Can Asia’s Export-led Development Model Survive Trump’s Tariffs?

When US President Donald Trump unveiled his so-called reciprocal tariffs on April 2, one of the most striking aspects was the extent to which developing countries in Asia were targeted for especially punitive tariffs. The heavily trade-dependent economies of Vietnam and Cambodia were allocated tariffs of almost 50 percent. Other developing Asian economies were given tariffs of 30-45 percent. These tariffs are currently on hold but could come into effect by early July. The threats of such high tariffs, along with the Trump administration’s broader assault on global trade, have got many wondering: can Asia’s export-led development model still survive?

No other part of the world is as reliant on or has done so well out of global trade as Asia. Export-oriented industrialization was the not-so-secret success of the original East Asian miracle economies of South Korea, Taiwan, Hong Kong and Singapore. The strategy has also propelled China’s meteoric rise, with the country soon to enter the ranks of high-income countries. Today, Vietnam and Cambodia have been among the fastest-growing economies in the world off the back of the export-led model, helping drive sharp declines in poverty. Most developing economies hope to mimic this success. Even India — which has pioneered its own services-led model — looks to manufacturing to generate future growth and, more importantly, jobs for its young population.

Globalization and America’s previous trade openness can’t take all or even most of the credit for the success of export-led development in Asia. Reforms by countries themselves and the technological changes of containerization and the information and communications technology revolution were the driving forces. Still, access to the largest consumer market in the world in the US was often pivotal, as was America’s role in promoting an open and rules-based global trading system.

The basic strategy of export-led industrialization is relatively straightforward. Leverage the availability of abundant cheap labor to enter basic manufacturing industries such as clothing and footwear that rely intensively on low skill workers. Then gradually move up the value chain into more sophisticated areas such as electronics, automobiles, machinery and semi-conductors. Throughout this process, take advantage of deep export markets in rich countries and foreign trade, investment, and supply chain networks that can bring in global knowledge and technology.

Many economists, however, argue that export-led industrialization has become less powerful as an escalator for development in recent times, owing to rising automation and China’s role as a manufacturing behemoth that leaves little space for others. Following Trump’s April 2 tariffs, Harvard economist Dani Rodrik has gone further to ask whether this might now spell the final death knell for export-led development.

NOT DOOMED

Yet for Asia’s developing economies, there are reasons to think the export-led model is not entirely doomed. The “premature deindustrialisation” afflicting most of the developing world is less evident in Asia, and the region is home to several countries that have notably bucked the trend in recent times — including Vietnam, Cambodia and Bangladesh. Asia’s developing economies are also the ones best placed to benefit as manufacturing supply chains increasingly shift out of China due to the long-term trend of rising labor costs, diversification by multinational firms and sharply higher US tariffs.

The idea that manufacturing might begin to move out of China due to rising labor costs has been talked about for some time. However, Trump’s trade war with China during his first term provided a critical jolt. America’s effective tariff rate (weighted by trade value) on China went from 3 percent at the start of 2018 to about 19 percent by the time the US-China Phase One trade deal was signed in early 2020. That compared to an average US tariff rate of 3 percent on the rest of the world at the time. This tariff differential set off what became a substantial shift in the supply chains feeding into America, reinforced by further tariffs during the Joe Biden administration as well as supply chain diversification efforts by multinational firms after the Covid-19 pandemic disruptions and in response to rising geostrategic tensions.

Developing economies in Asia, along with Mexico, have been the biggest beneficiaries of this shift in supply chains. In Asia, Vietnam has been the standout by far, with its merchandise exports to the US rising from US$48 billion in 2018 to US$120 billion in 2024 and its trade surplus with America tripling in size — much to the ire of the Trump administration. Other Asian developing economies have also made significant gains in the American market at China’s expense, with India, Thailand and Cambodia substantially increasing their share of US imports.

IS IT REALLY JUST HIDDEN CHINESE EXPORTS?

The Trump administration has denounced this shift in trade as little more than hidden Chinese exports to America via third countries. That includes pure tariff evasion through the rerouting of Chinese goods, but more significantly the heavy use of Chinese parts and components embedded in other countries’ exports to America. At a recent Senate hearing US Commerce Secretary Howard Lutnick, one of Trump’s chief lieutenants on tariffs, described Vietnam by saying “they buy US$90 billion from China, then they mark it up and send it to us. They are just a pathway of China to us.”

How true is this accusation? A detailed academic study from the Harvard Business School suggests that tariff evasion — with little-to-no value-addition in Vietnam itself — due to the US-China trade war might have resulted in several billion dollars’ worth of rerouted goods.1 A more important question is how much in Chinese parts and components might be hidden in Vietnam’s exports to America. Careful analysis of the data by myself and a colleague suggests that Chinese inputs account for around 28 percent of the value contained in Vietnam’s exports to America.2 That is a substantial share, indicative of China’s increasingly critical role in global supply chains as a source of intermediate inputs. But it is a far cry from Vietnam mostly serving as a platform for hidden Chinese exports. Most of the value in Vietnam’s exports to the US reflects supply chain inputs from countries other than China and value-addition in Vietnam itself.

In fairness to Lutnick and the Trump administration, the idea that Vietnam has served as a backdoor to the US market for hidden Chinese exports was popularized by The Economist magazine and many others pointing to the high correlation between Vietnam’s surging imports from China and its booming exports to America. That observation captures China’s rising importance in Vietnam but also misses a great deal. Most notably, that China is also an increasingly important source of supply chain inputs for Vietnam’s exports to the rest of the world besides America. The latter have risen by even more than Vietnam’s exports to the US, helping explain why Vietnam’s imports from China have also surged by so much.

To be sure, China undoubtedly plays a much larger role in some areas. One important study by economists at the World Bank found that indirect Chinese imports via third countries are higher in strategic sectors.3 Last year, the Biden administration imposed heavy import duties on solar panels from Vietnam and other Southeast Asian nations for having excessive Chinese content. That assessment is probably right, given that China dominates global solar-panel supply chains. But it is an argument for targeted trade interventions, not blanket tariffs.

CAN DEVELOPING ECONOMIES STILL WIN?

It is a similar argument if one looks at shifting patterns of investment, which provide a useful leading indicator of how future supply chains will evolve. The media is replete with stories of Chinese firms setting up factories in Vietnam. The data also backs this up. In 2023, announced Chinese manufacturing investment in Vietnam reached almost US$12 billion. In 2024, though, this dropped back by two-thirds to US$3.6 billion. Meanwhile, manufacturing investment from other countries has risen to about US$10 billion a year — with South Korea, Taiwan and Japan collectively investing about US$7 billion annually in recent years. The investment picture is thus similar to the trade one, suggesting future Vietnamese exports may reflect heavy involvement from Chinese firms but with an even larger role played by firms from other partners, especially advanced Asian economies.

Crucially, this story of genuine supply chain diversification away from China looks to hold true for most other Asian developing economies — with the potential exception of Cambodia where China dominates foreign direct investment into manufacturing.

Can Asia’s developing economies still win, though, now that Trump’s trade war has expanded to explicitly target them and the rest of the world?

Tariffs and damage to the global economy will hurt current growth rates in Asia. But if the US ultimately keeps its tariffs materially higher on China than on the rest of Asia, then supply chain shifts over time can provide an important offset.

Currently, the effective US tariff rate on Chinese imports is 51 percent, excluding tariffs on hold that previously had US tariffs on Chinese goods at 145 percent. The latest negotiations seem to have largely resulted in a continuation of the existing pause, rather than a de-escalation. Even if a more meaningful deal is eventually struck, the risk of renewed tariff escalation amid persistent superpower rivalry means its durability will remain in question.

Meanwhile, the Trump administration’s trade negotiations with other Asian economies appear to be progressing slowly, with prospects for avoiding, reducing or delaying the reciprocal tariffs uncertain. Negotiations with Vietnam remain in the spotlight. The Trump administration has thus far been resistant to Vietnam’s overtures of offering to cut its tariffs to zero while making various multi-billion-dollar purchase and investment deals. Instead, the administration is focused on pushing Vietnam to take greater action to curtail the involvement of China within its supply chains.

Given the fixation with China as America’s chief economic and geostrategic rival — not to mention a trillion-dollar merchandise trade surplus — it would seem illogical for the Trump administration to lower tariffs on China below 50 percent without also reducing tariffs on other countries in Asia. This is especially true for Vietnam and Cambodia, which currently face potential tariff levels almost as high as the tariffs currently on China and where hidden Chinese exports seem to be the administration’s top grievance. Anything is possible with Trump and tariffs. But if there is any consistency to the administration’s economic thinking then one should expect higher tariffs on China relative to others to persist.

Will this be enough to preserve Asia’s export-led development model?

HOW TO SURVIVE

India seems particularly well placed to gain at the expense of China, and perhaps others. India is currently facing a more moderate reciprocal tariff rate of 26 percent, its trade surplus with America is more modest, it does not rely heavily on Chinese supply chains, and it can offer to preferentially reduce its own high tariff walls, thereby giving America more favorable access than others to its large and fast-growing domestic market. Others, such as Indonesia and Malaysia, also face relatively moderate tariffs and could potentially benefit from supply chain shifts over time.

For Vietnam and Cambodia, which have been among the most successful in using the export-led model of late, the outlook is more uncertain. Cambodia is perhaps in the most difficult position — facing potential reciprocal tariffs of 49 percent, running a very large trade surplus with the US, having substantial Chinese involvement in its economy, and having relatively little to offer the US in return for lower tariffs.

Vietnam faces a similar situation, though it is arguably in a much better position thanks to its better strategic relationship with the US, lower reliance on US exports and stronger prospects for growing its exports to alternative markets. Whereas Cambodia relies primarily on exporting low value-added garments, Vietnam is increasingly embedded in electronics supply chains and has access to more and better trading arrangements. Both Vietnam and Cambodia are members of the Regional Comprehensive Economic Partnership agreement involving the rest of Southeast Asia and other major regional economies. But Vietnam is also a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. It also has a free-trade deal with the European Union. If Vietnam can continue to grow its exports to other markets at a similar rate to the past, it could completely replace its exports to the US before the end of this decade.

The best result would be for the Trump administration to recognize that shifting US trade to other low-cost locations besides China is to America’s advantage and would deliver the supply chain diversification it seeks at minimal cost. These are in any case also mostly low wage jobs that Americans are unlikely to want themselves. Developing a more targeted approach focused on rooting out products with excessive Chinese export content would provide a much better approach.

Unfortunately, there are other risks to the export-led development model. Economic tensions between the US and China may increasingly revolve less around tariffs and more around export controls in sensitive areas such as critical minerals, rare earths, semi-conductors, and other advanced technologies. This outlook risks hampering Asia’s ability to operate complex regional supply chains as well as its access to advanced technology.

China’s manufacturing exports have also been surging since the Covid-19 pandemic as the country grapples with weak demand at home and has sought to engineer a rapid switch in growth toward industrial upgrading and exports instead of its ailing domestic property market. China’s exports in 2024 were more than a trillion dollars higher than the pre-pandemic level. The fear now is that US tariffs will deflect even more Chinese exports to the rest of the world. While many Asian developing economies fear a flood of cheap Chinese imports, the bigger threat is if these countries are crowded out in the international markets that they need for scale and growth. Or if surging Chinese exports, along with US tariffs, end up prompting a downward spiral into global protectionism that could truly end the export-led development model.