Number Theory: US-Vietnam circuit trade and tariff trouble

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Stock markets and economic analysts across the world are having a meltdown in the aftermath of Donald Trump slapping tariffs on the entire world. The tariffs announced by Trump are designed to “reciprocate” to the extent of the US’s trade deficit with individual countries rather than the tariffs they impose on US. Trump, at least as of now, has ruled out a roll-back and is in fact suggesting that it is US’s trading partners which will now have to offer better “deals” to the US.

The Hanoi Stock Exchange in Vietnam. (AFP)

The problem with Trump’s calculations, even if they turned out to be true in terms of trading partners bringing down their tariffs, is that they are too simplistic in a world of extremely complicated economic connections, and therefore unlikely to achieve the desired results of bringing the US trade deficit down. US trade with Vietnam, which has been slapped with one of the highest tariffs, in just one commodity is a good example.

US-Vietnam circuit trade and tariff trouble

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  US’s trade deficit with Vietnam has been rising continuously

  Vietnam has been slapped with one the highest tariffs (46%) among US’s major trading partners in Turmp’s announcement last week. US’s merchandise trade deficit with Vietnam has increased from $7 billion to $122 billion between 2006 and 2024. Almost all of this increase in trade deficit is on account of the rise in US imports from Vietnam as US exports to Vietnam have remained flat. Trump has claimed that his tariffs forced Vietnam to offer to reduce its tariffs on US imports to zero. Will this lead to a reduction in US’s trade deficit with Vietnam? A research note published by Barclays Chief India economist Aastha Gudwani on March 28 shows that US charged an average tariff of 3.1% on Vietnamese imports compared to a tariff of 3.3% in Vietnam on US imports. The percentage point difference between tariffs faced and imposed by the US in Vietnam was among the lowest in south-east Asian countries and India, the report shows.
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  Trade in electronic circuits gives an interesting insight into US-Vietnam trade relations

  Why has the US been unable to export to Vietnam despite facing low tariffs? A commodity-wise analysis of Vietnam’s top exports and imports gives a clue to this puzzle. World Bank’s WITS database gives a list of top five imported and exported commodities for a country by HS code (technical classification of commodities in the international trading system) at the six-digit level. In 2022, Vietnam’s top commodity-specific import was monolithic integrated circuits, digital (HS code 854211). These are electronics circuits for transistors, resistors and capacitors which form a silicon chip to be used in electronic items. The same commodity, however, was also Vietnam’s fourth highest exported commodity. The export and import numbers in 2022 were $53.6 billion and $12.9 billion respectively. Interestingly, monolithic integrated circuits, digital were the third largest US export in 2022 valued at $50.4 billion, and the top non-petroleum export of the US. However, Vietnam recorded imports of just $3.2 billion of this product from the US. What explains this relative inability of the US to sell to Vietnam what is sells successfully to the rest of the world?
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  Vietnam’s backwardness, US advantage in global value chains hold IC exports back

  WITS data is useful once again. It gives the country-wise trade value and volume of Vietnam’s import of integrated circuits for 2021. While US was ranked the fourth in Vietnam’s imports of integrated circuits, it had a share of just 10% in Vietnam’s total imports behind South Korea (33.5%), China (16.2%) and Other Asia, not elsewhere specified (15.9%). The last grouping is often considered a proxy for Taiwan. A look at unit value of exports (price per unit product) among major exporters of this commodity to Vietnam shows that US had the second highest unit value after Israel. This suggests that it was exporting high value (and better quality) products than its competitors. This is in keeping with intuitive wisdom on trade patterns which suggests that the richest country in the world will make more advanced (and expensive products) which will not have as big a market as its cheaper, more mass consumed variants. Vietnam is primarily dealing in low-price variants of these goods unlike the US which only produces high-value versions. Tariffs alone are not going to help the US capture the market for relatively cheaper goods.
• The HS code

  To be sure, the HS code used here is from the 1988-92 classification and has been reclassified into four HS codes in the 2022 classification, which might have led to a discrepancy in the country-wise import and export data for this commodity reported by Vietnam and US.