Vietnam, China and rerouting: When perceptions matter as much as reality

n the face of US tariffs on Chinese exports, China has sought to channel exports to the US via Vietnam. The fact that Vietnam enjoys a huge trade surplus with the US appears to underscore Vietnam’s complicity in the rerouting. While the reality is more complex than is imagined, Hanoi has its work cut out in convincing the new Trump administration that it is not entirely complicit.

Since the US-China trade war started in 2018, Vietnam has emerged as one of its biggest beneficiaries. Exports to the US have soared, with the surplus hitting US$104 billion in 2023 — nearly triple the US$38 billion recorded in 2017. Over this period, Vietnam has climbed from sixth to third on the list of countries with the largest trade imbalances with the US, trailing only China and Mexico.

Yet, this success has bred suspicion. American officials worry that Chinese firms are exploiting Vietnam as a backdoor to dodge tariffs, which are up to 25 per cent for some products, relabelling these Chinese-made goods as Vietnamese before shipping them to the US, a practice known as rerouting. Vietnam’s ballooning trade surplus with the US and its growing deficit with China have only fuelled this perception.

Early evidence of rerouting emerged in 2019 when Vietnamese authorities uncovered dozens of fake product-origin certificates and illegal transfers by companies seeking to sidestep US tariffs. The hike of Chinese investment in Vietnam after the trade war added to the suspicions. Former US President Donald Trump, who will return to the White House next January, once singled out Vietnam as the “single worst abuser of everybody” in 2019.

However, new research from Harvard Business School and Duke University paints a more nuanced picture — rerouting appears to be lower than is imagined.

While trade rerouting through Vietnam does occur, its scale appears far smaller than previously thought. The study found that in 2021, about 16.1 per cent of Vietnamese exports to the US — roughly US$15.5 billion — could be classified as potential rerouting when analysed at the product level. But when the researchers examined individual firms — tracking specific products flowing from China through Vietnam to the US — the figure fell to just 1.8 per cent, or US$1.7 billion.

This stark contrast highlights how aggregate trade statistics can mislead. Vietnam’s rising imports from China and its growing exports to the US primarily reflect conventional and expanding supply chain patterns, not deliberate tariff evasion. These patterns are rooted in the pre-trade war “China-plus-one” strategy, where companies diversify production to countries like Vietnam to capitalise on their lower manufacturing costs and improve industrial capabilities. The steady growth in Vietnam-US trade also reflects a broader strengthening of bilateral economic relations over the past decade, driven by Vietnam’s integration into the global supply chains. 

The imposition of U.S. tariffs on Chinese goods accelerated these developments, prompting existing manufacturers in Vietnam to scale production and new firms to expand their operations in the country. For such a reason, Vietnam’s trade deficit with China swelled from US$28 billion in 2016 to US$68 billion in the first 10 months of 2024, while its surplus with the US grew from US$30 billion to US$86 billion. These parallel increases largely follow pre-trade war patterns. Much of Vietnam’s Chinese imports comprise machinery, raw materials and components used in legitimate manufacturing that add value to products, not merely carrying out a logistical exercise of relabelling finished goods and re-exporting them to the US.

Vietnam now faces a delicate balancing act. It must crack down on rerouting while ensuring that legitimate trade remains unaffected.

Yet, in trade politics, perception often matters more than reality. Vietnam learned this lesson in 2019 when Trump threatened tariffs on Vietnamese goods, prompting Hanoi to stave off penalties by making big-ticket purchases, including soybeans and aircraft. Today, with its trade surplus with the US larger than ever, Vietnam can attempt the same tactic, but it is likely that such concessions would be insufficient in the eyes of President Trump. A second Trump administration will likely take an even harder line on perceived trade infractions. Vietnam’s status as a “swing state” in the US’ broader China strategy (the US using Vietnam as leverage against China) may offer some leverage. But as one former trade negotiator noted, Trump showed little hesitation in targeting Asian nations accused of providing China with a backdoor to US markets, even when it undermined his strategy to contain Beijing.

Vietnam now faces a delicate balancing act. It must crack down on rerouting, i.e., disguising Chinese-made goods as “made in Vietnam” to evade US tariffs, while ensuring that legitimate trade remains unaffected. Vietnamese authorities have demonstrated a willingness to address the issue, but the new risks associated with Trump 2.0 demand tougher measures. Targeting enforcement efforts on high-risk sectors, such as advanced technology products where rerouting is most prevalent, could be a starting point. Vietnam also needs to conduct careful screening of Chinese foreign direct investment to prevent Vietnam from being used as a conduit for tariff evasion. This can be achieved through strengthening investment approval processes, enhanced rules of origin compliance, and rigorous post-investment monitoring of firms operating in high-risk sectors.

It would also need to accelerate finalising stricter regulations on certificates of origin to ensure that “Made in Vietnam” truly reflects Vietnamese production. Deepening cooperation with US customs officials to improve traceability could further build trust.

In the short term, transactional diplomacy may offer some breathing room. In October 2024, just weeks before the US presidential election, the Trump Organization signed a memorandum to build a US$1.5 billion complex in Hung Yen province, the hometown of To Lam, the leader of the Communist Party of Vietnam. Whether coincidental or strategic, the move could help defuse tensions.

The long-term solution, however, lies in Vietnam’s ability to climb the value chain. Adopting more cutting-edge manufacturing capabilities beyond assembly and repackaging, which will help increase local value-added content and reduce reliance on Chinese inputs, will make Vietnam less vulnerable to rerouting accusations. It is widely known that China uses Vietnam for lower-end manufacturing and packaging activities, such as packaging US-bound goods in Vietnam before sending them to the US. This requires sustained investments in infrastructure, workforce skills and innovation. A climb up the value chain would make Vietnam less susceptible to rerouting by Chinese firms.

The lessons from Vietnam extend beyond its borders. As a re-energised trade war looms large, other Southeast Asian nations that host significant numbers of Chinese firms and enjoy trade surpluses with the US are likely to face similar scrutiny. This includes countries such as Thailand, Malaysia and Cambodia. Policymakers across the region should take heed and consider proactive solutions to address these challenges.

Vietnam’s rerouting problem may be smaller than the headlines suggest. In a world where perception shapes policy, however, appearances matter as much as reality. The challenge for Vietnam is to sustain its export success while proving unequivocally that “Made in Vietnam” means exactly that.

Nguyen Khac Giang is Visiting Fellow at the Vietnam Studies Programme of the ISEAS – Yusof Ishak Institute. He was previously Research Fellow at the Vietnam Center for Economic and Strategic Studies.

This article originally appeared on the ISEAS–Yusof Ishak Institute's Fulcrum on 26 November 2024.