ASEAN’s Trade in Services with the US and China: A Hidden Casualty of Trump’s 2.0 Tariffs

In its bid to reduce its goods trade deficit by imposing tariffs, the US has ignored its strength in services exports. The US has also made the implicit — and flawed — assumption that tariffs on goods do not affect services trade. A closer look at ASEAN services trade reveals that rising protectionism in goods can have direct and indirect spillovers on ASEAN’s services trade with the US and China. These spillovers are usually unintended but can bring negative consequences.

ASEAN has maintained a trade deficit in services with the US. The record from 2005 to 2021, the most recent available data compilation, shows this negative trade balance (Figure 1). This is unsurprising; the US is a service-led economy, with services contributing 76.4 per cent of its GDP in 2021 and leading globally in finance, insurance, IT, education, R&D, and entertainment. In contrast, ASEAN’s economy is primarily goods-oriented. Services value added made up less than 50 per cent of GDP on average across ASEAN countries in 2021, with Singapore having the highest share at 71 per cent.

Figure 1. ASEAN’s Trade in Services Balance with the US: Imports from the US have increasingly exceeded exports to the US (million US$)

The widening of the deficit can be better explained by looking at the items involved. The largest contributors to the ASEAN–US services trade deficit are charges for the use of intellectual property rights (IPR) and other business services (OBS) (orange and black segments in Figure 2). Since 2016, OBS has overtaken IPR as the larger contributor. IPR charges include royalties and licensing fees for US software (e.g. Microsoft, SaaS platforms), entertainment copyrights (e.g. Disney’s Mickey Mouse, Winnie the Pooh), and trademarks. OBS encompasses management consulting, professional, R&D, technical, and trade-related services.

OBS and charges for the use of IPR are predominantly transacted within companies or groups of companies. These transactions are linked to US-based business activities with ASEAN, whether in the form of US parent groups’ exports to their foreign affiliates in the region or exports of US affiliates of ASEAN parent groups. The flipside of the US’ goods trade deficit with ASEAN is its services trade surplus.

Figure 2: ASEAN’s Trade-in-Services Balance with the US, by Item (million US$): Driven by Intellectual Property Rights (IPR) fees and Other Business Services (OBS)

The travel category (red in Figure 2), which includes tourists and students, contributed to a reduction of the deficit from 2016-2019, as outbound travel from the US to ASEAN (ASEAN’s export) exceeded travel from ASEAN to the US (ASEAN’s import). A stronger dollar made outbound travel less expensive for Americans while inbound tourists found it more expensive to travel and spend in the US. In 2021-22, students from ASEAN, comprising over 5 per cent of all the international students in the US — with the largest numbers coming from Vietnam, followed by Indonesia and Thailand — contributed over US$1.7 billion to the US economy.

The US tariffs, while targeting goods trade, may unintentionally undermine its advantage in precisely the area where the US leads the world.

However, the emergence of the Covid-19 pandemic in 2020 reversed the trend as travel from the US to ASEAN shrank, reflected in the sizable travel services trade deficit. A surge in digitalisation and increased imports of digital services also contributed to the significant widening of the overall services trade deficit during the Covid-19 pandemic.

In contrast, ASEAN has largely sustained a goods trade deficit and services trade surplus with China, with the latter rapidly increasing from 2015 to 2019 (Figure 3). Again, this is not surprising as services constituted only 54.6 per cent of China’s GDP in 2023. The trade balance in goods trade is also far more important to China than to the US, as reflected in the share of services in total exports, which constitutes 9.5 per cent for China as compared to 33.4 per cent for the US. ASEAN’s trade-in-services balance with China fell to a deficit in 2020 before recovering to a surplus in 2021.

Figure 3. ASEAN’s Trade-in-Services Balance with China (million US$): Recent Surge, Interrupted by the Covid-19 Pandemic

The sharp drop in services exports to China during the Covid-19 years was clearly driven by the travel category (red in Figure 4). The pandemic and subsequent prolonged lockdown in China due to its zero-Covid-19 policy reduced outbound tourism from China to the world, including ASEAN. Financial services and charges for the use of IPR are two notable components of the surplus, with small but rising shares (yellow and black in Figure 4).

Figure 4. ASEAN’s Trade in Services Balance with China, by Item (million US$): Travel Fuels the Surplus

While Trump’s tariffs aim to address its manufacturing trade, the weaker growth forecasts by the IMF in April and the fall in global trade forecasts by the WTO will also affect services trade. Even if the ongoing trade negotiations with the US can keep Trump’s tariffs at the baseline 10 per cent, global growth is unlikely to recover due to the loss of credibility in Trump’s shambolic policies. Global uncertainty will likely colour the rest of Trump’s administration, affecting global investments negatively. Reduced investments could, in tandem, reduce demand for OBS, IPR and other services.

US services exports could drop in various other ways. Multinational corporations’ reshoring of investments back to the US, or diversification of investment through relocating operations from high-tariff to low-tariff locations, will reduce the import of IPR and OBS from the US. Should ASEAN growth slow down, reduced disposable income will negatively impact on US-inbound travel. Meanwhile, the flow of outbound tourists from the US is forecasted to stay neutral due to the strong dollar.

US exports of education services to ASEAN will foreseeably shrink, as colleges become less affordable and conditions less attractive. This outlook is exacerbated by the US funding cuts/freeze, including for international scholarship programmes, and anxiety about student visas, which has been heightened by reports of Indonesian students’ visas being revoked.

The US tariffs, while targeting goods trade, may unintentionally undermine its advantage in precisely the area where the US leads the world. At the same time, ASEAN’s services surplus with China, which is anchored mainly in travel, could also suffer from spillover effects if the economic conditions curtail Chinese tourist visits to the region.

ASEAN needs to strengthen regional integration in goods and services in the face of the on-going US-China trade conflict, to reduce its exposure to both countries by increasing intraregional trade in goods and services.

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