Southeast Asia and the New Economic Disorder
The White House has wound back, temporarily, its chaotic “Liberation Day” tariff program to focus on its main target, China. This offers cold comfort. Deepening trade hostility between the world’s economic superpowers could play out badly for the global economy, and the baseline 10% tariffs that Washington continues to levy on other countries will still be harmful (with no relief in sight for Heard Island’s Macaroni penguins). Washington’s willingness to deploy the economic equivalent of a nuclear “escalate to de-escalate” approach as an apparent negotiating tactic has already done enduring damage worldwide to US credibility. It has certainly taken a hit in Southeast Asia, a region that has benefitted enormously from globalization.
The Trump administration’s attempt to play a game of chicken with its trading partners saw Southeast Asian countries levied with some of the harshest “reciprocal” tariffs under the initial stipulations. Among members of the Association of Southeast Asian Nations (ASEAN), Cambodia faced the highest US tariffs (49%), followed by Laos (48%) and Vietnam (46%). No ASEAN members were spared; only Singapore initially received the baseline 10% tariff. But the city-state’s prime minister, Lawrence Wong, noted that if the tariffs were truly reciprocal, then Singapore’s should be zero. He concluded that “the era of rules-based globalization and free trade is over.”
This episode will have shaken confidence in the reliability of US commitments and the country’s adherence to long-standing trade principles.
Vietnam provides 4.2% of US imports and has been a major beneficiary of east Asian supply-chain networking and production diversification, especially by Chinese firms. While geographic tariff arbitrage (which one Trump adviser criticized as “nontariff cheating”) has heavily driven the latter trend, it is also a function of changing relative price structures as China’s economy has developed.
These factors were well known when Washington sealed a Comprehensive Strategic Partnership (CSP) agreement with Hanoi in 2023. Although President Joe Biden concluded the agreement, it followed important steps during Donald Trump’s first term that deepened US-Vietnam economic relations. Hanoi will rightly be perplexed that the United States was prepared to take such extreme tariff action when a CSP—one that provides a framework for ongoing market access negotiations and reflects deepening geopolitical connections—exists.
Accounting for under 1% of American imports each, Cambodia’s and Laos’ exports to the United States are inconsequential for its trade deficit. But even at a now-lower 10% rate, US tariffs will not be painless. They disregard the long-accepted practice of special and differential treatment for developing countries’ efforts to support nascent industries and facilitate revenue collection.
The past relative openness of US markets to developing countries’ exports has been one of the most potent American contributions to international development. Undermining confidence in that mechanism will do more than just tarnish Washington’s reputation. It represents a gift to Beijing’s efforts to burnish China’s standing as a reliable alternative economic and geostrategic partner.
Hanging over all this upheaval is the specter of a protracted US-China trade war that would deliver serous collateral damage to Southeast Asian economies that are heavily exposed to the health of the two giants’ economic relationship.
The (Quiet) Art of the Deal
In the aftermath of the “Liberation Day” announcements, many Southeast Asian countries quickly but discreetly engaged Washington to explore potential deals that could deliver tariff relief. Trump welcomed these overtures although frameworks to carry them through are yet to crystalize even as the tariff program has been dialed back. US expectations also remain, perhaps deliberately, ambiguous. Vietnam’s initial offer to eliminate its tariffs on American goods was rebuffed immediately as inadequate without a clear sense, at least publicly, of what Washington really wants. US trade partners facing similar unpredictability may reasonably conclude that much of this far-reaching intervention has been improvised.
As the initial shock subsides, there is some recognition within ASEAN of the value of regional coordination to avoid being divided and conquered. Malaysian Prime Minister Anwar Ibrahim, as the group’s chair, has offered to “lead efforts to present a united regional front, maintain open and resilient supply chains, and ensure ASEAN’s collective voice is heard clearly and firmly on the international stage”.
Sustaining collective action will not be easy as countries are inevitably drawn to their domestic challenges and to greater competition for regional markets. With the largest ASEAN economy, Indonesia will fear a flood of diverted goods, especially if a US-China trade war gathers momentum. That would compound the direct impacts of tariffs and add to the challenges that President Prabowo Subianto faces in achieving his ambitious 8% annual growth target.
A Pattern of Disappointment
While the amplitude of this latest Trump administration policy rollercoaster has few precedents, Southeast Asian countries have had front row seats to decades of US international economic policy fluctuation and heavy-handedness. An American propensity for the latter was most sharply demonstrated by the swingeing reform agenda for which Washington advocated in response to the Asian financial crisis in the late 1990s. That soured affected governments’ attitudes towards US prescriptions.
This rocky history has, perversely, provided a level of inoculation in Southeast Asia against US policy turbulence. The region’s countries know they are best served by responding strategically. But the United States’ standing as a reliable economic partner will continue to erode, and ASEAN members will likely intensify efforts to diversify partnerships and embrace nonalignment to manage their exposure to US policy uncertainty. With this same objective, the Asian Development Bank has urged action to enhance national resilience through a combination of domestic market development, foreign exchange and debt risk management, and regional integration.
Global macroeconomic trends are also not on Washington’s side. White House Deputy Chief of Staff for Policy Stephen Miller has argued that, since the United States has the largest share of global consumption, “we get to set the rules and terms for international trade.” The country has undoubtedly made a vital contribution to the global economy as the “consumer of last resort”. But its share of global final consumption is gradually diminishing as a natural consequence of growth in the rest of the world. This trend could be accelerated by a self-induced US economic slowdown.
A Political Win for China?
Beijing has been quick to emphasize that it will be a tough but stabilizing actor amid the turmoil. In discussions with European Commission President Ursula von der Leyen in early April, Chinese Premier Li Qiang presented his country as the champion of international order. “The resolute measures taken by China are not only to safeguard its own sovereignty, security and development interests, but also to defend international trade rules and international fairness and justice,” he said.
Many of China’s Southeast Asian neighbors, especially competing South China Sea claimants on the receiving end of Beijing’s coercion, have no illusions about its commitment to international rules and fairness. But, with declining confidence in US reliability, most ASEAN members will be more determined to avoid picking sides in the US-China competition. That may have implications for their receptiveness to a promised stronger American regional security presence.
China’s neighbors will also still want their (economic) cake. They are rightly worried that a trade war would reduce China’s demand for Southeast Asian output and severely disrupt regional supply chain and production arrangements. But regional economic integration will not be easily (or desirably) unwound, and China’s economic heft and geographic proximity will remain undeniable forces.
Europe’s Role
The US protectionist shock has prompted renewed interest in international collaboration to mitigate risks. While Europe cannot expect to match what the United States or China can (in happier times) offer Southeast Asia, the continent can play a greater constructive and stabilizing role in the region. The plan is already there in the form of the 2021 EU Strategy for Cooperation in the Indo-Pacific. Implementation is still in its early stages and now faces greater potential for distraction, but the bloc’s interaction with Southeast Asia has been strengthening. Engagement with Indonesia, the Philippines, and Vietnam shows early promise, with Vietnam, in particular, receiving a series of senior-level European and EU visits this year, including the French, Spanish, and EU leaders.
A commitment to long-term partnerships will be vital but, even in the near term, the prospect of closer economic cooperation with Europe would boost confidence and help offset China’s economic gravitational pull. Europe is well placed to be a trusted partner for ASEAN members in working with international financial institutions to strengthen financial stability and crisis management precautions should the chances of a trade war-induced global recession increase.
Europe could also work in collaboration with other regional partners to encourage wider Southeast Asian participation in World Trade Organization-compliant plurilateral mechanisms such as the Multi-Party Interim Appeal Arbitration Arrangement. With even greater ambition, Europe might explore opportunities for pan-regional free trade agreements along the lines of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Several ASEAN members are likely to be wary of the demands involved in such initiatives if high standards are to be preserved. But even modest advances would signal a commitment to rules-based, liberalizing trade models while the United States chooses to focus elsewhere.