News - The China-US trade war and Southeast Asia

The China-US trade war and Southeast Asia

Published on: May 28, 2019

The renewed trade tensions between the US and China will bring about some near-term volatility, but could benefit the Southeast Asian region

Since his inauguration in 2016 the Trump administration has ratcheted up tariffs on Chinese goods which have been reciprocated from Beijing. The latest tariffs included 25% on US$200 billion (RM832 billion) worth of Chinese goods, taking effect earlier this month.

While this trade war is between the two world superpowers, it will inevitably have spill over effects into Southeast Asia. On a macro level, any disruption in global trade is not a good thing and will no doubt harm some of the region’s more export-orientated economies, especially those that depend on providing goods for Chinese manufacturers.

However, some countries will also benefit. Many companies in Asia are involved in global supply chains that cross through China and so are caught up in the trade war. Taiwanese companies, for example, are heavily interlinked with China and the Taiwanese government launched a “New Southbound Policy” (NSP) that aims to expand economic links with Southeast and South Asia. The trade war will only make Southeast Asian countries more attractive to these firms as compared to China.

Companies are now looking to ensure that their final production processes take place in Southeast Asia allowing them to avoid tariffs. Furthermore, many of these countries have lower tariffs than China to markets including Europe, Japan and the US thanks to free-trade agreements (FTAs). They also have increasingly advanced manufacturing capabilities themselves.

Vietnam, Thailand and Malaysia all welcomed new factories as firms shifted production from China to Southeast Asia following the first series of Trump’s tariffs.

Another interesting side note is the fact that, increasingly, the final destination for many of these goods is in fact Southeast Asia. As the region grows and consumers become wealthier, they have started demanding more and more consumer goods. Having factories located in the region, to serve consumers here can only make the supply chain more efficient.

The trade war did not cause this shift in manufacturing to Southeast Asia – that was happening anyway due to lower labour costs – but it has certainly accelerated it. Mr. Trump may have hoped that his tariffs would spur more companies to relocate to the US, but proximity to China plus a growing domestic market looks to be benefitting Southeast Asia.

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