Navigating Trump 2.0 Tariffs: Keep Calm and Carry On

In less than two weeks into his second presidency, President Trump has set in motion global trade uncertainties that we have come to expect under his leadership. At the time of writing, the implementation of proposed tariff measures concerning Canada and Mexico has been put on hold for 30 days after these countries agreed to ramp up security at their borders. This will allow the two countries to start negotiations with the US on a more concrete deal. That said, tariffs on China stand as Beijing retaliates with tariffs of between 10-15 per cent on selected US imports including coal, liquified natural gas, crude oil and agricultural machinery. Apart from the tariffs, China will also start an anti-trust investigation into Google.

Whether tariff threats are merely used as a bargaining chip or followed through, Southeast Asian countries will have to navigate this dynamic trade landscape more strategically. They are more visible on the US’ trade radar, since they have largely benefited from the China+1 diversification strategy. As such, it would be timely for firms with interests in China and the wider Southeast Asian region to re-assess their approach to supply chain resilience in the region before their bottom lines are adversely impacted.

Much has been said about the Made in China versus the Made By China concept, with the latter referencing the case of Chinese firms producing goods outside of China. The latter concept is not new, and has been executed by firms seeking lower cost locations and larger markets. Arising from this, Chinese Foreign Direct Investment (FDI) into Southeast Asia has seen a considerable pick-up since 2020. The average value of Chinese FDI during 2021-2023 was US$16.2 billion compared to a corresponding value of US$6.3 billion just a decade ago. Thus, above and beyond more traditional firm motivations for seeking greener pastures offshore, production diversification on account of the ongoing trade tensions has also become a key decisive factor.

The US Trade Representative has announced a review of foreign trade practices for discriminatory actions towards the US. Apart from the big picture trade balance yardstick used to evaluate this, there are two more nuanced ways in which Southeast Asian countries could be exposed to a more broad-based US tariff strategy: Southeast Asia-based operations tagged as ‘Made By China’ as well as those targeted for being China product trade conduits. These include Malaysia and Vietnam, where in some circumstances Chinese goods pass through with minimal value-added inputs.

… it would be timely for firms with interests in China and the wider Southeast Asian region to promptly re-assess their approach to supply chain resilience in the region before their bottom lines are adversely impacted.

Taken together, these circumstances could suggest a potential redirection in firms’ strategies to help allay suspicion concerning trade policy loopholes, as well as mitigate risks of more Southeast Asian countries being targeted and becoming collateral damage in the ongoing Sino-US trade war.

As such, greater local co-ownership in Chinese firms, as well as higher value-added contribution to manufacturing activities in the global value chain by these local entities, could be one emerging trend. Besides helping to avert potential additional US tariffs on Southeast Asia, this emerging trend could also stimulate economic development through higher investments, upgrading of productive capacities and subsequent upskilling of the labour force.

Aside from that, the effectiveness of potential firm-level actions by the Trump administration to curb China’s technological rise has been called into question. Moves to potentially widen Foreign Direct Product Rules (FDPR) as well as the number of companies on the Entity List may go against the grain of the deregulation stance of the new Trump administration. Moreover, evidence of potential loopholes in these measures has also been brought to light. With these considerations in mind, this may not be a route that the US may actively pursue to achieve its trade policy ambitions. This would lessen some risk for firms in the region with strong trade alliances with targeted Chinese manufacturers.

There is another upside. Southeast Asian countries could further benefit from more investments from US firms based in China. Recent sentiment gauges show that US firms in China may also be accelerating their diversification strategies. An estimated 30 per cent of US firms located in China have considered or have already started relocating out of China. Southeast Asia and India remain prime destinations for such relocations. Moreover, the trend of US firms’ involvement in the Southeast Asia mergers and acquisitions space has always been quite active. This may strengthen even further.

Apart from relocation activities, important economic partners are also ramping up strategic partnerships with regional countries. Most recently, the European Union and Malaysia relaunched negotiations on the EU-Malaysia FTA, which had been stalled for over a decade. Although gains from this strategic partnership may not be realised in the immediate term, developments like these serve as positive signals that some short-term uncertainties will not divert from longer term aims of deeper economic engagement between regions.

Although uncertainties continue to cloud the horizon, the Southeast Asian region and its economic partners are more prepared for the challenges ahead. There are proactive initiatives to strengthen economic alliances with external partners like the EU and economic integration efforts among ASEAN Member States. In addition, Southeast Asian countries can pursue strategic industrial policies such as increasing value-added production activities to allay concerns over unfair practices against the US. Taken together, it could very well be Southeast Asia’s second opportunity to benefit from a Trump-initiated silver lining.

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