being the “single worst trade abuser” of the trade system in 2019, Hanoi responded with its trademark hyper-transactional approach. It offered tariff-free entry for U.S. goods, quickly approved a Trump-branded golf resort, and ramped up efforts to curb illegal transshipment. These gestures were enough to secure a provisional deal before the initial July 9 deadline. But the agreement remains precarious. Its hinge is a yet-to-be-defined term – “transshipped goods” – that could trigger tariff rates of up to 40 percent depending on interpretation. If Vietnamese negotiators can narrow the definition, they buy time. If not, disruption will follow.

More worryingly, the core problem is structural and beyond Hanoi’s capacity to fix in the short term. Asking Vietnam to unwind its integration with China is akin to demanding it amputate its own supply chains. China provides not just components but the very scaffolding of Vietnam’s industrial economy. When Beijing briefly closed border crossings during the COVID-19 pandemic, Vietnamese agriculture and assembly lines seized up almost overnight. China remains essential to Vietnam’s economic engine.

And Beijing is not above reminding Hanoi of that fact. China has warned that it will retaliate against any deals that undermine its national interests – and it has the tools to make good on such a threat. It controls critical inputs, border logistics, and geopolitical levers. The October 2024 attack on Vietnamese fishermen in contested waters – just days after To Lam’s trip to New York – was less a maritime scuffle than a calculated show of coercive power. Since Trump’s “Liberation Day” tariff threat, Chinese vessels have loitered ominously in Vietnamese waters. In Vietnam’s case, trade and geopolitics are fused.

As the China-U.S. rivalry intensifies, so does the pressure on Hanoi to pick a side. For Vietnam, the challenge is no longer staying relevant, but staying neutral. Its prized role as a “super transistor” in global trade is now a source of stress. Avoiding a meltdown will take more than agile diplomacy – it will require systemic resilience at home.

The Art of Strategic Delay

To Lam understood the game at hand. His early call to Trump on April 4 – making him one of the first world leaders to respond to the “Liberation Day” announcement – promptly earned him praise on Truth Social, the U.S. president’s preferred social media network (and one which he owns). Days later, Hanoi rolled out the red carpet for Xi Jinping, hosting the Chinese president’s second visit in two years and reaffirming their commitment to a “Community with a Shared Future.”

In the weeks that followed, Vietnam expanded its diplomatic choreography: dispatching envoys to Moscow and Central Asia, receiving French President Emmanuel Macron, and upgrading ties with Thailand – all within a single month.

This burst of activity reflects a sharper-edged version of Vietnam’s “bamboo diplomacy.” Once known for its flexibility – bending without breaking – Hanoi now seeks to weave a denser web of overlapping alliances and partnerships, capable of absorbing pressure from any one power without snapping.

Central to this strategy is deepening cooperation with like-minded economic and security partners: the European Union, Japan, South Korea, and Australia – all bound to Vietnam through bilateral free trade deals or via ASEAN frameworks. Regionally, Hanoi continues to court fellow Southeast Asian states that share its instinct to hedge against great power rivalry.

Multilateralism forms the second pillar. Vietnam has embraced institutions like ASEAN and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) to amplify its voice, while its cautious engagement with BRICS – as a partner rather than a full member – signals a desire to diversify alignments without overcommitting.

Still, this strategy has constraints. ASEAN remains divided, with members like Cambodia and Laos leaning heavily toward Beijing, and others hesitant to trade growth for confrontation. Meanwhile, Trump’s distaste for multilateralism adds further friction. His recent threat to impose tariffs on “BRICS-associated” countries highlights how even symbolic alignments can trigger economic blowback.

Domestic Transformation: From Assembly Line to Economic Powerhouse

External shocks have exposed the fragility of Vietnam’s growth model, prompting a profound internal reckoning. When To Lam rose to the post of general secretary after Nguyen Phu Trong’s death in July 2024, the ideological shift was immediate and stark. Trong, ever the guardian of communist orthodoxy, placed regime security and ideological purity above rapid economic reform. His signature anti-corruption campaign, the “Blazing Furnace,” dominated his 13-year tenure and created a climate of fear, hampering governance and stifling business confidence.

Lam, ironically the chief enforcer of that very “furnace,” saw the limits of scorched-earth governance. Upon assuming power, he signaled that economic pragmatism would trump ideological rigidity. Days after taking charge, he emphasized he would not let anti-corruption efforts hinder economic growth. He rightly diagnosed Vietnam’s chronic dependency on low-value manufacturing, highlighting its vulnerability to geopolitical volatility and the looming middle-income trap.

Within months, Lam launched sweeping bureaucratic reforms aimed at dismantling Vietnam’s bloated state apparatus. His initiatives were bold: digitalizing government services, limiting business inspections to once per year, and dramatically expediting infrastructure and investment approvals. By mid-2025, Vietnam had halved its provincial bureaucracy, eliminated over 200,000 public-sector jobs, and merged numerous ministries.

But these were more than administrative tweaks. They underpinned a broader ambition: to reposition the private sector from economic understudy to leading actor. In May 2025, the CPV’s Resolution 68 formalized the shift: the private sector, long treated as a junior partner to state-owned enterprises (SOEs), would become the “most important force” in the economy. The plan was unapologetically ambitious: double the number of private firms to 2 million by 2030, nurture 20 globally competitive “national champions,” and slash red tape by 30 percent.

Big infrastructure is central to the push. Projects like the $67 billion North-South high-speed rail, alongside sweeping investments in digital infrastructure and renewable energy, are intended not just to spur short-term growth but to anchor a stronger, more self-reliant domestic economy. Lam’s vision is nothing short of transformative: a resilient, high-tech Vietnam, led by homegrown champions and buffered from external shocks. By 2045 – the 100th anniversary of modern Vietnam – he aims to place the country firmly in the ranks of high-income nations.

Whether that goal can be realized, however, will depend on Vietnam’s ability to navigate the many hurdles ahead.

The Obstacles Ahead

For all Lam’s ambition, formidable obstacles remain. Externally, the space for strategic ambiguity is narrowing. Both Washington and Beijing increasingly demand explicit alignment, threatening Vietnam’s careful balancing act. Global trade fragmentation further complicates this delicate positioning, as supply chains reorganize around geopolitical, not economic, priorities. Meanwhile, the South China Sea remains a flashpoint, where one misstep could drag Vietnam off its neutral path and into dangerous waters.

Technology poses perhaps the greatest external risk. Caught between U.S. restrictions on advanced semiconductors and Chinese dominance of crucial components, Vietnam risks collateral damage in the superpowers’ tech war. U.S. firms face growing pressure to limit technological transfers to nations closely tied to China, while Beijing might weaponize its supply chain control against overtly pro-U.S. stances.

Domestically, Lam faces brewing resistance within his party. Conservative factions see Resolution 68’s embrace of private enterprise as a betrayal of socialist principles. State-owned enterprise bosses, long beneficiaries of privileged access, are unlikely to surrender their turf quietly. Provincial officials are wary of centralized decision-making undermining their local business networks.

Then come the economic contradictions. Promoting large conglomerates may crowd out the small and medium-sized enterprises that generate most jobs and innovation. Boosting domestic consumption risks diluting the export-led model that powered past growth. Grand infrastructure plans, funded by debt, may please planners but unnerve investors concerned about macroeconomic stability.

Structural weaknesses further complicate the story. Resolution 68’s vision of globally competitive private champions runs into hard limits. Vietnam’s top firms remain heavily concentrated in finance and property – sectors rich in speculation and poor in productivity. Financial fragility is not uncommon. Vingroup, the flagship of Vietnam’s private-sector ambitions, carries a debt-to-equity ratio of 4.23 – four times the benchmark set by South Korea’s chaebols, the model Hanoi hopes to emulate. A tangled web of cross-ownership between banks and conglomerates magnifies systemic risk. The collapse of Van Thinh Phat, one of the country’s largest real estate groups, reportedly dealt a $27 billion blow to the economy – a cautionary tale of what happens when opacity and leverage collide.

Most alarming is the specter of the middle-income trap. Vietnam is no longer the cheapest workshop in Asia, yet it still lacks the technological heft of Japan or South Korea. Innovation remains thin on the ground: only 2 percent of its top 50 private firms operate in high-tech sectors. Demographics, too, are turning. The working-age population is expected to shrink within a decade – well before the country reaches anything resembling high-income status.

The wage-productivity squeeze encapsulates the challenge. Wages have doubled since 2010, but productivity has failed to keep pace. Without urgent advances in education, technology uptake, and institutional reform, Vietnam risks joining the ranks of middle-income economies that rose quickly – only to stall just short of the finish line.

Threading the Needle

Vietnam’s future could follow one of three paths. In the most optimistic scenario, To Lam manages to balance reform with party unity. Economic diversification cushions the blows of geopolitical decoupling. Private sector champions evolve into true innovators rather than politically connected rentiers. Productivity catches up with wages. The country graduates into middle-power status with a resilient, balanced economy.

A more plausible outcome is muddling through. Growth persists, reforms inch forward, and strategic ambiguity is maintained – but vulnerabilities linger. Vietnam remains tethered to foreign supply chains and demand, exposed to the whims of global trade politics. Political resistance blunts reform momentum. Infrastructure improvements are siphoned off by vested interests. The economy hums, but never quite soars.

The bleakest scenario sees reform derailed altogether. External pressure and domestic pushback stall momentum. Trade tensions force hard geopolitical choices. Institutional inertia creeps back, breeding inefficiency and corruption. Vietnam stagnates and becomes yet another middle-income economy that sprinted through its early catch-up phase, only to falter when deeper transformation became essential.

The questions are clear, if daunting. Can Lam push reforms without fracturing the party? Will Vietnam’s diversification outrun the fracturing of global trade? Can national champions become builders of innovation rather than fortresses of cronyism?

Vietnam encapsulates the dilemma of all connector economies in the era of geopolitical fragmentation: how to stay open while building resilience, how to navigate great power rivalry without choosing sides, and how to transform without betraying the roots of past success. The coming decade will show whether pragmatism and ambition can help Vietnam defy the gravitational pull of an increasingly polarized world.