It has been argued that ‘connector’ countries can benefit from trade tensions by bridging the gap between trade blocs. This column examines trade flows of six Asian emerging markets from 2018 to 2022, distinguishing between trade reallocation and rerouting. While the impact of US–China trade tensions on most of these countries is unclear, Vietnam appears to have experienced trade reallocation rather than trade rerouting, supported by rising domestic production and stronger inward FDI. Despite potential short-term gains, trade reallocation increases connector countries’ vulnerability to geoeconomic fragmentation, with losses for all countries in the long run.
Since the rise of US–China trade tensions, there has been a growing debate on the impact of rising trade barriers on global and bilateral trade patterns (Aiyar and Ilyina 2023, Aiyar et al. 2023, Alfaro and Chor 2023, Freund et al. 2023, Freund et al. 2024) against a backdrop of the public debate on deglobalisation (Baldwin 2022). Geoeconomic fragmentation poses losses to all countries in the medium-to-long term, but may lead to different trade dynamics among countries in the short term. It has been argued that ‘connector’ countries benefit from bridging the gap between trade blocs – for example, by increasing exports to the US as they substitute for declining US sourcing from China while at the same time increasing imports from China (Fajgelbaum et al. 2023, Fajgelbaum et al. 2024, Freund et al. 2023, Freund et al. 2024, Gopinath et al. 2025). However, it is not clear (a) whether such connector countries do indeed serve as bridges, as the increasing imports from China may reflect other factors; and (b) even if such ‘bridging the gap’ effects exist, through which channels they operate. Two possible channels are:
Separating these channels is important. Trade reallocation could benefit the domestic economy at least in the short term as it increases domestic production for exports. Conversely, trade rerouting involves minimal or no domestic production activities and may result in harmful countervailing trade restrictions. In a recent paper (Schulze and Xin 2025), we provide a nuanced assessment of the changing trade patterns during 2018 and 2022 by disentangling these two channels and examining the spillover consequences of the higher US tariffs on China in 2018 for a sample of six Asian emerging markets (India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam).
We first document that the positive correlation between these countries’ imports from China and exports to the US may reflect other forces at play, such as Chinese supply chain reconfiguration and growing domestic markets, and not necessarily their connector roles in bridging the gap between China and the US.
We then leverage the Eora global supply chain database, which captures global production linkages, to construct two value-added measures of each country’s exports to the US between 1990 and 2022: (1) the share of domestic value added, and (2) the share of Chinese value added. We use a synthetic control approach to estimate the effect of US-China trade tensions on these measures, especially for strategic sectors that have been most affected by the US tariffs on Chinese exports. Compared to the synthetic counterfactual, a higher share of domestic value added in a country’s exports to the US would suggest evidence of trade reallocation, i.e. domestic production expanding and more domestic content being embedded in the country’s exports to the US. On the other hand, a lower share of Chinese value added in a country’s exports to the US would suggest no evidence of trade rerouting on a significant scale.
Vietnam appears to have benefited from the trade reallocation effect during 2018-2022 – significantly increasing its domestic value added (Figure 1) and reducing Chinese value added in its strategic sector exports to the US – rather than trade rerouting from China. Specifically, Vietnam saw statistically significant increases in the share of domestic value added in its exports to the US (6 and 7 percentage points higher than its synthetic counterfactual in 2018 for the “electrical and machinery” sector and “petroleum, chemical and non-metallic mineral products” sectors, respectively, and 10 and 12 percentage points higher in 2022). This suggests that Vietnam has increased domestic production for its strategic sectors’ exports and has thus been able to embed more domestic content in its exports to the US. On the other hand, Vietnam saw a statistically significant decline in the share of Chinese value added in its strategic sectors’ exports to the US, suggesting no evidence of trade rerouting from China to the US on a significant scale.
Figure 1 Estimated effect on the share of domestic value added in the country’s exports to the US: Electrical and machinery (percentage points)
Moreover, Vietnam has been able to export more domestic content not only to the US but also globally (Figure 2), though the effects on the latter are slightly smaller and take longer to become statistically significant. This suggests that, beyond increasing its domestic content in bilateral exports to the US, Vietnam managed to expand its domestic production capacity to capture a larger share in the global market.
Figure 2 Share of domestic value added in Vietnam’s exports to the world: Electrical and machinery (percentage points)
We extend our analysis to foreign direct investment (FDI) by examining the cumulative number of greenfield FDI projects that commit Chinese capital to Vietnam. Vietnam attracted more greenfield FDI projects in strategic sectors from China after 2018 (Figure 3), which has likely contributed to the scaling up of domestic production of its exports: Chinese firms have relocated their production – or accelerated a relocation process that started before due to higher domestic labour costs – to Vietnam against the backdrop of increasing US tariffs on China.
Figure 3 Cumulative number of greenfield FDI projects that commit Chinese capital to Vietnam: Electrical and machinery
Taken together, Vietnam appears to have benefited from the trade reallocation effect by increasing its domestic production – partly supported by Chinese FDI but also by its favourable structural characteristics – and embedding more domestic content in its exports to the US and the rest of the world. Meanwhile, the evidence suggests that Vietnam has not served as a one‑stop place allowing China to reroute its exports to the US on a significant scale. As for the other five Asian countries, the impacts of the US–China trade tensions are elusive.
We provide a nuanced assessment of changing global trade patterns against the backdrop of increasing geoeconomic fragmentation, by zooming in on connector countries, delving into the value‑added trade, and distinguishing between trade reallocation and trade rerouting effects. Some countries, such as Vietnam, have experienced trade reallocation rather than trade rerouting, supported by rising domestic production and stronger inward FDI. Despite potential short-term gains, trade reallocation increases connector countries’ vulnerability to geoeconomic fragmentation, with losses for all countries in the long run.
Source : VOXeu
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