U.S. reciprocal taxes: What is the response for the Vietnamese government and businesses?

Recently, the US government has shown strong moves to protect domestic production through a series of executive orders issued to strengthen the tariff barriers of this trading country. On April 3, the President of the United States announced a list of countries subject to U.S. reciprocal tariffs and applicable tariffs, which are seen as a retaliatory measure in response to the tariff policies of trading partners. Previously, Vietnam made necessary preparations to respond to the US tariff decree through a Decree amending and supplementing the preferential import tariff rates of a number of items in the Preferential Import Tariff according to the List of taxable items issued together with the Government's Decree No. 26/2023/ND-CP dated May 31, 2023 ("Decree amending and supplementing the  Addition").

Risks from the US reciprocal tax policy

First of all, it is necessary to understand the concept of "reciprocal taxation". Reciprocal tariffs[1] are simply understood as a retaliatory tariff measure imposed by the U.S. government to protect the domestic industry. Specifically, when a country imposes high tariffs on U.S. exports, the U.S. responds by imposing similar tariffs on imports from that country. This is a "response" strategy that has been put into use by President Donald Trump's administration to reduce the competitive advantage of partner countries and put economic pressure on these countries. The imposition of reciprocal tariffs has caused a lot of "stirring" in the international trade market, because it can increase product costs, reduce competitiveness and change the trade balance between countries.

Currently, the United States has published specific information on the list of countries subject to reciprocal tariffs, in which Vietnam is subject to reciprocal tariffs with high tariff rates (46%). The imposition of reciprocal tariffs is not only a hypothesis but a situation that has occurred, Vietnamese products when imported into the US market will be subject to an additional tariff rate of 56% (10% import tariff rate from April 5 and 46% of the reciprocal tariff rate from April 9, 2025).[2] At that time, Vietnam's exporters will face pressure to increase production costs, shrink profit margins and decrease revenue when prices increase due to the imposition of taxes. In addition, the increase in reciprocal tariffs could disrupt supply chains between countries and affect the country's ability to maintain foreign currency revenues, creating significant losses not only at the corporate level but also on a national scale.

It should be recognized that currently most domestic manufacturing industries in general and production for export in particular still have to import raw materials and materials from China - a country also affected by the import tax policy of the United States - to reprocess or serve the production process. Previously, when Vietnam was not directly affected, the impact from neighboring China on Vietnam's export market showed obvious signs when input costs increased, forcing export prices to increase, not to mention import taxes from other countries in the world. When the cost of products increases, American consumers may switch to choosing products from other countries or domestic products in the United States with cheaper prices and comparable quality, leading to the loss of market share of Vietnamese businesses in the US trade market. This is not only a pressure for domestic businesses but also a negative impact on the trade balance and revenue from export activities of the whole country.

Proactively responding to the new tariff policy

The amended and supplemented Decree[3] has shown the scope of application of preferential import tax rates for imported goods in general with the highest import tax rate of 70%, focusing mainly on imported cars. In addition, the amended and supplemented Decree also applies low import tax rates to imported raw materials, supplies and components used for the production and processing (assembly) of supporting industry products prioritized for development with the lowest tax rate of 0%. This is also the basis for Vietnam to apply negotiations and renegotiate with the United States related to reciprocal taxes, it is feasible that the tax rate that Vietnamese enterprises must bear will not exceed a certain threshold applied by Vietnam to the United States. Although it is currently subject to reciprocal tariffs, the legal basis from the amended and supplemented Decree allows the Government to propose that the reciprocal tariff rate that Vietnamese enterprises must bear does not exceed a certain threshold, ensuring fairness and stability in bilateral trade. Affirming the reciprocal tariff limit based on the preferential tax mechanism for raw materials, supplies and production components will help create a "balance point" in negotiations, contributing to reducing the negative impact of protective measures that foreign partners are applying while the majority of production factories of public companies and consumer products are all processed in Vietnam and exported back to the US such as Apple and Nike. At the same time, the legal basis of the amended and supplemented Decree also creates leverage for the Government to propose policies to support and protect the domestic manufacturing industry through renegotiation of trade terms with the United States, demonstrating a goodwill towards a more reasonable and stable reciprocal tariff in the future.

From that basis, when the time to officially apply the reciprocal tariff is until April 9, 2025, negotiations and dialogue between Vietnam and the United States to consider adjusting and postponing the imposition of import reciprocal duties on the US for Vietnam for a certain period of time should be prioritized. In parallel with external relations, the Government may consider and promulgate a special legal document to support and allow enterprises to suspend or mitigate tax payment obligations for severely affected export industries. This document should adjust the current provisions of the Law on Corporate Income Tax and the Law on Value-Added Tax, create a mechanism of incentives and financial support through reducing lending interest rates, credit guarantees, and supporting transportation costs and production restructuring. The establishment of an interdisciplinary steering committee to monitor and implement support policies will contribute to ensuring flexibility and timeliness in responding to the current situation, the implemented mechanism will be a great support for exporters. In the long term, reforming the legal framework on import and export taxes is necessary. The Government needs to amend and supplement the provisions of the export tax law and related guiding decrees, create a flexible tax mechanism, adapt to fluctuations in the international market and help businesses easily transform their structure as well as optimize the value chain.

For businesses, responding to reciprocal tax measures from the United States requires initiative and flexibility in both the short and long term. In the immediate period, businesses need to quickly re-evaluate the estimated cost structure for exporting goods to the US market in particular, renegotiate contract terms with partners and optimize production processes to minimize the immediate impact of tariff measures. Actively monitoring support policies from the Government will be the basis for businesses to timely grasp information and propose effective response solutions. Meanwhile, in the long term, businesses should consider expanding the market to other regions such as Europe, Asia or other countries, in order to reduce dependence on the US market. Taking advantage of the free trade agreements (FTAs) that Vietnam has signed will support businesses to access new markets with tariff incentives, help businesses have a way out in bringing products to consumers and reduce cost losses.  contributing to the protection and sustainable development of the national economy.

The imposition of a 46% reciprocal tariff by the United States on Vietnamese goods poses a great challenge for exporters. However, with close coordination between the Government and the business community, we can overcome this difficult period. The government needs to continue to promote negotiations with the United States to adjust the appropriate tax rate, and at the same time implement policies to support domestic businesses. On the business side, diversifying the market, optimizing the supply chain and improving product quality will be important strategies in the coming time. At that time, it is the initiative and flexibility that will help Vietnamese businesses not only effectively respond to current challenges but also create a foundation for sustainable development in the future.