ASEAN and Trump's Tariffs: Regional Calamity, Rent Seeking, or Return to the Status Quo?

The Diplomat

2 days ago

On April 2, President Donald Trump threw financial markets into turmoil when he announced his 'liberation day' tariffs, which looked set to upend world trade and reverse decades of globalization. He quickly backpedaled, pausing the tariffs for 90 days in order to allow trade negotiations with the affected nations. Among the most heavily tariffed nations were many members of the Association of Southeast Asian Nations (ASEAN), including Cambodia, which was hit with a tariff of 49 percent, Laos (48 percent), Vietnam (46 percent), Myanmar (44 percent), and Thailand (36 percent). On July 8, with negotiations stalling, Trump sent out 14 tariff letters to many leaders informing them of 'new tariff lines' if they did not hurry up and settle trade deals by August 1. This quickly focused the minds and attention of the region's leaders, who rushed to negotiate with Washington in the hope of avoiding economy-crippling tariffs.
After Trump's initial tariff announcement in April, ASEAN leaders were understandably concerned about the unilateral American tariffs and the possible wide-ranging negative impacts they would have on their export-based economies. On July 3, Vietnam became the first ASEAN country to secure a deal with the U.S., gaining a reduction in its tariff to 20 percent. Indonesia and the Philippines secured their deals in late July, each getting tariffed at 'only' 19 percent. This left Thailand and others in the region understandably angry at their own governments for not yet finalizing deals.
When the August 1 deadline arrived, news of 'final' tariff lines was quick to calm the fears of governments and publics across the region.
Laos, Myanmar, and Brunei were the only ASEAN countries that did not see threatened tariffs reduced significantly, receiving tariffs of 40 percent in the case of Laos and Myanmar, and 25 percent in the case of Brunei. Nor have there been any expressions of concern from these countries, for whom the U.S. is a relatively minor export market. Brunei's top 3 export partners are Australia, which accounts for 22 percent of its total exports, Singapore (17 percent), and China (17 percent), with the U.S. taking less than 1 percent. Likewise, Laos's top 3 export partners are China (42 percent), Vietnam (22 percent), and Thailand (14 percent), with the U.S. making up just 1.8 percent. Myanmar's top 3 export partners are China (23 percent), Thailand (20 percent), and India (8.6 percent), with the U.S. taking just 3.2 percent. Simply put, Trump and America do not matter much in economic terms to these three ASEAN countries.
The final tariffs, as posted on August 1, essentially return most ASEAN member states back to the status quo ante of April 1. Aside from the above states and Singapore, which has been hit with just the 10 percent 'baseline' tariff, all other members are within percentage margins of one another. From a macro view, this will have a very limited impact on the relative competitiveness of these nations' export industries. This is not to say there will not be supply chain disruption and possible rises in prices for goods going both ways, as some products are re-exported to Southeast Asia from the U.S. via corporate supply chains. However, this should be the exception rather than the rule.
When one digs further into Trump's tariff exemptions, a richer picture emerges. Annex II of his executive order includes a massive list of product exemptions. Those goods exempted include electronics, pharmaceuticals, smartphones, lumber, computers, integrated circuitry (including semiconductors, mineral and derivative refined ores (including copper and nickel), rubber, chemicals, including aromatics, fuel oils, various forms of oil derivatives and byproducts including fatty vegetable oils. Many of these are among ASEAN nations' top five exports to the United States.
A straightforward way to understand these exemptions is that these are products America cannot produce or cannot be sourced elsewhere. This, of course, is to keep the American market and consumer from feeling the pinch of aggravated inflation, noticeable shortages of goods, or shortages needed for American industry.
For the time being, Southeast Asian nations have been spared their worst fears. This does not mean that ASEAN economies are safe or that the region's biggest economies with significant export exposure to the American market will not be affected. Machine tools, automobiles, steel, aluminum, processed foods, and other important exports are all subject to the tariff rise.
Additionally, Japan and South Korea, which can and do produce similar products, are now subject to substantially lower tariffs of 15 percent, and their industries can rapidly retool for production shifts away from Southeast Asia.
The degree of impact is not yet known as the tariffs have only just gone into effect. A major point of contention and focus for the Trump administration was, and is, trade diversion: namely, goods exported from China to Southeast Asia, which are relabeled, rebranded, have slight value added, or are simply provided with fraudulent paperwork to deceive U.S. customs agents as to their origins. It is known that part of the tariff deals with Southeast Asian governments has been an insistence on cracking down on the transshipment of goods to the American market, i.e., goods from China. It is rumored that the U.S. could set regional or content origin requirements as high as 50 percent, meaning that half of the final product's value must be added in the country subject to import tariffs. This is designed to disrupt Chinese industrial and corporate supply chains and deal with product transshipment.
The Trump administration's method for dealing with transshipment is to impose a 40% import tariff if customs officials deem a product to be transshipped or not in compliance with content origin rules. This is forcing some ASEAN states to reorganize their regulatory methods, with Malaysia no longer allowing chambers of commerce to issue certificates of origin. Similar moves and restructuring will be seen across ASEAN in the very near future.
The problem with current content origin rules is that there is a lack of certainty as to the exact formulation and percentage or local content required. There is no defined and published formula for how much content from China or how much value-added processing will be allowed before transshipment tariffs apply. This, of course, creates massive uncertainty for business and points to a lack of clear and uniform strategy from the Trump administration. However, with transshipment, one can assume that there will be a single unified formula applied globally. If not, businesses will simply reorient to the lowest-cost and most feasible jurisdiction, as they did after the first Trump administration's imposition of tariffs on China in 2018.
The Trump administration can go broad and try to punish China-based businesses, which will lead to significant supply chain disruption, reorganization, and the likely movement of some production out of China. The second option is a narrow application designed to do away with small value add, relabeling, and the like, which will lead to minor disruptions to the status quo. Which way the administration breaks depends on its intent to harm Chinese business while mitigating noticeable effects to American consumers.
In addition to the uncertainty surrounding transshipment rules is Trump's continuously shifting policy. On August 7, the day before the tariffs were set to come into force, the U.S. president announced that he would now levy a 100 percent tariff on semiconductor imports. Major producers such as South Korea had already secured exemption of semiconductors as part of their 'deal.' It can be assumed that Southeast Asian governments secured product line-specific carve-outs similar to South Korea rather than depending on the vagaries of Trump's executive order, which subjected exemptions in accordance with Section 232 national security investigations.
Trump managed to leverage American economic and trade power against ASEAN states by setting sky-high initial tariff threats, engaging in bilateral negotiations, and using compressed time frame tactics to gain beneficial outcomes. Nearly all ASEAN countries that cut deals within the August 1 deadline, including Cambodia, Indonesia, Malaysia, Thailand, and Vietnam, agreed to large purchases of U.S. goods, including Boeing planes and liquefied natural gas (LNG), designed to reduce the size of their trade surpluses with the U.S. On the surface, this appears to be a major win for certain American industries. However, Boeing currently has an order backlog of over a decade, while its 737 Max, which Cambodia, Malaysia and Indonesia have promised to purchase, is still grounded by the FAA due to its deadly flight safety record.
LNG was also a major sell for ASEAN states in the trade negotiations. However, LNG production is nearing maximum capacity in the U.S., with new export production of 11 billion cubic meters coming online in 2028. Given that the European Union is reportedly going to buy €750 billion in LNG over the coming decade, a big question is whether these LNG deals are real or a form of performative statecraft designed to placate Trump. The laws of physics and markets at present and in the near future simply do not equate to America being able to increase LNG production to meet all these trade deals. Put simply, on paper, Trump's transactionalism sounds great, but the delivery timelines of the promised Boeing planes and LNG will stretch far beyond Trump's presidency, by which point they might well be canceled or renegotiated.
Initial economic analysis predicts that the current tariff regime could reduce Thailand's GDP by 0.44 percent, Vietnam's by 0.33 percent, and Indonesia's by 0.11 percent, reflecting their different industry-specific tariff lines and exemptions. However, preliminary economic forecasts can only be speculative, given the lack of certainty around rules and enforcement. These forecasts also do not take into account Southeast Asian government measures aimed at stabilizing industries, such as export subsidies, and other policy responses that are certain to materialize. Thailand has already set aside 20 billion baht ($618 million) for the support of affected industries, and other governments are likely to follow suit in order to secure their economic interests.
President Trump has managed to rearrange relations with ASEAN states and has successfully made most Southeast Asian leaders 'kiss my ass.' However, his heavy-handed tactics have touched raw nerves with leaders and publics in the region. Singaporean Defense Minister Ng Eng Hen articulated the regional sentiment when he stated during this year's Munich Security Conference that the U.S. was now behaving like a 'landlord seeking rent,' bringing into question American steadfastness and Washington's commitment to the region. That remark was made prior to Trump's initial tariff announcement; the past few months have likely only reinforced these views.
The president has also delinked trade from security partnerships, altering a hallmark of previous foreign policy. It appears that only Singapore received significant benefits from being a close U.S. security partner, although this was possibly the result of its trade deficit with Washington. As existing relationships have been brought into question and economic pressure builds, Southeast Asian leaders need to grasp the opportunity to deepen trade ties through the ASEAN Trade in Goods Agreement, unlock the ASEAN Trade in Services Agreement, and provide industry support for supply chain ownership in ASEAN states.