What the Vietnam trade deal means

Trump is cracking down on China's use of third countries as transshipment hubs

The US this week announced a trade deal with Vietnam, the key features of which are a 20 percent tariff on imports from the country and a punitive 40 percent tariff on any transshipments going to the United States via Vietnam. The latter is clearly directed at China, which - as I noted in several posts recently - has used transshipments very aggressively to circumvent the 50 percent US tariff rate it now bears. Today’s post makes two points on what the Vietnam trade deal means in the big picture.

First, the Vietnam trade deal signals US focus on stopping Chinese transshipments to the US. The telltale sign of transshipments in the case of Vietnam is a rapid widening in the US trade deficit, which is unlikely to stem from a sudden boom in US demand for Vietnamese goods and - instead - likely reflects Chinese goods that are coming to the US via Vietnam. There’s lots of other countries against which the US trade deficit has also been widening sharply, as the four charts above illustrate. All these countries made a strategic error turning a blind eye to Chinese transshipments, because this now weakens their negotiating position with the US. There’ll be many more trade deals that’ll follow the Vietnam template.

Second, one of the big puzzles this year has been that inflation hasn’t picked up despite tariffs. One reason why this happened is that Chinese transshipments of goods to the US slowed the inflationary impulse from tariffs. As the US cracks down on transshipments, this inflationary impulse from tariffs will grow.

This of course has implications for the Dollar, which has been weighed down by dovish market pricing for the Fed. If US inflation starts to rise, potentially as soon as the coming CPI print, this should see the Dollar rally.