Trade in Southeast Asia under Trump

Southeast Asia appears vulnerable to Donald Trump's threat of universal tariffs and a renewed trade war with China. Five of the region's six largest economies run trade surpluses with the United States. According to Nikkei Asia, all is not lost for Southeast Asia. Exports and economic growth would take a hit in the short term, but the region can reap rewards from trade diversion and substitution and might even take a tougher stance against Chinese firms' anticompetitive practices.

Geopolitically neutral, the area saw an increase in gross trade with both China and the US between 2017 and 2020 during the first Trump presidency. Vietnam, Indonesia, Malaysia and Thailand won big as companies from China, Japan, South Korea, Taiwan and the US relocated from China or duplicated their manufacturing bases in Southeast Asia to avoid US tariffs. 

Here's what you need to know: 

What is Trump's tariff threat?

The objective of Trump's stated trade policy is to return manufacturing jobs to the US and disentangle its supply chains from China. Trump and his advisers view China's trade advantage as unfairly derived from currency manipulation, intellectual property theft and forced technology transfers. 

During his first term, Trump used executive powers to impose tariffs of up to 25% on US$250 billion worth of electronics, machinery and consumer goods imports from China. Beijing retaliated with similar measures against US agricultural, automotive and technology exports. 

Now, Trump has proposed a 60% duty on all Chinese goods entering the US and tariffs of up to 20% on imports from everywhere else. That would be done with a mix of executive and legislative tools.

How bad could it be for Southeast Asia? 

Nearly 40% of Cambodian exports go to US, the largest exposure in ASEAN, in terms of proportion of total exports, followed by Vietnam at 27.4% and Thailand at 17%, according to Oxford Economics, putting all three at particular risk. Thanavath Phonvichai, president of the University of the Thai Chamber of Commerce, said Thailand's economy might take a 160.5 billion baht ($4.6 billion) hit if Trump follows through on his promises.

Vietnam has the fourth-largest trade surplus in the world with the US The imbalance grew rapidly as Chinese, Taiwanese and South Korean firms used Vietnam to bypass Trump-era tariffs. Vietnam's fortunes could just as quickly turn, especially if the US continues to classify it as a "nonmarket economy," which tends to entail higher tariffs. 

Uncertainty about Trump's tariffs could prompt firms to pause or stop investment plans in Southeast Asia. US companies accounted for about half of the US$9.5 billion in fixed asset investments in Singapore last year, according to the city-state's Economic Development Board. Prime Minister Lawrence Wong was quick to remind Trump in a congratulatory letter that the US has maintained "a consistent trade surplus" with Singapore. 

Any blow to the Chinese economy will spill over to ASEAN countries that depend on Chinese consumption, export demand and tourism. Weaker appetite for Chinese goods will affect Southeast Asian suppliers of inputs to Chinese producers. Indonesia, Southeast Asia's largest economy, would suffer most because of its 24.2% export exposure to China, mainly of commodities.

Chinese exporters unable to send their wares to the US might divert them to Southeast Asia, where governments have fielded complaints from local producers hurt by dumping of metals, textiles and consumer goods. 

What is the upside for Southeast Asia? 

Southeast Asia's current manufacturing boom began because of the trade war. Analysts expect that, in time, trade substitution and diversion will outweigh the hit to growth. 

"We think an even greater pushback on China could drive more supply chain diversion, with Chinese businesses trading and investing more within Asia," said Jayden Vantarakis, head of ASEAN research at Macquarie Capital. 

The electric vehicle factories that some Southeast Asian governments aggressively courted could provide an economic buffer. "There is also EV demand growing outside the US, so I think there may actually be a net benefit to Indonesia. What will happen is that smaller countries that are trying to become carbon neutral, especially since petrol prices are increasingly expensive, will try to take over the supply and buy more electric cars," said Sumit Agarwal, professor at the National University of Singapore Business School. 

Trump's promised tariffs may provide ASEAN governments with the impetus to impose antidumping tariffs on Chinese goods, as Thailand did with rolled steel this year. Tighter US rules of origin could also give governments an opportunity to ensure that more high-value parts production and assembly are done locally. 

What will happen to Southeast Asian currencies and markets?

Trump's tariffs may ease the pressure on Southeast Asian central banks to further loosen monetary policy.

"Essentially, Trump's victory is inflationary for the world due to his planned tariffs, so the global monetary normalization or easing cycle likely won't be as sharp as previously thought, including in the Philippines," said Miguel Chanco, chief emerging Asia economist at Britain-based Pantheon Macroeconomics. 

Chanco told Nikkei Asia that Southeast Asian currencies will not strengthen as previously expected, due in part to the markets re-pricing the pace of easing by the US Federal Reserve and therefore continuing dollar strength. 

Among the six major Southeast Asian economies, the Thai baht and Malaysian ringgit have been the worst performers since Trump's victory, declining 3.2% and 2.9%, respectively, against the US dollar through Wednesday. 

Thai securities house InnovestX recommended stocks that will benefit from the strong dollar and weak baht. These include companies with significant export revenue like CP Foods and Delta Electronics, or which are involved in tourism, such as Airports of Thailand, property developers and hoteliers. 

How should Southeast Asian economies prepare? 

Governments are already taking steps to reduce their overreliance on either the US or China by deepening relationships with other countries and regions, and stressing their neutrality.

The Philippines sees its trade agreements with the likes of South Korea as a buffer against US shocks. "We want to see many more of these ... bilateral and multilateral agreements, so that we can open up many more opportunities," said National Economic and Development Authority Secretary Arsenio Balisacan. 

Former Thai Prime Minister Thaksin Shinawatra has suggested, governments could do more to support local companies investing in the US and other diversified manufacturing bases, as Japan did in 2020 with a US$2 billion program known as the "China exit subsidy." 

That support could include reducing operating and logistics costs, providing trade risk insurance and removing barriers to trade. Amending relevant laws to allow transshipment at Laem Chabang port, Thailand's main export channel, would be an invaluable boost to Thai exporters, said Kongrit Chantrik, executive director of the Thai National Shippers' Council. 

Southeast Asian economies should also focus on building resilience by strengthening intra-ASEAN trade, according to Jaideep Singh, analyst at the Institute of Strategic & International Studies, Malaysia.

"There should be efforts to promote economic integration through reduced non-tariff measures, improved trade facilitation and better coordination of regional value chains," he said.

Similarly, countries like Vietnam could "win brownie points" from Trump by buying aircraft engines or liquefied natural gas from the US, according to VinaCapital chief economist Michael Kokalari. 

But he added that fears are "hyperbolic" about trade under Trump, who visited Vietnam twice in his first term. There are no "significant reservations from American consumers to purchase 'made in Vietnam' products," he wrote. On the contrary, the US cannot re-shore everything, so "Vietnam may be viewed as helpful in [weaning] the US off of low-end China-made goods."

 

ASEAN losing its composure

Southeast Asia is at a dangerous crossroads. Once regarded as a haven of relative stability and economic progress, today the region is buffeted by escalating geopolitical struggle between the United States and China, state fragmentation in Myanmar and internal political conflicts that are exposing the limits of democratic reform and the dangers of populism.

These issues will be on full display at the annual leaders' summit of the Association of Southeast Asian Nations next week in Jakarta and may well intensify as the group's rotating chairmanship passes afterward from Indonesia to Laos, the bloc's smallest and poorest member.

Civil society and the international community have long looked to ASEAN, which has reliably preserved regional peace for decades, to deal with major challenges.

But the bloc is now deeply divided. On Myanmar, for example, mainland states have put a premium on state integrity and security over political change and reform while more democratic maritime states, led by Indonesia, regard military rule as intolerable.

In an alarming public display of regional dissonance, Thailand recently directly engaged with Myanmar's military junta without informing Indonesia. By playing on such divisions, the junta has avoided complete ostracization.

The region is also divided over the extent to which China poses a threat and whether it should be contained by the United States and its allies.

Laos, Thailand and Cambodia have close ties with Beijing, reflecting proximity or long-standing political alignment. Vietnam views China with deep historical enmity but maintains a dual-track relationship sustained by ties between the two nations' ruling communist parties. Even so, Hanoi has drawn closer to the US.

The Philippines has effectively checked out of ASEAN because officials in Manila believe the group has done nothing to defend the country's maritime claims against Chinese intrusions, noting its failure to support the 2016 arbitral ruling by a court in The Hague affirming Philippine sovereignty over contested areas.

"We might as well be allied with Taiwan, Japan and South Korea," said a former official after the recent confrontation between a Chinese coast guard ship and Philippine vessels attempting to resupply troops on Second Thomas Shoal in the disputed Spratly Islands. Manila has indeed moved closer to the US since Ferdinand Marcos Jr. became president last year.

Compounding such rifts over external issues is a distinct political divide. The rise of democratic reform movements in Indonesia, Malaysia and even Thailand over the last 30 years has led to more frequent changes in national leadership.

As a result, the personal relationships that held ASEAN nations together under more authoritarian regimes have frayed. Some democratic leaders have begun to wonder why they need to spend so much time with tedious ASEAN meetings when their domestic constituents are more interested in social equality and food security than strengthening regional identity.

All this has made Southeast Asia more fragile and isolated than it appears. Great power leaders who once routinely attended regional summits now often skip them. The US and China prefer bilateral engagements during which they can press for alignment. While he will skip this month's ASEAN summit, US President Joe Biden will visit Vietnam right afterward, reportedly to sign a bilateral strategic partnership agreement.

ASEAN has lost its much-touted centrality and is frankly on life support as an autonomous multilateral platform, reflecting to some degree the decline of multilateralism globally.

What can be done to revive effective multilateral cooperation and rescue the region from fracture by competing great powers and division by political dispute?

Civil society has traditionally helped in quiet ways to build and sustain the sinews of connectivity in the region. Networks of academics and think tanks helped promote connections and address sensitivities among governments and offered regional policy ideas.

Many of those veteran scholars are now retired or deceased. The younger generation has not filled the void, in part because the rivalry of the great powers has polarized much of their ranks.

A possible new approach would be to launch a recovery process to help reconnect the 10 ASEAN states. This would involve identifying common challenges rather than relying on outdated institutionalized processes or weak mechanisms to manage conflicts and protect human rights.

There is clearly a need for cross-bloc dialogue about what can be done. A bottom-up approach could offer innovative ideas and help ease the acrimony that has built up over the past few years. Post-pandemic, there is an urgent need for more contact and understanding in a region vastly more challenged than it was even five years ago.

The US and China are locked in an epic, dangerous rivalry that treats Southeast Asia as a battleground, so they will not be of help. But midsized powers and traditional partners such as Australia, the EU and UK could support regional cohesion if they spent less time pushing Western values and seeding animosity toward China, which even if justified, generates further division.

Southeast Asian governments and their leaders could help by speaking with one voice on critical issues and maintaining traditional balancing approaches to great power competition. As things stand today, there is a real chance that the Philippines and China will come to blows over the Second Thomas Shoal.

That would bring the United States and China dangerously close to war. Will ASEAN leaders be able to combine and collaborate to prevent any crisis from escalating? Right now, that looks doubtful.

 

Corona virus likely to move from India to neighboring countries

The world is watching India’s coronavirus crisis but Asia’s developing nations are all at risk. From Laos, Vietnam and Thailand in Southeast Asia to Bhutan and Nepal bordering India, countries have been reporting significant surges.

The reported spikes in these handfuls of nations have been steep enough to raise the alert against potential dangers of an uncontrolled spread. The increase is mainly because of more contagious virus variants, though complacency and lack of resources to contain the spread have also been cited as reasons.

In Laos last week, the health minister sought medical equipment, supplies and treatment, as cases jumped more than 200-fold in a month.

In Nepal hospitals have been quickly filling up and running out of oxygen supplies. With infections surging, will Nepal be the next Covid-19 hotspot?

In Vietnam, authorities on Tuesday closed schools in Hanoi as Vietnam battles its first wave of Covid-19 cases via community transmission in more than a month.

In Thailand health facilities are under pressure, as 98% of new cases are from a more infectious strain of the pathogen, while some island nations in the Pacific Ocean are facing their first Covid waves.

Although nowhere close to India’s population or flare-up in scope, the reported spikes in these countries have been far steeper, signaling the potential dangers of an uncontrolled spread. The resurgence – and first-time outbreaks in some places that largely avoided the scourge last year – heightens the urgency of delivering vaccine supplies to poorer, less influential countries and averting a protracted pandemic.

Also on top of the list are Bhutan, Trinidad and Tobago, Suriname, Cambodia and Fiji, as they reported the epidemic erupting at a high triple-digit pace.

All countries are at risk as disease appears to be becoming endemic and will likely remain a risk to all countries for the foreseeable future.

The situation is very serious as new variants require a new vaccine and a booster for those already vaccinated. The economic hardship of poorer countries makes the battle even tougher.

The new cases emerged shortly before a three-day public holiday in Vietnam when many families travel across the country, raising the risk of a wider outbreak.

In Sri Lanka, authorities have isolated areas, banned weddings and meetings and closed cinemas and pubs to cap a record spike following last month’s local New Year festivities. The government says the situation is under control.

The Covax program to distribute vaccines around the world had planned to ship 1.9 million doses in the first half of this year. However, India’s surge in cases has resulted in global shortages.

The situations in many countries prove that vaccines are far from a panacea. Some vaccines, which had been considered highly effective, caused severe side effects, including even death, leading many countries to stop their use.