Nowhere to Hide
Caught between a rising flow of Chinese exports and the mounting threat of U.S. tariffs, Southeast Asia finds itself caught in the crossfire of the global trade war
SINGAPORE -- With all eyes on the risks of a naval confrontation off the Second Thomas Shoal or an amphibious assault on Taiwan, the rising geopolitical tensions in Southeast Asia get less attention. There’s little risk of open hostilities breaking out here, but the global reorientation of trade and financial flows has cast a cloud on the growth prospects of Southeast Asia.
Try as they might to avoid choosing sides between the world’s two largest economies, Singapore, Malaysia, Thailand and their neighbors in the Association of Southeast Asian Nations (ASEAN) face mounting collateral damage from the global economic conflict.
The story picks up with the Trump Administration’s 2018 tariffs on Chinese exports that re-routed direct shipments to the United States to this region. Some were inputs for local manufacturers, and some were thinly disguised transshipments to avoid trade barriers. Higher Chinese labor costs had already made countries like Malaysia, Thailand and Vietnam eye-catching alternatives for industrial production, but the U.S. tariffs made them even more attractive.
But what might otherwise be a regional boon now looks like a gathering storm. Beijing’s industrial policy now aims explicitly to expand what it calls “new productive forces” that will concentrate more valuable activities in China and reinforce the country’s self-sufficiency. The result has already been an increase of manufactured exports by 40% from 2018 through last year compared to a 15% increase in the previous five-year period. China now exports roughly half its manufacturing output, a surplus by some estimates near 2% of global GDP.
Whichever candidate wins the U.S. presidential elections, pressure will mount in Congress for tariffs on imports with substantial Chinese content, even if it’s nominally “Made in ASEAN.”
With Chinese domestic consumer spending still weak from the pandemic and ensuing real estate bust, the flow of manufactured exports continues to expand. Recent efforts to boost flagging growth seem mainly concentrated on industry and infrastructure rather than expanding consumer demand for this excess production.
These trends have naturally aggravated trade tensions and become a central talking point in the U.S. Treasury’s conversations with Chinese counterparts. In her April trip to Beijing and Guangzhou, Secretary Janet Yellen highlighted concerns: “It’s fine for China’s firms to export in this industry, to develop it,” she said. “But some of the techniques that they use — subsidizing their firms very heavily and then supporting them even when they’re losing money ... this is something that’s unacceptable from the U.S. point of view, and many of our allies feel the same way.”
Indeed, complaints have been rising fast in Europe. And the grumbling can even be heard in these otherwise circumspect countries depending on the levels of industrial pain and the political will to confront the region’s dominant power. China’s manufactured trade surplus with ASEAN has nearly doubled to 6% since before COVID.
Of course, these Chinese inflows also bring benefits to these countries by boosting their own exports and trade surpluses. But this only makes them more vulnerable to rising protectionism in key markets like the U.S. Whichever candidate wins the presidential elections, pressure will mount in Congress for tariffs on imports with substantial Chinese content, even if it’s nominally “Made in ASEAN.”
Squeezed between cheap Chinese manufactured goods that undercut their own domestic production and likely fresh U.S. tariff barriers for their own exports, these countries face a tricky future. Try as they might to seek shelter from the mounting conflict, there’s really nowhere to hide.