China On Edge After US-Vietnam Trade Deal? Economists Warn Of Backlash As Trump Targets ‘Transshipped’ Goods In Bilateral Pacts

With the Trump administration’s July 9 deadline for striking bilateral trade deals fast approaching, China is reportedly becoming apprehensive about the U.S. negotiating agreements with other nations that could potentially exclude it from the global supply chain.

A Bloomberg report stated that the terms of the agreement the U.S. was negotiating with its major trading partners in Europe and Asia included restricting Chinese content or obtaining a commitment from these nations to counter what it perceives as “unfair trade practices.”

A trade deal President Donald Trump announced with Vietnam calls for a 20% tariff on exports from the Southeast Asian country and a 40% tariff on transshipping. 

Transshipment refers to the shipment of goods to an intermediate destination en route to another country. The 40% levies on the transhipped goods through Vietnam primarily target countries such as China, which use this route to skirt U.S. import duties.

It would deal a blow to products with components from countries that require only minimal final assembly before being exported to the U.S.

Given the lack of details about the agreement negotiated with Vietnam, but for the broader framework, the impact of the two-tiered levy on Chinese exports to Vietnam isn’t yet known, the report said.

The optimism observed in global markets in recent sessions is partly due to hopes that the tariff uncertainty will be resolved. The SPDR S&P 500 ETF (SPY), which tracks the broader S&P 500 Index, reached a new high on Wednesday. Retail sentiment toward the ETF had remained ‘bullish’ (63/100) on Stocktwits, with the message volume at ‘normal’ levels.

The SPY is up 6.5% for the year compared to the 19% gain for the iShares MSCI China ETF (MCHI).

Bloomberg’s in-house economist, Rana Sajedi, said, “The looming question now is how China will respond.”

“Beijing has made clear that it would respond to deals that came at the expense of Chinese interests, and the decision to agree to a higher tariff on goods deemed to be ‘transshipped’ through Vietnam may fall in that category.”

Most recently, on Saturday, the Chinese Commerce Ministry said,” China firmly opposes any party reaching a deal at the expense of Chinese interests in exchange for so-called tariff reductions.”

“If this happens, China will never accept it and will resolutely counter it to safeguard its legitimate rights and interests.”

Bloomberg’s Sajedi also said if China chooses to retaliate, those measures would have an outsized impact on Vietnam’s economy, given that China is its biggest trading partner and supplies key inputs to domestic production.

She also flagged negatives, such as Vietnam’s exports to the U.S. falling by 25% in the medium term, which would impact more than 2% of its GDP. Other nations may struggle to match the 20% rate agreed upon by Vietnam, which is twice the baseline tariff rate, the economist noted. 

Sajedi also pointed out that the deal does not detail sectoral tariffs, which is the case with other nations such as Japan, South Korea, and the EU. 

A recent report from Natixis SA Asia-Pacific Chief Economist Alicia Gracia Herrero said, “Asia’s dilemma when it comes to Trump’s trade war is all about dependence on US final demand while relying heavily on China’s value added in domestic production,” Bloomberg reported.

The report also noted that Chinese Foreign Minister Wang Yi will likely raise the issue during his visit to Europe this week. 

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