Why Vietnam’s front foot play matters

Vietnam has the highest exposure to increased across-the-board US tariffs in the Asia-Pacific region.

“Over the past decade, Vietnam's exports to the US have risen strongly from USD $28.6 billion in 2014 to USD $119.2 billion in 2024, equivalent to 26 per cent of GDP.”

Since taking office in January, President Donald Trump has proposed tariffs on Mexico, Canada, and China.

Vietnam has not been directly impacted by these tariffs yet, but the fact the US runs the third-largest bilateral trade deficit with Vietnam puts the country in the crosshairs.

Vietnam currently benefits from a bilateral trade agreement with the US, which grants both countries most-favoured-nation status.

Both countries elevated their relationship to a Comprehensive Strategic Partnership in 2023, which helped to solidify the friendshoring trend towards Vietnam.

Growth decade

Over the past decade, Vietnam's exports to the US have risen strongly from USD $28.6 billion in 2014 to USD $119.2 billion in 2024, equivalent to 26 per cent of GDP.

Machinery, transport equipment, and miscellaneous manufactured items account for over 95 per cent of US imports from Vietnam, with semiconductor being one of the major items.

The recent announcement of reciprocal tariffs by the US will not have a major direct impact on Vietnam’s exports.

This is because the effective trade-weighted tariff that Vietnam imposes on imports from the US at 2.8 per cent is lower than the 4.6 per cent average tariffs that the US places on imports from Vietnam.

However, Vietnam remains highly vulnerable to the US enforcing non-tariff barriers to trade or looking more forcefully at rules of origin for products as the authorities clamp down on trade re-routing.

Vietnam acts

The Vietnamese government has noted their intention to purchase more from the US, including agricultural products, aircraft and LNG.

In 2024, Vietnam’s imports from the US makes up only 3.9 per cent of their total, suggesting this is unlikely to reduce the bilateral deficit substantially.

Despite the risks from trade disruption, the Vietnamese government has set an ambitious growth target of 8 per cent for 2025, up from the 7.1 per cent growth achieved in 2024.

To support this growth, the State Bank of Vietnam (SBV) is targeting total credit growth of 16 per cent for the year to boost domestic demand.

SBV is also allowing more flexibility in the exchange rate. For most of 2024, the SBV kept the central rate steady and intervened in the FX market to prevent the dong from weakening too far.

VND traded at the weak side of the trading band for a period.

With the recent increase in market volatility as a result of the tariff news coming out of the US administration, the SBV decided to allow more flexibility in VND by setting the central rate weaker following the Lunar New Year holiday.

This saw the dong weaken to all-time lows against the US dollar.

It was reported that SBV intervention totalled USD $9 billion in 2024 and has recently started to use futures instead of the spot market to undertake intervention.

However, a desire to preserve FX reserves (which stood at USD $82.5 billion as of October 2024) was likely behind the reason for allowing VND to weaken.

In the face of a stronger US dollar and the potential for more tariffs to be imposed by the US on its various trading partners, letting the currency act as a shock absorber is a better option.

Should the US impose tariffs or other measures on Vietnam, the SBV will likely allow the VND to weaken further.

Lunar New Year effect

Vietnam’s CPI inflation accelerated to 3.63 per cent year on year in January, above the consensus estimate of 3.10 per cent.

We put the upside surprise in inflation down to the timing of Lunar New Year, which occurred in January this year compared to February in 2024.

As certain prices (like food) tend to rise in the lead up to the long holiday period, this causes a base effect which pushes the year-on-year inflation rate higher.

Even with this January increase, inflation remains well below last year’s peak.

Among the subcomponents, food and foodstuff, medicine and health, and culture and entertainment recorded the sharpest rise over the month.

However, a decline in transport inflation helped provide some offset.

Global crude oil prices, adjusted for currency movements, were lower in January compared to the same period in the previous year which led to lower transport prices in year-on-year terms.

At present, we do not expect the inflation momentum to sustain in the coming months as demand moderates.

Uneven labour market performance and declining cost of petroleum imports indicates downside risks for inflation.

The SBV Governor has indicated the central bank will follow an adaptive monetary policy in 2025 and aims to maintain the inflation below 4.5 per cent over the year.

The Lunar New Year effect was also apparent in Vietnam's January export data, which fell by 4.3 per cent year on year marking the first contraction in eleven months.

This decline was primarily due to a 5.6 per cent year on year reduction in exports from the Foreign Direct Investment (FDI) sector.

It is not uncommon to see outright contractions in export growth during years when Lunar New Year falls in January.

There were only 17 working days in January 2025 compared to 22 in 2024, meaning one less work week in comparing the year-on-year performance.

Hence, we can expect the February export data to show a rebound.

Export deceleration?

However, even accounting for the Lunar New Year effect, there are signs export growth has decelerated since the third quarter in 2024.

Growth in key export categories such as electronics, machinery, and transport equipment subcomponents has slowed compared to mid-2024 levels.

Growth in textiles and footwear exports has also consistently declined over recent months.

Manufacturing PMI data corroborates the slowdown in production due to slower external demand.

The new export order index remained in the contractionary zone for the third consecutive month in January.

Furthermore, the future output index, which gauges sentiment regarding production over the next 12 months, has also weakened.

Given its importance in driving Vietnam’s GDP growth, the export performance over the next few months amidst the uncertain global trade backdrop will be important in determining if the government’s growth target for 2025 can be achieved.

Khoon Goh and Kausani Basak are Head of Asia Research with ANZ, and FX Analyst with ANZ