What does the trade agreement between the U.S. and Vietnam mean for the Asian market?

According to Xinhua News Agency report on July 3, U.S. President Trump stated that the United States has reached a trade agreement with Vietnam. Trump mentioned that the U.S. will impose a 20% tariff on Vietnamese goods and a 40% tariff on goods transshipped through other countries to Vietnam; Vietnam will impose zero tariffs on U.S. goods and "fully open its market" to the U.S.

According to the latest research from Citigroup, the newly announced U.S.-Vietnam trade agreement is not the "good news" the market expected, but rather releases several concerning signals.

Citigroup believes that the 20% tariff is higher than expected, increasing cost pressures on Vietnamese exporters, which may affect other Asian economies in the future; while the 40% high tariff on transshipped goods may impact supply chain-related countries such as Thailand and Malaysia. Given the enhanced negotiating power of the U.S., other countries face greater uncertainty, and future trade agreements may be less favorable to emerging markets in Asia.

China Central Television pointed out that July 9 is the deadline for the U.S. government to suspend the so-called "reciprocal tariffs" for 90 days. As this date approaches, Asian countries face unprecedented pressure in trade negotiations.

Agreement Announced: Mixed Blessings, but More Concerns

The Citigroup report noted that the announcement of the U.S.-Vietnam trade agreement itself is good news, as it eliminates uncertainty and allows businesses to plan more clearly. Additionally, it also suggests that there is still a possibility of the U.S. reaching agreements with other countries before the 90-day tariff exemption period expires.

However, the negative news is far more concerning than the positive news. The details of this agreement reveal several core risk points:

1. Higher-than-expected tariff rates: The agreement imposes a 20% tariff on goods exported from Vietnam to the U.S., which is double the commonly assumed 10% general tariff rate. This unexpectedly high rate sets a harsh starting point for subsequent trade negotiations with other countries.
2. High tariffs on transshipped goods: Most unexpectedly, the U.S. has imposed an independent tariff of up to 40% on goods transshipped through Vietnam. This punitive rate aims to combat the practice of circumventing tariffs by transshipping through third countries. Countries like Thailand and Malaysia may be more affected than other emerging markets in Asia, as they have close ties with Vietnam in the supply chain and may be involved in transshipment trade.
3. Supply chain spillover effects: The agreement may have spillover effects on foreign investors who have relocated factories to Vietnam. For example, South Korean companies' production activities in Vietnam will face impacts. The report specifically mentions that the extent of the impact on South Korea will depend on whether the U.S. grants tariff exemptions for Samsung smartphones manufactured in Vietnam.
4. Potential industry tariffs: Analysts also warn that following the U.S.-Vietnam agreement, the U.S. may impose tariffs on specific industries, with the pharmaceutical and automotive sectors being high-risk areas The report analysis believes that given the current high position of the U.S. stock market, the U.S. has stronger bargaining power in trade negotiations. The agreement with Vietnam will undoubtedly put greater pressure on other countries that have not yet reached agreements with the U.S., prompting them to make concessions in the short term. This asymmetric negotiating position may lead to trade agreements reached in the future being more unfavorable for emerging markets in Asia.

Impact on Asian Interest Rates and Foreign Exchange Markets

Citigroup believes that the conclusion of this U.S.-Vietnam trade agreement poses sustained downward pressure on Asia's interest rate market.

In the interest rate market, the report suggests that Asian economies will face ongoing pressure for interest rate cuts. Although most central banks have already implemented multiple rounds of rate cuts, countries like South Korea and Malaysia still have further room for easing. Referring to the U.S.-Vietnam agreement, the likelihood of the Monetary Authority of Singapore (MAS) reducing the appreciation slope of the nominal effective exchange rate (NEER) of the Singapore dollar to 0% has increased. For Thailand, its domestic political challenges and slow progress in trade negotiations have raised the possibility of an earlier rate cut.

In the foreign exchange market, the impact is more complex. The report states that the narrative of "de-dollarization" is still fermenting and may continue. However, such trade agreements will undermine the trade surplus of emerging markets in Asia, thereby setting new obstacles for the strengthening of regional currencies. Therefore, the report believes that the cross rate of the euro against Asian currencies (EUR/Asia) will continue to be supported.

Within the emerging markets of Asia, the impact of this agreement on different currencies will show divergence. The report assesses that the New Taiwan Dollar, Indonesian Rupiah, Indian Rupee, and Philippine Peso may be less affected; while the Malaysian Ringgit, Thai Baht, South Korean Won, and Singapore Dollar will face more direct impacts