Promise and peril for Southeast Asia in Trump’s tariff talk

Southeast Asia could see a new wave of factories moving in from China to evade the soaring tariffs U.S. President-elect Donald Trump has proposed to impose on the world’s second-largest economy, trade experts tell VOA.

But the trade surpluses the region has built up with the United States and its heavy use of Chinese inputs for its own exports may blunt the benefits, they add.

A number of firms with factories in China, both Chinese and foreign owned, moved their plants to Southeast Asia to skirt the tariffs Trump imposed on the country — as high as 25% on some goods — during his first term from 2017 to 2021. For his second term, which starts in January, Trump has threatened to push tariffs on all imports from China up to 60%.

If that happens, “the speed of relocation will increase, and we will almost certainly now be looking at a world of bifurcated supply chains,” said Jayant Menon, a senior fellow at Singapore’s ISEAS-Yusof Ishak Institute.

“What that means is a world where most important manufactured goods are produced not once but twice using two sets of supply chains,” he added, one for the U.S. and possibly European markets and another for everyone else.

And whereas the first wave of relocations mostly brought Southeast Asia factories hungry for lots of cheap labor, he said the second could bring in factories that rely more on equipment, technology and other capital for making machines, electronics, cars and the like.

“Countries that can closely replicate the costs and conditions in China will benefit, and at the moment a lot of those countries are in Southeast Asia,” Menon said. “Other countries can benefit if they respond to this opportunity, but at the moment Southeast Asia is the closest competitor.”

Aat Pisanwanich, an associate professor at Thailand’s Center for International Trade Studies, agreed.

Facing even higher U.S. tariffs than before, factories in China will “come to Thailand and other ASEAN countries more than [during] Trump 1,” he said, referring to the Association of Southeast Asian Nations and to Trump’s first term.

Memon said most of the factories that left China for Southeast Asia after Trump’s first round of tariffs settled in Malaysia, Thailand and Vietnam and that those fleeing a second would follow suit. He added that Cambodia and Laos — both very close with China — as well as Indonesia could start to attract more interest as well.

Some of the sub-region’s largest industrial park developers and operators have reportedly begun preparing for an expected influx already by expanding their sales teams and hiring more Chinese speakers.

But trade experts say Trump’s take on tariffs, and on international trade in general, also poses risks for Southeast Asia that could dull, or even outstrip, the potential rewards.

Trump has repeatedly railed against the trade surpluses many countries besides China have built up with the U.S. and suggested bringing them down with higher tariffs on their goods as well, or with other trade restrictions.

That could prove problematic for many countries in Asia, and Vietnam especially, says Deborah Elms, head of trade policy at the Hinrich Foundation, a Singapore-based research group focused on sustainable global trade.

Trump called Vietnam “almost the single worst abuser” of the global trade system in 2019, when the country’s annual trade surplus with the U.S. stood at $55.8 billion. It has soared well past $100 billion since then.

“That’s put Vietnam quite high up in the crosshairs for retaliation this time, and that makes it a less popular location for firms because you don’t want to move out of China into Vietnam, only to find yourself hit with more tariffs and other kinds of trade restrictions because you’re now in Vietnam and they’re trying to reset the trade balance,” said Elms.

Indonesia, Malaysia and Thailand all now have trade surpluses with the U.S. in the tens of billions of dollars as well.

The other major risk the region faces, experts say, is the growing attention the United States is paying to imports not only from China but from anywhere else with a large share of Chinese inputs, and the added trade curbs they too might face in Trump’s second term.

“That would present a real problem for Southeast Asia, because you can move manufacturing — you can sew a T-shirt in the region, you can make a phone case in the region, whatever, that goes to the United States — but a lot of the raw materials, parts and components in those products, whether it’s fabrics or plastics or screws or whatever it is that’s in the product, is imported from China,” said Elms.

Aat, of the Center for International Trade Studies, said factories that move to Southeast Asia to make exports but continue to draw heavily on Chinese inputs also crowd out producers across the sub-region that could be supplying them instead, leaving local economies with little to gain from their arrival.

And even if Southeast Asian countries avoid the added U.S. tariffs or trade curbs many fear, they may still face the 10%-20% levy Trump has proposed imposing on all U.S. imports across the board.

Elms says it’s also not clear how much of what Trump has said about tariffs he will actually follow through on, and how quickly, making the choice firms will face on whether to move out of China all the more difficult.

Some of them will be “dusting off” the relocation plans they shelved after Trump left office in 2021 for another look now that he is headed back to the White House, she said.

“Whether they execute those is still, I think, an open question,” she added. “There are so many factors that matter, but there’s a reason why firms are so heavily located in China, and it’s because China just continues to have a speed and a scale that is hard for anywhere else to match.”

Rather than move, Elms said some of those firms may end up choosing instead to absorb higher tariffs, if they can, or to focus on other markets besides the U.S.

While that could give regional trade within Asia a boost, Aat and others fear it will flood Southeast Asia with cheap Chinese goods that undercut local producers.

All three experts said Trump’s tough talk on tariffs ultimately holds more peril than promise for the countries of the region.

“In the short term, of course they will benefit from the massive relocation, if there’s an increase in this relocation,” said Menon. “But eventually, as these things work themselves out, this is not going to be very beneficial.”