July 6, 2025
Summary:
This blog discusses the potential impact of the newly agreed 20% flat tariff on all U.S. imports from Vietnam. Vietnam is the sixth largest national source of US imports and so tariff adjustments will impact both Vietnamese producers and US buyers. Slim net profit margins in labor-intensive consumer goods industries will limit any sharing of the additional fiscal burden with Vietnamese producers. US retailers and consumers will likely bear the majority of the tariff burden – perhaps less than a 5% average retail price increase for imported apparel but likely more than a 10% increase for imported furniture given the level of existing tariffs on these goods. With much lower existing apparel wage rates in South Asia and President Trump hinting at a lower tariff on Indian exports, a long-term shift of global production to South Asian countries is likely provided supply chains and productivity can be enhanced sufficiently.
More economic impact will be felt in the United States from a 20% tariff applied to intermediate goods imported from Vietnam – representing two thirds of total Vietnamese exports to the United States. US manufacturers likely already source inputs from the lowest cost producers around the world. If alternative competitively priced suppliers are found in other countries after all US tariff adjustments have been completed, changing suppliers will be a lengthy and costly process for US companies. Compliance with strict quality, delivery and capacity criteria has to be carefully managed. For global producers, shifting industrial production to lower cost countries is even more problematic. The adverse impact of tariff increases on imported industrial inputs has already been observed following the 25% tariff imposed on steel imports during President Trump’s first term in 2018 and provides useful lessons for other imported industrial inputs.
Blog:
On July 2, President Trump announced that his administration had agreed in principle with the government of Vietnam to a flat 20% tariff on all US imports from Vietnam. Whether this represents a 20% ceiling and a 10% floor (the rate agreed with the United Kingdom) on imports into the US in future negotiations with other countries remains to be seen. Only agreements in principle with Vietnam and the United Kingdom have been announced to date.
Vietnam is a very large exporter of goods to the United States – $142 billion in 2024, ranking Vietnam the sixth largest exporter to the United States. It exports both consumer products (apparel, footwear, furniture and phones) and intermediate goods (industrial and electronic products). Vietnam reached this achievement supported by a workforce of over fifty million and an openness to capital inflow, automation and direct foreign investment. Japanese, Chinese and Korean companies shifted labor-intensive production to Vietnam to take advantage of (apparel) labor rates that are half the average Chinese labor rate.
The immediate impact of the 20% tariff on Vietnam will be more significant in some industries than others. This will ultimately depend on the level of US tariffs negotiated with other exporting nation competing with Vietnam. For example, 75% of Vietnam’s furniture exports ($15 billion) went to the United States in 2024 representing 20% of all US furniture imports. These were subject to an average tariff of only 1% and will now be subject to a rate of 20% – a 17.8% cost increase if the total tariff burden is passed on to the US importer. However, if a similar 20% tariff is imposed on other furniture exporters to the United States, i.e. China, Mexico, Malaysia, Indonesia, etc., then Vietnam may not lose market share to these countries.
How much of the burden of the additional tariff will be shared between Vietnamese producers and US importers may depend on their relative profit margins. The typical net profit margin of Vietnamese furniture exporters appears to be less than 10% with one large exporter experiencing losses in recent years. This suggests limited capacity for Vietnamese producers to absorb much of the tariff impact. Higher retail prices in the US will likely erode consumer demand to a degree, further lower profit margins and will likely promote greater reuse of existing furniture. As will be discussed next for apparel and footwear, furniture production could shift to lower wage countries in South Asia but only if their supply chain costs continue to improve.
Labor intensive apparel and textiles have always been subject to high US tariffs – averaging 14.6% compared to an applied average tariff of 2.5% across all US imports in 2024. This is the result of lobbying efforts by industry groups to maintain protection for domestic manufacturers over much of the past century. Even with high tariffs and quotas on apparel and textile imports, the US industry has lost 99% of its workforce since 1968 (2.1 million workers). Today’s domestic production is limited to high-tech non-woven textiles and small-scale production of mainly apparel samples. 98% of apparel sold in the US is imported.
Vietnam supplies the US with 30% of its total imports of footwear subject to an average pre-2025 tariff of 12%. Vietnam also supplies the US with 18% of its total apparel imports with an average pre-2025 tariff of 13%. Unlike the capital-intensive steel and aluminum sector, high labor costs preclude any large-scale apparel manufacturing in the United States. Therefore, apparel will continue to be imported regardless of the tariff. Can Vietnamese producers absorb any of the tariff increase – a 7% increase in the imported cost of footwear and 6% in the imported cost of apparel.
Table 1 below shows the basic apparel wage and net profit margin of apparel producers in the largest Asian apparel exporters to the United States. Global apparel producers are able to subcontract or shift labor-intensive apparel production relatively easily – a good example of the “Flying Geese” development model describing the shift of labor-intensive production from the 1960s in Japan first to Hong Kong Singapore, South Korea and Taiwan, then to the rest of ASEAN and China. The global apparel industry is extremely competitive, and profit margins are notoriously thin. No Asian producer could bear to reduce its profit margin to absorb an increase in their US tariff to 20%. Of all Asian apparel producers, Vietnamese producers could perhaps shave one or two percentage points off their net profit margins to align with margins in other Asian countries – but such a large reduction of up to 40% of net profit would be resisted by investors. U.S. apparel retailers will be equally loath to reduce their margins – current net profit margins of US apparel retailers range from 5%-10%. If the higher tariffs persist in the long term, apparel producers are likely to continue to push costs downward and enhance productivity in lower-wage countries in particular, South Asia.
Table 1. Average Apparel Monthly Labor Rates and Estimated Apparel Producer Net Profit Margins in Countries Exporting to the United States
| Country | Basic Monthly Apparel Wage (Jan 2024) | Estimated Net Profit Margin of Domestic Apparel Industry (2024-25) |
| Bangladesh | $93 | 3%-5% |
| Cambodia | $244 | 2%-4% |
| China | $500 | 4%-7% |
| India | $132 | 3%-6% |
| Indonesia | $147 | 3%-6% |
| Sri Lanka | $111 | 4%-6% |
| Vietnam | $250 | 5%-8% |
Source: Asia Floor Wage Alliance survey 2024, Grok AI
An apparel, footwear and furniture production shift to South Asia will depend upon the ultimate US tariff imposed on South Asian country exports to the United States. On July 2, President Trump said, “Right now, India doesn’t accept anybody in. I think India is going to do that, if they do that, we’re going to have a deal for less, much less tariffs (than the current 27% tariff – Author’s insertion)”[1]. A production shift to South Asia will also depend on supply chain and productivity enhancements in South Asia. Even though Indian apparel wages are almost half those of Vietnam, Vietnamese apparel producers use less labor per unit of output than Indian producers due to greater automation in Vietnam. Supply chain operations and foreign direct investment regulation are also likely more efficient in Vietnam than in India.
What of Vietnam’s exports of intermediate products to the United States. About two thirds of total US Imports from Vietnam are intermediate products (electronics, plastics, etc.) The danger of the tariff increase here is that while the worst that would happen to imports of furniture, apparel and footwear is that their retail price in the US will increase and demand will fall, US industry relying on intermediate inputs from Vietnam will see a sudden increase in input costs, higher domestic output prices, lower competitiveness in export markets and consequently lower output and/or profitability.
US manufacturers likely already source inputs from the lowest cost producers around the world. If alternate competitively priced suppliers do exist in another country then changing suppliers takes time – quality, delivery and capacity reliability has to be carefully tested. For suppliers, shifting industrial production to lower cost country suppliers is not as straightforward as shifting apparel production. Apparel equipment and technology is simpler and more transferable than electronic and industrial production which relies upon more skilled labor, complex supply chains and precise quality standards.
The impact of increased tariffs on intermediate inputs has already been felt by US industry following the series of tariff increases on steel and aluminum imports starting with the 25% tariff on steel and 10% tariff on aluminum applied by President Trump in 2018. The impact will likely be similar on other user industries impacted by the 20% tariff on all imports from Vietnam. President Biden increased tariffs on steel imports from China to between 25% and 100%. Effective June 3, 2025, US tariffs on both steel and aluminum imports from all countries increased to 50% except the United Kingdom. According to a PBS story, tariffs have consistently raised steel and aluminum prices in the US, with U.S. steel costing $984 per metric ton in 2025 compared to $392 in China. With 50 times more workers in steel- and aluminum-using industries than workers in steel and aluminum production in the US the impact of the tariff increases has been felt across US manufacturing. The U.S. International Trade Commission reported in 2023 that while the tariffs boosted steel and aluminum production by about $2.25 billion in 2021, they reduced output in downstream industries like automobiles, tools, and industrial machinery by $3.48 billion, a net economic loss.
In conclusion, the increased tariff burden on imported consumer goods, particularly apparel, footwear and furniture will likely lead to modest retail price gains and reduced margins for US retailers. However, the majority of Vietnam’s exports to the United States are intermediate products used in the production of goods and services in the United States. The impact of ever increasing tariffs on steel and aluminum imports since 2018 suggests a similar impact for the 20% flat tariff on all imports of intermediate inputs from Vietnam. High manufacturing input costs lead to lower output, profitability and export competitiveness.
[1] https://www.reuters.com/world/india/we-are-very-close-with-india-trade-deal-bessent-tells-fox-news-2025-07-01/
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