Jaideep Singh was quoted in Nikkei Asia, 21 November 2024
Well-managed opportunities outweigh risks for regional exports
By Francesca Regalad, Nikkei staff writer
BANGKOK — Southeast Asia appears vulnerable to Donald Trump’s threat of universal tariffs and a renewed trade war with China. Five of the region’s six largest economies run trade surpluses with the U.S.
But all is not lost for Southeast Asia. Geopolitically neutral, the area saw an increase in gross trade with both China and the U.S. between 2017 and 2020 during the first Trump presidency. Vietnam, Indonesia, Malaysia and Thailand won big as companies from China, Japan, South Korea, Taiwan and the U.S. relocated from China or duplicated their manufacturing bases in Southeast Asia to avoid U.S. tariffs.
Exports and economic growth would take a hit in the short term, but the region can reap rewards from trade diversion and substitution and might even take a tougher stance against Chinese firms’ anticompetitive practices.
Here’s what you need to know:
What is Trump’s tariff threat?
The objective of Trump’s stated trade policy is to return manufacturing jobs to the U.S. and disentangle its supply chains from China. Trump and his advisers view China’s trade advantage as unfairly derived from currency manipulation, intellectual property theft and forced technology transfers.
During his first term, Trump used executive powers to impose tariffs of up to 25% on $250 billion worth of electronics, machinery and consumer goods imports from China. Beijing retaliated with similar measures against U.S. agricultural, automotive and technology exports.
Now, Trump has proposed a 60% duty on all Chinese goods entering the U.S. and tariffs of up to 20% on imports from everywhere else. That would be done with a mix of executive and legislative tools.
How bad could it be for Southeast Asia?
Nearly 40% of Cambodian exports go to America, the largest exposure in ASEAN, in terms of proportion of total exports, followed by Vietnam at 27.4% and Thailand at 17%, according to Oxford Economics, putting all three at particular risk. Thanavath Phonvichai, president of the University of the Thai Chamber of Commerce, said Thailand’s economy might take a 160.5 billion baht ($4.6 billion) hit if Trump follows through on his promises.
Vietnam has the fourth-largest trade surplus in the world with the U.S. The imbalance grew rapidly as Chinese, Taiwanese and South Korean firms used Vietnam to bypass Trump-era tariffs. Vietnam’s fortunes could just as quickly turn, especially if the U.S. continues to classify it as a “nonmarket economy,” which tends to entail higher tariffs.
Uncertainty about Trump’s tariffs could prompt firms to pause or stop investment plans in Southeast Asia. U.S. companies accounted for about half of the $9.5 billion in fixed asset investments in Singapore last year, according to the city-state’s Economic Development Board. Prime Minister Lawrence Wong was quick to remind Trump in a congratulatory letter that the U.S. has maintained “a consistent trade surplus” with Singapore.
Any blow to the Chinese economy will spill over to ASEAN countries that depend on Chinese consumption, export demand and tourism. Weaker appetite for Chinese goods will affect Southeast Asian suppliers of inputs to Chinese producers. Indonesia, Southeast Asia’s largest economy, would suffer most because of its 24.2% export exposure to China, mainly of commodities.
Chinese exporters unable to send their wares to the U.S. might divert them to Southeast Asia, where governments have fielded complaints from local producers hurt by dumping of metals, textiles and consumer goods.
What is the upside for Southeast Asia?
Southeast Asia’s current manufacturing boom began because of the trade war. Analysts expect that, in time, trade substitution and diversion will outweigh the hit to growth.
“We think an even greater pushback on China could drive more supply chain diversion, with Chinese businesses trading and investing more within Asia,” said Jayden Vantarakis, head of ASEAN research at Macquarie Capital.
The electric vehicle factories that some Southeast Asian governments aggressively courted could provide an economic buffer. “There is also EV demand growing outside the U.S., so I think there may actually be a net benefit to Indonesia. What will happen is that smaller countries that are trying to become carbon neutral, especially since petrol prices are increasingly expensive, will try to take over the supply and buy more electric cars,” said Sumit Agarwal, professor at the National University of Singapore Business School.
Trump’s promised tariffs may provide ASEAN governments with the impetus to impose antidumping tariffs on Chinese goods, as Thailand did with rolled steel this year. Tighter U.S. rules of origin could also give governments an opportunity to ensure that more high-value parts production and assembly are done locally.
What will happen to Southeast Asian currencies and markets?
Trump’s tariffs may ease the pressure on Southeast Asian central banks to further loosen monetary policy.
“Essentially, Trump’s victory is inflationary for the world due to his planned tariffs, so the global monetary normalization or easing cycle likely won’t be as sharp as previously thought, including in the Philippines,” said Miguel Chanco, chief emerging Asia economist at U.K.-based Pantheon Macroeconomics.
Chanco told Nikkei Asia that Southeast Asian currencies will not strengthen as previously expected, due in part to the markets repricing the pace of easing by the U.S. Federal Reserve and therefore continuing dollar strength.
Among the six major Southeast Asian economies, the Thai baht and Malaysian ringgit have been the worst performers since Trump’s victory, declining 3.2% and 2.9%, respectively, against the U.S. dollar through Wednesday.
Thai securities house InnovestX recommended stocks that will benefit from the strong dollar and weak baht. These include companies with significant export revenue like CP Foods and Delta Electronics, or which are involved in tourism, such as Airports of Thailand, property developers and hoteliers.
How should Southeast Asian economies prepare?
Governments are already taking steps to reduce their overreliance on either the U.S. or China by deepening relationships with other countries and regions, and stressing their neutrality.
The Philippines sees its trade agreements with the likes of South Korea as a buffer against U.S. shocks. “We want to see many more of these … bilateral and multilateral agreements, so that we can open up many more opportunities,” said National Economic and Development Authority Secretary Arsenio Balisacan.
But, as former Thai Prime Minister Thaksin Shinawatra has suggested, governments could do more to support local companies investing in the U.S. and other diversified manufacturing bases, as Japan did in 2020 with a $2 billion program known as the “China exit subsidy.”
That support could include reducing operating and logistics costs, providing trade risk insurance and removing barriers to trade. Amending relevant laws to allow transshipment at Laem Chabang port, Thailand’s main export channel, would be an invaluable boost to Thai exporters, said Kongrit Chantrik, executive director of the Thai National Shippers’ Council.
Southeast Asian economies should also focus on building resilience by strengthening intra-ASEAN trade, according to Jaideep Singh, analyst at the Institute of Strategic & International Studies, Malaysia. “There should be efforts to promote economic integration through reduced non-tariff measures, improved trade facilitation and better coordination of regional value chains,” he said.
Similarly, countries like Vietnam could “win brownie points” from Trump by buying aircraft engines or liquefied natural gas from the U.S., according to VinaCapital chief economist Michael Kokalari.
But he added that fears are “hyperbolic” about trade under Trump, who visited Vietnam twice in his first term. There are no “significant reservations from American consumers to purchase ‘made in Vietnam’ products,” he wrote. On the contrary, the U.S. cannot reshore everything, so “Vietnam may be viewed as helpful in [weaning] the U.S. off of low-end China-made goods.”
Additional reporting by Tsubasa Suruga in Singapore, Ramon Royandoyan in Manila, Nana Shibata in Jakarta, Lien Hoang in Ho Chi Minh City and Norman Goh in Kuala Lumpur.
This article also published in Nikkei Asia, 21 November 2024
