In the new trade paradigm coming out of the US, questions have been raised about Vietnam’s FDI-powered growth and whether it can be sustained. With this in mind, this article looks at how tariffs impact FDI flows and what to expect moving forward.
Foreign direct investment has been pivotal to Vietnam’s development story.
It has been the fuel that has powered its manufacturing industry, which has become very much central to global trade.
But the trade regime that created the conditions for all of that FDI to flow so freely into Vietnam is changing.
The tariff-heavy trade policy championed by the US president is reshuffling global supply chains, with foreign capital flows poised to follow.
With this in mind, this article explores the factors weighing on investment decisions and how Vietnam’s FDI inflows might shift in response.
Trade diversion to lower tariff jurisdictions.
Firstly, the focus of most tariff commentary has been on trade diversion, the thinking being that companies will rejig their supply lines toward lower tariff jurisdictions.
At the moment, Vietnam is facing a tariff of 20 percent per the announcement made by Donald Trump on July 2.
Assuming there are no changes to the tariffs proposed for Vietnam’s regional manufacturing peers — Thailand, the Philippines, and Indonesia face tariffs of 36, 20, and 19 percent, respectively – Vietnam does look to be in a pretty good position.
That is to say, there isn’t really any reason to shift production elsewhere, on a tariff-rate basis.
However, that doesn’t speak to Vietnam’s ability to attract new FDI, which is under threat at a more existential level.
Increased risks to Chinese investors.
China, for example, has been a key source of new FDI.
In 2024, it directly invested in 955 projects in Vietnam with total registered capital (that is capital pledged not necessarily spent) of US$4.7 billion.
That’s not to mention the US$4.3 billion that came via Hong Kong or any investments made through holding companies in Singapore, which is a fairly common practice for Chinese firms.
The Trump administration, however, has made clear that a big part of its trade policy is targeted specifically at China.
In the case of Vietnam, this has meant being singled out as a transhipment hub for Chinese goods looking to get around US tariffs, which the US administration has not looked on kindly.
This, however, coupled with existing tariffs on China linked to fentanyl and illegal migration, makes it look a lot like the US-China trade war is almost personal.
That is to say that it’s not about fentanyl, migration, or transhipment but rather a deep-seated, visceral problem with China that no amount of concessions may be able to placate.
If this is the case, it creates considerably more risk for large-scale Chinese foreign investments.
Uncertain US trade policy.
But therein lies another key challenge: US trade policy is anything but clear.
The deal announced July 2, for example, has already started to come unstuck with reports that what was agreed to was not what Trump announced.
Vietnam was expecting something around 11 percent, whereas Trump announced 20 percent.
Moreover, in the same week, just days before tariff rates announced back in April were due to come into force, the tax rates were revised for almost all other countries, and the start date was pushed back to August 1.
This makes for a challenging environment in which to make significant financial commitments, and it is more than likely that firms that can wait out the Trump presidency likely will at least try.
Consumer behaviour in the US will change.
All of that said, there is a second part to this equation that seems to be largely overlooked: Tariffs don’t just create trade diversions, they also change consumer behaviour — Vietnam’s share of the pie is not only likely to change, but the pie itself looks set to shrink too.
Tariffs are a tax charged to importers by the US government.
Those costs are likely to be passed on to consumers, decreasing their purchasing power.
Moreover, if inflation spikes, as it has been broadly speculated that it will, and US interest rates rise, consumers will have even less to spend.
This may mean prioritising things like power, fuel, housing, and transport over more discretionary items like IKEA flat pack furniture or new Nike sneakers — the kind of goods Vietnam makes.
More to the point, big foreign manufacturers simply may not have either the need or the finances to expand their operations anywhere, let alone in Vietnam.
FDI flows so far this year
As it stands, the National Statistics Office in its first half economic report noted that FDI commitments were up 32.6 percent year-on-year to US$21.52 billion — if FDI is set to take a hit it’s not clear to see yet.
Although given the time it takes to get an FDI project off the ground, this data likely reflects processes that began before the first round of tariffs were announced.
Moreover, registered capital doesn’t always extend to capital expenditure, with project approvals often followed by lengthy delays and many not seen through at all.
Still, it does at least look like there is a bit of foreign capital floating around.
Whether it hangs around and can be realised, however, is difficult to say in the current climate, but for businesses operating in the FDI space, it would make sense to prepare for a situation in which it may not.