No Escape: SUVs don’t fit Vietnam’s roads or its market

This year marks 30 years of America’s diplomatic relationship with Vietnam. In that time, both nations have worked together on everything from joint economic ventures to war reconciliation, as well as addressing national security issues. The bilateral relationship with Vietnam has come a long way since the end of the Vietnam War, but it has recently hit a snag.

President Trump is in the process of negotiating a deal that would see the US export to Vietnam tariff-free while slapping a 20 percent tariff on Vietnamese imports. This is a part of a larger effort to boost American exports, strengthen domestic manufacturing, and shrink the trade deficit. But while a 0 percent export tariff sounds good on paper, it is more symbolic than effective, while the 20 percent tariff rate could seriously harm Vietnam’s economy.

Dropping export tariffs won’t suddenly create a large demand for American goods in Vietnam, as other factors than price determine demand. Still, Trump claims that American SUVs, among other products, would be a “wonderful addition” to Vietnamese markets, completely ignoring consumer preferences.

Only 9 percent of Vietnamese households own cars, much less SUVs, which are too large to be practical on many Vietnamese streets. Even America’s main exports to Vietnam, such as agricultural products and machinery, won’t necessarily sell more if they don’t align with Vietnamese customers’ needs. The amount we sell now more or less reflects the existing demand in Vietnam.

There is also an affordability issue. With an average salary of $300 a month, the average Vietnamese worker would need to work around 11 years to afford a base model 2025 Ford Explorer. Given that Vietnam has 200 million fewer consumers and a much lower average salary, it is no surprise that their demand for American goods is lower than American demand for Vietnamese products. That’s why tariff policy alone is unlikely to reverse America’s trade deficit with Vietnam, and in reality, the trade deficit is simply not a problem for either country.

If we really want to increase Vietnam’s purchasing power and stimulate demand, the answer is simple: free trade. In his book Free Trade and Prosperity, leading developmental economist Arvind Panagariya says that “outward-oriented policies” that embrace free trade and exports are the most important factors for long-run prosperity. If Trump genuinely wants to boost American exports, he should scrap the 20 percent import tariff and let Vietnam prosper. Free trade is a positive-sum game where Vietnam’s development can further boost US exports. A more prosperous Vietnam would be a stronger market for American goods, as we already saw after Vietnam’s 1986 “Doi Moi” economic reforms.

Free trade with Vietnam also has foreign policy benefits. My Competitive Enterprise Institute colleagues recently pointed out in their latest paper that free trade expands US soft power and helps to build friendlier relationships with other countries. This is especially true in Vietnam’s case. Welcoming Vietnam into America’s global value chain not only promotes mutual growth, but enriches security alliances in a region where China’s influence continues to expand.