Clothed in Uncertainty: Southeast Asia’s Garment Exports and the US–China Trade Tensions

The garment industry has had a large presence in Southeast Asian economies. Textile and clothing manufacturing were important to Thailand and Indonesia during the late 1980s and the early 1990s. Today, this industry continues to thrive in Vietnam, Cambodia, and Myanmar. Vietnam is currently the world’s third-largest garment exporter with a global market share of 8.5 per cent in 2024, behind China (23.0 per cent) and Bangladesh (9.1 per cent) (Table 1). The world market shares of Indonesia and Thailand have stabilised at around 2.1 per cent and 0.6 per cent, respectively, in recent years. 

The US is the world’s single largest importer of clothing, accounting for nearly one-fifth of the global demand. China remains the largest exporter of clothing to the US, although its market share declined from a peak of 39.7 per cent in 2010 to 21.6 per cent in 2024 (Table 2). In the same period, Vietnam and Cambodia increased their share of US clothing imports, reaching 18.4 per cent and 4.8 per cent in 2024, respectively, while Indonesia’s share has held steady at around 5.5 per cent. Thailand has consistently accounted for about one per cent of US clothing imports.

The US has been concerned about tariff circumvention by Chinese exporters via transshipment activities in Southeast Asia. The garment industry, along with its supply chains that mainly involve fabrics, might come under the US’ anti-transshipment scrutiny for two reasons. Firstly, garment production in Southeast Asia relies on imported fabrics. The value of imported fabric per unit of clothing has increased or held steady among Asian garment-exporting countries, with recent levels of around US$2.26 in Vietnam, US$4.60 in Indonesia, and US$8.51 in Thailand (Figure 1). Secondly, Southeast Asian garment exporters overwhelmingly rely on China for imported fabrics. The share of China-sourced fabrics in total imported fabrics has increased noticeably in Vietnam, Indonesia, Cambodia, and Thailand over the past few years (Table 3).

The method for investigating transshipment activities for tariff circumvention remains uncertain. However, it is widely expected that the criteria for identifying the origin of garments will adopt the rules of origin (ROO) used in previous FTAs such as the US-Mexico-Canada Agreement (USMCA), which is the yarn-forward ROO. To comply with the criteria, yarns must originate from the garment-exporting country. If the yarn-forward ROO is applied to identify transshipped garments, many exporters from the Southeast Asian economies will not be able to avoid the additional transshipment tariffs.

… given the growing concerns in the US about the impact of tariffs on the cost of living, Southeast Asian countries could make the case for a mutually beneficial resolution that maintains supply chains and affordable clothing.

Regardless of whether the transshipment tariffs will materialise, policymakers might be tempted to implement policies that support greater domestic participation in the upstream component of the garment industry and to move up the value chain into activities such as manufacturing yarns and fabrics locally. Such policies will encounter two main challenges. Firstly, these upstream industries are relatively capital-intensive. This is especially true of spinning and weaving, and to a lesser extent, of the knitting industries. Capital-intensive investments are at odds with these countries’ factor endowments of abundant labour and scarce capital. More investments in upstream industries could result in lower-quality and/or higher-priced inputs, which would then impair the export competitiveness of the garment industry. We should learn from the dismal experience of Thailand’s and Indonesia’s promotion of upstream industries during the early 1980s, which failed to supply quality and competitively priced inputs for export-oriented garment manufacturers. 

Secondly, it will not be easy to replace the imported fabrics from China with alternative sources. The share of China in global fabric exports has been on a steady uptrend over the past two decades, reaching 45 per cent in 2024 (Figure 2). Sourcing from elsewhere takes time and will incur additional costs.

A better strategy is to negotiate with the US administration for a reasonable and tempered approach to the transshipment question. As garments are a basic necessity and given the growing concerns in the US about the impact of tariffs on the cost of living, Southeast Asian countries could make the case for a mutually beneficial resolution that maintains supply chains and affordable clothing.

In the meantime, Southeast Asian countries should strengthen their garment supply chain consistent with their existing resource endowments. There is no one-size-fits-all solution. Some might entice Chinese textile manufacturers to set up their affiliates, while others might focus more on downstream product niches in line with their comparative advantage.

2026/28