Southeast Asia Faces Trade War Crosswinds

Nations navigate rising tensions between the U.S. and China amid tariff deadlines.

Southeast Asian countries are increasingly concerned about potential repercussions as the 90-day pause on **Donald Trump’s** “reciprocal tariffs” nears its end. Securing tariff reductions may involve political fallout and strained relations with China, their largest economic partner.

ASEAN’s Unease

Across the Association of Southeast Asian Nations (ASEAN), perspectives differ on the price worth paying. Conversations with officials in five ASEAN countries reveal growing anxiety about their short-term economic prospects, as initial optimism fades and the trade-versus-geopolitics dilemma intensifies.

As trade negotiators examine demands from the U.S. Trade Representative (USTR), it’s clear that the U.S. seeks to diminish China’s economic influence rather than merely expand America’s share.

China’s Position

Reportedly, **Beijing’s** message to ASEAN is to negotiate favorable deals with the U.S. while safeguarding China’s interests. This places ASEAN in a difficult position, contributing to the region’s growing apprehension.

Reduced access to the U.S. market would hurt ASEAN economies, though the impact varies. Existing reciprocal tariffs range from 10% for **Singapore** and 17% for the **Philippines** to 46% for **Vietnam** and 49% for **Cambodia**.

Varied Exposure

**Indonesia**, with a large domestic market and less than 10% of exports to the U.S., faces less exposure. Conversely, **Vietnam** grapples with a significant $124 billion trade surplus with the U.S. and a $144 billion trade deficit with China in 2024.

Vietnam’s Deal

On July 2nd, **Vietnam** reached a provisional trade agreement with the U.S., lowering reciprocal tariffs to 20% for most goods but maintaining 40% on goods suspected of Chinese transshipment. In return, **Vietnam** will allow duty-free entry for all U.S. imports.

Most other ASEAN members aim to find common ground with the USTR, offering to increase purchases of U.S. agricultural products (soybeans, wheat, cotton), commercial aircraft, military equipment, and oil and gas, even at higher costs.

Many are offering favorable tariff rates for U.S. imports, preferential treatment for U.S. investors, and reduced non-tariff barriers. According to the World Bank, removing non-tariff barriers could boost ASEAN’s GDP by up to 5% (World Bank, 2024).

Some countries, including **Vietnam** and **Indonesia**, have offered investments in the U.S. or access to critical minerals like nickel and cobalt. All have committed to stricter enforcement of rules of origin to prevent Chinese circumvention of U.S. tariffs and sanctions.

Bewildering Process

ASEAN trade negotiators in **Washington, DC**, face a confusing process. The USTR, Commerce Department, and Treasury Department present differing demands, making it hard to determine who can secure **Trump’s** approval.

Hidden Costs

ASEAN countries are concerned about hidden costs associated with U.S. demands. These include a lack of guaranteed tariff relief and potential erosion of the global trading system.

The lack of clear guarantees exposes ASEAN governments to domestic backlash. **Trump’s** comments about countries “kissing my ass” to negotiate tariffs have been widely reported and unpopular across ASEAN.

Relief from reciprocal tariffs is only one concern, as the U.S. could impose other tariffs, such as Section 232 tariffs on imports that “threaten to impair” U.S. national security.

Section 232 tariffs already affect autos, aluminum, and steel, with new ones considered for semiconductors, pharmaceuticals, commercial trucks, and critical minerals. The U.S. has not committed to applying reciprocal tariff relief to Section 232 tariffs.

Erosion of Global Trade

Another concern is that concessions to **Washington** undermine the global trading system that has facilitated ASEAN’s growth.

Preferential treatment for U.S. goods violates the “most favored nation” principle, a foundation of international trade that requires equal treatment for all trading partners.

Collision Course with China

Most importantly, negotiations with **Washington** are placing ASEAN countries on a collision course with China, the region’s top trading partner. The USTR’s demands include “economic security” commitments.

One such commitment limits reciprocal tariff reductions to goods with no more than 10-20% Chinese content, including raw and intermediate materials. Similar commitments are sought for goods from companies with significant Chinese investment.

ASEAN countries also face demands to comply with future U.S. sanctions or trade restrictions on China.

The extent of these “economic security” commitments in the **Vietnam** deal remains unclear, as does China’s response.