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."
