The U.S.-Vietnam Trade Agreement: A Last-Minute Deal

Workers stitch apparels at a garment factory in Vietnam’s Thai Nguyen Province,from AFP

On June 26, 2025, former U.S. President Donald Trump announced a major trade breakthrough with Vietnam. The agreement came at the eleventh hour—just days before a 46% tariff on Vietnamese imports into the U.S. was due to take effect. This tariff had been introduced earlier that year under Trump’s “reciprocal tariff” policy, designed to counter what his administration viewed as unfair trade imbalances. Vietnam had become a top target due to its growing trade surplus with the United States and its emergence as a key node in global manufacturing.

Vietnam’s rise as a manufacturing hub has been remarkable over the past decade. The country’s strategic location, competitive labor costs, and improving infrastructure have attracted significant foreign direct investment (FDI). Many global brands, including Nike, Apple, Lululemon, and Gap, had relocated significant portions of their supply chains to Vietnam in previous years in response to earlier U.S.-China tariff disputes. These companies hoped Vietnam would provide a stable and low-cost alternative to Chinese manufacturing. The looming 46% tariff threatened to disrupt those business models and send shockwaves through both Southeast Asia’s economies and global retail markets.

The new agreement reduced the punitive tariff from 46% to 20%. In exchange, Vietnam agreed to eliminate tariffs on U.S. exports entirely and pledged to open its markets fully to American goods. President Trump hailed the deal as a “Great Deal of Cooperation,” emphasizing that Vietnam would now offer “TOTAL ACCESS” to U.S. producers and exporters. In practice, this could mean expanded U.S. sales of agricultural products, energy commodities, and high-tech components into the Vietnamese market, further integrating the two economies.

However, one of the most controversial elements of the new trade arrangement is the imposition of a 40% tariff on goods identified as “trans-shipped” through Vietnam. This term refers to Chinese goods that are routed through Vietnam to the United States in an effort to circumvent direct tariffs on China. According to Peter Navarro, Trump’s senior trade advisor, as much as a third of Vietnam’s exports to the U.S. were of Chinese origin. The new enforcement mechanisms aim to block this practice, though experts like Adam Sitkoff of the American Chamber of Commerce in Hanoi question the clarity and feasibility of the term “trans-shipping,” calling it vague and difficult to police. Sitkoff further noted that many small and medium-sized Vietnamese firms may not have the compliance capacity to handle such requirements, potentially putting them at risk of losing market access.

Despite these concerns, market reactions to the announcement were initially optimistic. Shares of companies with Vietnamese supply chains rose in anticipation of continued export flows. Yet as more details of the 20% baseline tariff emerged, investor enthusiasm cooled. For Vietnam, the deal is a mixed blessing. While it preserves essential access to the U.S. market and strengthens bilateral ties, it imposes stricter conditions and increases surveillance over trade practices. Politically, the agreement also reflects Vietnam’s delicate balancing act in maintaining strong relations with both Washington and Beijing, as it seeks to remain a hub for global production without alienating its largest neighbors and partners.

Vietnam’s role in global supply chains has been growing steadily over the past decade. The country’s strategic location, competitive labor costs, and improving infrastructure have attracted significant foreign direct investment (FDI). According to the United Nations Conference on Trade and Development (UNCTAD), Vietnam’s FDI inflows have increased by over 50% in the past five years, making it one of the fastest-growing economies in Southeast Asia.

The shift of manufacturing from China to Vietnam has been driven by several factors. Firstly, the U.S.-China trade war has led many companies to seek alternative production bases to avoid tariffs. Secondly, Vietnam’s labor costs are significantly lower than those in China, making it an attractive destination for labor-intensive industries such as textiles and footwear. Lastly, Vietnam’s government has been proactive in promoting foreign investment, offering tax incentives and improving infrastructure.

However, the new U.S.-Vietnam trade deal introduces significant challenges for Vietnam’s supply chains. The imposition of a 40% tariff on trans-shipped goods could disrupt the flow of components from China to Vietnam and then to the U.S. market. This could force companies to re-evaluate their supply chain strategies and potentially relocate production to other countries.

Canada’s Reversal on the Digital Services Tax

Meanwhile, in a move that unfolded just days earlier, Canada reversed course on a controversial digital services tax (DST) it had planned to enforce against major U.S. tech firms. The tax, originally proposed in 2020, would have levied a 3% charge on Canadian revenues of companies like Amazon, Meta, Google, and Apple. Set to apply retroactively to January 2022, the DST was expected to generate more than C2 billion in its first year, with federal projections forecasting over C5.9 billion in revenue over five years.

However, the DST had long been a point of friction between Ottawa and Washington, particularly under Trump’s renewed trade offensive. Earlier in the week, Trump had abruptly called off bilateral trade negotiations with Canada, denouncing the DST as a “blatant attack” on American enterprise. He threatened to retaliate with sweeping new tariffs on Canadian exports. Canada, facing growing economic pressure and the risk of a major diplomatic rift, announced it would scrap the tax just hours before the first payments were due. Canadian Finance Minister François-Philippe Champagne declared that legislation would be introduced to repeal the tax and halt any collections. Champagne emphasized that Canada’s preferred approach remained a multilateral framework for digital taxation, echoing calls from the OECD and other international organizations for global consensus on the matter.

The reaction from the United States was immediate and positive. U.S. Commerce Secretary Howard Lutnick and the American Chamber of Commerce both applauded the move, calling it a constructive step toward rebuilding economic cooperation between the two nations. For Canada, however, the decision sparked debate at home. Critics argued that the government had squandered a vital source of revenue and capitulated to foreign economic pressure. Michael Geist, a law professor at the University of Ottawa, criticized the retroactive nature of the tax and the government’s handling of U.S. concerns, writing that the five-year rollout of the DST had been “badly managed” from the outset.

The digital services tax has become one of the most contentious issues in global trade in recent years. As digital platforms become central to consumer behavior and advertising, traditional tax structures struggle to keep pace. Countries around the world, including the UK, France, and India, have proposed or enacted similar taxes, arguing that tech giants profit extensively from local markets while paying minimal corporate tax.

The OECD has been leading efforts to develop a multilateral framework for digital taxation. However, progress has been slow, and many countries have decided to implement their own taxes in the meantime. This has led to a patchwork of different tax regimes, creating significant challenges for multinational companies.

The Canadian reversal underlines how hard it remains to implement such policies when global consensus is lacking and economic asymmetries are significant. The U.S. has been particularly vocal in opposing digital services taxes, arguing that they unfairly target American companies. This has led to several trade disputes, including the U.S. threatening to impose tariffs on countries that implement such taxes.

Broader Implications for Global Trade

Beyond these two specific events, the broader implications for global trade are significant. Both developments show the continued erosion of multilateral institutions and the rise of transactional, bilateral arrangements. Countries like Vietnam are increasingly being drawn into highly specific trade deals shaped by the demands of larger economies. The enforcement mechanisms being introduced, such as trans-shipment monitoring and market-access conditionality, are placing new compliance burdens on exporters and regulators alike.

Meanwhile, Canada’s retreat from the DST shows how vulnerable middle powers can be when caught between domestic policy priorities and international pressure. The episode highlights the challenges of balancing national interests with global cooperation in an increasingly interconnected world.

The Future of Global Trade

These events highlight persistent vulnerabilities in global supply chains. The U.S.-Vietnam deal, though framed around tariffs, is fundamentally about sourcing, component traceability, and re-routing of goods. These pressures are prompting companies to reassess the resilience and transparency of their manufacturing networks. Digital tools for tracking product origin, regulatory alignment across countries, and investment in customs technologies will become increasingly necessary. Firms operating across borders must now think not only about cost efficiency, but about compliance risks and geopolitical factors in their supply chain design.

In facing these challenges, the world must recognize that protectionism and unilateralism—however expedient—carry long-term costs. Trade conflicts may temporarily resolve through force or concession, but without shared standards and cooperative frameworks, uncertainty and inequality persist. As we look ahead, the future of global trade depends on building a system that is open, inclusive, and based on fairness and mutual benefit. Only through balanced and rules-based cooperation can countries ensure sustainable growth and resilience in an interconnected world.

By Gao Shen