The Sino-US Trade War Presents Hard Choices for Southeast Asia

President Trump’s doubling down on tariffs on China, while pausing escalation towards other countries, could well mark the US entering the last stages of decoupling “Chimerica” — the symbiotic relationship between the world’s two biggest economies.  But Trump’s approach to date bodes poorly for a global economic restructuring in the US’ favour.

For Southeast Asian countries, this means a future of “unpredictable shocks”. Despite the caprice of Trump 2.0, replacing US export markets, investment and technology inputs is challenging. Yet China is not just their fastest-growing investor, leading trade partner, and key source of intermediate goods, but also has “escalation dominance” over the US in this trade war. In other words, China is better placed to endure this conflict and has more cards in play to control its course.

Exports are important but not critical to China, constituting around 20 per cent of GDP, with the US now accounting for under 15 per cent of Chinese exports. The domestic drivers of China’s economy are clearest in emerging sectors: for example, China’s leading electric vehicle maker BYD still generates around 80 per cent of its revenue at home. Currently, an estimated 10-20 million workers in China are exposed to US export markets. By contrast, in the late 1990s China’s state-owned sector laid off 35 million workers without national disruption.

The US is already going beyond tariffs to expand restrictions on exporting critical goods to China. But the Chinese now have well-developed efforts for import substitution and export control circumvention. In high-tech sectors like chipmaking equipment, China’s domestic industry generates almost all revenue at home and can now meet many requirements, or source them from countries other than the US. China can also source agricultural and energy imports from third countries.

In contrast to Trump 2.0’s erratic, incoherent, and seemingly improvised methods, China has long prepared for this situation. Beijing has expanded its own export controls to leverage Chinese dominance over minerals processing, most recently for rare earths. It is targeting US service imports like Hollywood films and ramping up other non-tariff measures that target US exports linked to politically important constituencies in America.

Unsurprisingly, there is no sign of the deal-seeking from Beijing that Trump apparently expected. Conversely, the US seems to already be signalling at least a partial retreat.

 Despite China’s economic challenges, its leaders know their country has advantages of scale over the US, especially a concentration of global manufacturing that impeded reshoring even before Trump’s global tariff escalation. Over a third of US imports from China are highly exposed to it as a sole-source country, compared to 10 per cent vice versa.

In many high-tech and less complex manufacturing sectors, hollowed-out US workforces cannot yet support extensive homeshoring. Meanwhile, US industry must absorb tariffs passed on by foreign suppliers, including US multinationals which carry out much of their production abroad. US carmakers alone will potentially face US$108 billion in extra costs from the Trump administration’s tariffs over 2025.  

In contrast to Trump 2.0’s erratic, incoherent and seemingly improvised methods, China has long prepared for this situation.

In the longer term, Trump’s methods are eroding the pillars of US dominance in trade and technology. This is clearest in US financial markets, which have been rocked by the simultaneous sell-off of stocks, bonds, and the dollar, with more voices warning that the greenback’s global reserve currency status is under threat. US scientists and engineers are sounding increasingly loud alarms about the Trump administration’s politically-driven “decimation” of the national research enterprise. An increasing number of US-based researchers are considering jobs abroad.

These trends matter because US dominance in many high-tech industries is more fragile than first appears. In the semiconductor industry for instance, US firms still account for most of global revenue. But much of this comes from software and chip design activities that have relatively low barriers to entry. Leaders in these fields like Nvidia face rising competition from China and elsewhere. US vendors of chipmaking equipment face mature competitors in advanced economies and increasingly in China.

The global exclusions from US reciprocal tariffs announced on 11 April cover almost a quarter of US imports from China by value. These exclusions focus on electronics, and so seemed to benefit several ASEAN states. But on 14 April, the US announced an investigation into imports of semiconductors and chipmaking equipment, flagging potential new tariffs and quotas to drive import substitution. This threatens the semiconductor industries in Singapore, Malaysia, and Vietnam, a pillar of these states’ development plans and an enabler for emerging sectors like electric vehicles.

Trump adviser Peter Navarro has singled out Vietnam for punishment, saying that Hanoi’s offer to drop tariffs to zero “means nothing”. Tariff reduction will likely to be linked to issues beyond international trade that Trump and his subordinates clearly want other countries to change: value-added tax, digital economy governance, food safety regulation, and other matters properly within sovereign prerogatives.

Renegotiating trade relations with this US administration can only be a damage mitigation exercise, even if achieved within the 90-day tariff pause. Any agreement could be disrupted by industry lobbying, such as that leading to the duties imposed in late April on solar panel imports from four ASEAN countries. The progress of US-Japan negotiations to date is not an encouraging example.

The clearest theme running through Trump 2.0’s chaos is the intent to restructure economic relations with all countries asymmetrically in the US’ favour. To hedge against this, the EU, UK, Japan, South Korea, and Brazil are talking to China. Southeast Asian governments are wise to follow suit. The current US government may view this as hostile behaviour, but such reactions are now simply fallout to be managed.

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