How China Might Retaliate Against Southeast Asia’s US Trade Deals

Across Southeast Asia, governments have successfully secured deals with the Trump administration to lower reciprocal tariffs to a range of 15-19 per cent, following the expiration of the August 1 deadline. The deals that Vietnam and Indonesia signed with the US — the first two involving Southeast Asian countries — highlight the Trump administration’s priority of reshaping trade with Southeast Asia. By imposing a 40 per cent levy on Chinese transshipment in both cases, the Trump administration is pushing the region to limit its supply chain exposure to China. Similar terms are under discussion with India, in which the US is trying to negotiate down a 60 per cent local content requirement to 35 per cent. Taken together, these conditions indicate the administration’s aim to design a trade architecture that limits China’s involvement.

However, maintaining market access to the US is not the only issue Southeast Asia has to consider as it navigates the Trump administration’s attempts to reshape the global trade architecture. China’s response weighs heavily on regional leaders who are considering the extent of concessions to the US, given the US’ aim of isolating China from regional supply chains. China has pledged to retaliate against third countries that harm its interests in any negotiations with the US. Similar warnings have been telegraphed to South Korea and the European Union, underscoring Beijing’s intention to retaliate.

Southeast Asia’s position is particularly precarious because China wields substantial leverage across lending, investment, and trade. Yet, China’s true influence lies not in its ability to retaliate against Southeast Asia, but the large trove of Chinese capital and intellectual property that present opportunities for the region to move up the value chain — a far more powerful inducement. As Southeast Asian leaders rush to consolidate or clarify their deals with the US, they have to weigh the cost-benefit calculus of embedding American demand in the region and the developmental opportunities China presents.

After crossing the hurdle of lowering US tariff rates, Southeast Asian countries will need to grapple with a China that aims to remain deeply embedded in regional supply chains and that will resist being marginalised by the US or its trading partners.

China’s leverage as a source of inbound FDI into Southeast Asia will likely stem from the potential retraction of further infrastructure upgrading plans — something the region sorely needs as it seeks to capture production shifts. The Asian Development Bank estimates that ASEAN countries need a combined US$2.8 trillion in infrastructure investment from 2023 to 2030. Faced with this major infrastructure gap, Southeast Asia will need to rely on China as the second largest source of infrastructure funding after Japan.

China could restrict already decreasing big-ticket infrastructure funding, like potential plans to connect its Belt and Road Initiative rail projects across Southeast Asia, and concurrently relieve the pressure of debt owed to its domestic institutional lenders. Private Chinese FDI in clean energy, electric vehicles, mining, and electronics may also be leveraged by the National Development Reform Council (NDRC) and Ministry of Commerce (MOFCOM), which are responsible for managing registration and approval of outbound investments. Delays in the approval of outbound investment certificates or cancellations of planned projects can signal Beijing’s displeasure and inflict direct economic costs on Southeast Asian countries seeking to move up the value chain in technologically advanced industries. However, restricting private outbound FDI is unlikely to be a preferred source of leverage as doing so could exacerbate an anaemic and involuted economy at home.

Southeast Asia is a major recipient of development finance from China, with Laos, Cambodia, and Malaysia as the top three recipient countries relative to their GDP (see Figure 1). Much of this debt, particularly among top lenders, involves public liability that increases countries’ exposure to Chinese pressure. The likelihood that China weaponises this lending by seizing collateral is very low, given the expected damage to Chinese state-owned and commercial lenders which hold a majority of the debt. A more likely and adroit form of pressure is for Beijing to delay the process of extending and deferring debt payments, or frustrate debt restructuring efforts involving multilateral lenders. Delays in debt rollover or restructuring processes could induce political instability, especially when the debt is owed or guaranteed by governments, while mitigating the economic pain of China’s commercial lenders.

Figure 1: Development finance from China as share of GDP (2012-2021)

Trade measures are the most likely and lowest-cost option for China to retaliate against Southeast Asian countries. The region’s strong supply chain integration with China is the most obvious form of leverage for China. Beijing could impose export tariffs on key manufacturing inputs across machinery, iron and steel, and plastics, impacting both Southeast Asian economies and the Western multinationals that have expanded production there in recent years. On the other hand, China may impose import tariffs on Southeast Asia agriculture, palm oil, and minerals, exerting substantial demand impact through its role as a global commodity consumer.

It will be difficult to retaliate against such trade measures. Chinese suppliers remain the most price-competitive and geographically proximate, while commodity demand from other advanced markets is unlikely to match China’s scale. In sum, Southeast Asia may face the double burden of trade restrictions by China and the US.

The successful signing of reciprocal tariff deals with the Trump administration will anchor the region’s position as a key producer and exporter to the US. However, after crossing the hurdle of lowering US tariff rates, Southeast Asian countries will still need to grapple with a China that aims to remain deeply embedded in regional supply chains and that will resist being marginalised by the US or its trading partners. Individual governments will need to closely examine their exposure to China across lending, investment, and trade, and to brace for potential pressures from Beijing.

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The views expressed are the author’s own.