Taiwan, Taiwan – Southeast Asia’s export-driven economy faces new uncertainty from President Donald Trump’s trade war as it declines exports that pass through third countries to avoid tariffs on China.
Under an executive order issued by Trump last week, goods imported into the United States face punitive 40% tariffs plus penalties and applicable state obligations.
The tariff is expected to come into effect Thursday along with Trump’s latest country-specific tariffs in the 10-41% range.
China is the main goal of a new tax on transportation that applies to all redirected goods regardless of country of origin, but Southeast Asia could suffer from many of its fallouts due to its supply chain highly integrated with Chinese manufacturers, trade experts say.
Fallout depends precisely on how the Trump administration defines transshipment.
“If Washington maintains a narrow interpretation, if it targets only goods imported from China, processed or re-evaluated to a minimum and re-exported to the US, the economic impact on ASEAN could be limited.”
“However, a broader, more punitive interpretation that is also considered breaching China’s important inputs could prove economically catastrophic for countries such as Vietnam, Indonesia, Cambodia and Malaysia,” she added.
Chinese manufacturers have been steadily expanding into Southeast Asia over the years as part of a strategy known as “China and 1.”
This strategy has helped Chinese companies avoid US tariffs, leverage cheaper labor, and diversify their supply chains.
China’s foreign direct investment in 10 ASEAN countries increased from $7.1 billion to $19.3 billion, according to ASEAN data from ASEAN.
At the same time, exports from China to Southeast Asia increased from $385 billion to $587 billion, according to the Carnegie Fund for International Peace.
A surge in Chinese exports, including goods that are sometimes illegally misunderstood to hide their origins, has put Southeast Asia on the Trump administration’s crosshairs.
“We need intermediate imports from China to create products that will be shipped to the US, but there is a great bias that ASEAN is the main channel as companies are caught up in illegal transshipment in the region.”
A key example of trade that sparked Washington’s rage is centered around the solar cell industry.
In April, the US Department of Commerce announced tariffs of up to 3,500% on Southeast Asian manufacturers allegedly exporting Chinese products illegally after years of investigation.
While Southeast Asia is currently not alienating China, it is in a “sticky situation” where it has to soothe the US (the region’s best export market), Kishore said.
Beijing threatened to “take decisive measures” against countries that agreed to trade with the United States, which violated its interests.
In May, Malaysia announced that non-governmental organizations such as the Chamber of Commerce would no longer allow certificates of origin to be issued as part of their efforts to ensure the integrity of their exports.
Similarly, Vietnam agreed to a 40% shipping fee in the framework agreement reached with the US in May, but Indonesia’s Trade Minister Budi Santoso said last month that his country is opposed to transshipping.
Steve Okun, founder and CEO of Singapore’s APAC Advisor, said transport charges could pose major private sector compliance issues despite efforts by the Southeast Asian government to ease the US.
The biggest concern is how the US will deal with products made from components from multiple countries.
US tariffs are usually determined by where the product has undergone “substantial transformation,” but compliance and enforcement are extremely difficult when the Trump administration applies its obligations based on the existence of a small amount of Chinese elements.
“You’ll have to do due diligence in the supply chain you’ve had to do,” Okun told Al Jazeera.
The changes “may redefine trade,” he said.
The strict interpretation of transshipping could dim the appeal of Southeast Asia even further when the Trump administration has already removed its one competitive advantage in China, said Richard Laub, CEO and co-founder of Dragon Sourcing, a global procurement service provider.
Trump’s latest tariffs include Singapore being subject to a 10% rate, while Malaysia, Thailand, Cambodia, Vietnam and Indonesia are subject to a 19 or 20% rate.
Trump’s transportation fees could potentially eat to its advantages.
“Many of China’s supply strategies have been to establish some kind of facility overseas to add those facilities and basically avoid loading them, as there is limited content, limited value.
The Washington, D.C.-based consultant has advised businesses on trade and supply chain issues in China, and has observed a similar phenomenon, but said it would undermine U.S. exporters.
“We see (multinarians) from all over the world serving the Chinese market, especially the US, and doing more to localize China’s supply chains,” the consultant told Al Jazeera, asking not to be nominated for engagement to the US government.
Companies in the sector that rely on materials such as foreign-made steel, which are subject to US tariffs, have discovered that manufacturing is too expensive in the US and have begun moving manufacturing abroad, the consultant said.
“This is a terrible outcome and the opposite of what the administration intends,” he said.
Nick Malo, Asia’s leading economist in the Economist Intelligence Unit, said despite uncertainty, Washington’s policy direction was ambiguously bad for Southeast Asia.
“Obviously the US is worried about transportation,” Maro told Al Jazeera.
“Obviously, it’s moving to crack down on them, so for those investors, those companies, those in China and the government that stakes their premises about one thing, we’re now seeing a reassessment. That’s something investors have to integrate into their strategy.”
