Southeast Asian countries were among those most heavily targeted by Donald Trump’s so-called reciprocal tariffs – now struck down by the US Supreme Court. Paradoxically, however, the region was benefitting handsomely from Trump’s tariffs via trade diversion and the shifting of supply chains out of China. In the short term, this was allowing Southeast Asia to displace Chinese goods in the US market. In the medium term, with new investment inflows and increased economies of scale, it would also allow the region to increase its exports to the rest of the world while moving into more sophisticated export activities in electronics and machinery.
The viability of export-led growth remained very much alive in Southeast Asia despite the protectionism of the world’s largest economy.
How do things look now? The tariffs Trump had applied under the International Emergency Economic Powers Act (IEEPA) have been struck down but the administration is moving quickly to rebuild its tariff wall with alternative, more legally robust, instruments.
Trump has already introduced a new 15% tariff on most imports under Section 122 of the Trade Act, justified as a temporary measure to correct America’s large trade deficit. These will however only apply for 150 days. In the meantime, the White House will look to rebuild its tariffs using two other mechanisms, Section 301 tariffs related to unfair trading practices and Section 232 tariffs on national security grounds.
For Southeast Asia, a major immediate uncertainty is that several countries – Cambodia, Malaysia, and Indonesia – had already signed bilateral agreements with the US which included agreeing to US reciprocal tariffs of 19%. Despite the Supreme Court ruling, there appears to be some uncertainty as to whether these deals might nevertheless stand (see for example discussions here and here). Indeed, US Trade Representative Jamieson Greer has said he is confident the deals will remain in effect.
If so, then it’s a cruel irony for these and other countries that, under duress, rushed to do quick tariff-reducing deals with the Trump administration.
Complicating matters for Southeast Asia is that China is one of the biggest immediate beneficiaries of the court’s decision. The court threw out not only the 10% baseline reciprocal tariffs China faced but also the additional 10% tariffs imposed for China’s role in the fentanyl trade. The latter tariffs were particularly important as this applied to all goods without exemption, whereas the reciprocal tariffs exempted many electronics products. China will still face the new 15% tariff, but this excludes the same products as the reciprocal tariffs did and will eventually expire.
The key variable in all this is potential new tariffs based on Section 301 investigations into whether individual countries are treating US firms or interests unfairly.
After several rounds of trade fights, China has proven its ability to push back on Trump’s threats by utilising its chokehold over the global trade in rare earths.
The Trump administration already started a new Section 301 investigation late last year into China’s adherence to the trade deal reach during Trump’s first term. This seems likely to be used as the basis for rebuilding Trump’s second term tariffs on China.
Equally, whether the current bilateral tariff deals with some Southeast Asian countries technically stand or not, it seems clear the Trump administration will look to use Section 301 investigations to rebuild its tariffs on the region as well.
If we assume a degree of consistency to the Trump administration’s trade policies (which admittedly might be too generous), then ultimately Southeast Asia might not end up in too different a position relative to China than it was before.
One complication though is if China is able to negotiate much more effectively with the Trump administration this time around, including given Trump’s upcoming visit to China at the end of March. After several rounds of trade fights, China has proven its ability to push back on Trump’s threats by utilising its chokehold over the global trade in rare earths. Potentially this could now be used by China avoid a return to higher US tariffs.
Taking a longer view however, any pause in economic tensions between the US and China will remain extremely fragile. Geopolitical risk is therefore likely to remain a powerful force supporting the shift of supply chains out of China and into Southeast Asia. But if China does end up facing lower US tariffs than Southeast Asia, even if only temporarily, it could slow that shift down considerably.
A final point is that the striking down of the IEEPA tariffs is good for both the US and world economies. And while Trump wants to rebuild his tariff wall, it is not clear whether he will end up going as far as he did before given the tariffs have been deeply unpopular at home. If overall US tariff rates remain lower than before, in either the short or longer term, then that will be a positive for total demand for Southeast Asia’s exports.
