The contours of a new trade order are becoming visible

Inevitably, the world’s multinationals and giant retailers have been slow to move production and factories for the understandable reason that this takes time. Instead, they have filled up warehouses with goods, racing to beat changing deadlines for new tariffs while waiting to get some clarity on US policies before they invest in new factories in different parts of the globe. This is understandably a process that takes years, not months. Supply chains are complex operations that take years to build.

Also Read: Balance please: Watch the ‘Masala’ pinch of an India-US mini trade deal

While businesses wait warily and watch for new announcements, uncertainty is at an unprecedented level. The hedging devices being used are bonded warehouses, where goods can be stockpiled but tariffs are paid only when the wares are taken out of storage and sent to distributors or retailers in the US. “Storage costs for bonded warehousing are now up to four times the cost of non-bonded premises,” the Financial Times reported earlier this month. “Another ripple effect is port congestion—ships still carry 90% of global trade.”

There has not been the sort of trade disruptions experienced during covid. But for countries such as India that are still in negotiations with the US for a deal on tariffs, it is not clear at all if there are lessons to be drawn from the few countries that have successfully concluded trade deals, such as the UK and Vietnam. The UK, for instance, is a relatively open economy with low tariffs, so it had little to lose. Even so, the deal comes with the threat that higher tariffs could be imposed if the US is not satisfied that the UK is doing enough to diversify its supply networks to be less dependent on China.

Also Read: Mint Quick Edit | Vietnam’s raw trade deal with the US isn’t good news

Vietnam, by contrast, has been the greatest beneficiary of the past few years’ trend of multinational businesses diversifying away from production in China. A third of its exports go to the US. But this also means, its tariff deal with the US notwithstanding, that it can be accused of serving as a transshipment point for goods made in China. 

This matters immensely because while US tariffs for imports from Vietnam have been brought down to 20% from the initial 46% on the April list, there remains the US threat that tariffs could be raised to 40% if evidence of transshipment is found. 

As an electronics manufacturer, including of smartphones, Vietnam, like much of the world, is dependent on China for components. Defining when a product is deemed to have been manufactured in China and when a higher duty is to be levied because the product is judged to be transhipped through Vietnam will be tricky. 

The devil will almost always be in the details. Garment manufacture, by contrast, might seem straightforward, but even that promises to be complicated because China is a major supplier of man-made textiles and accounts for about two-thirds of Vietnam’s imports.

Also Read: Trade agreements struck earlier have taught India how to raise its game

Vietnam continues to be a prime beneficiary of the China-plus-one trend, which I predicted five years ago on these pages (shorturl.at/AjDV1). It has far higher educational standards than its Southeast Asian and South Asian competitors. In the first half of this year, foreign direct investment into Vietnam jumped by a third to $21.5 billion. 

Foreign investment in factories there is at risk if Washington’s hard line on transshipment leads to higher tariffs on products with heavy use of components or raw material inputs from its large Communist neighbour. “That does not take into account how supply chains work,” an American businessman in Hanoi complained to the Financial Times recently. “It’s not just impossible for Vietnam. It’s impossible for everybody.” Welcome to managing export businesses in 2025.

Six months since the new administration took charge in Washington, there is not much clarity on how and why tariffs are being levied, other than the fact that President Donald Trump has for several decades believed that the US trade deficit is a sign that foreigners are taking advantage of the country. On 9 July, Brazil found itself threatened with a hefty 50% increase in tariffs for “attacking free speech.” This was interpreted as punishment for the ongoing trial of former president Jair Bolsonaro, a right-wing populist leader who the administration displays an affinity towards. The US, in fact, enjoys a trade surplus with Brazil.

Also Read: India should use Trump’s playbook on Trump for a fair trade deal

Russia has been threatened with a larger hike in tariffs unless it quickly agrees to a ceasefire with Ukraine. The letter outlining the threat of higher tariffs on Thailand, meanwhile, was addressed to that country’s king, apparently on the mistaken belief that he has executive powers. 

The complex tangle of tariff threats promises to further entangle Washington. Inflation, however, increased to 2.7% in June with the initial effects of tariffs becoming visible in appliances and home furnishings. Still, most of America’s allies are dealing with its demands without levying retaliatory tariffs. The EU last week was reported to have backed down on plans to introduce a digital services tax on companies such as Apple and Meta while it seeks a deal with the US. It is hard not to conclude that might is right.

The author is a Mint columnist and a former Financial Times foreign correspondent.