Asean walks trade war tightrope
WITH its pauses and U-turns, Donald Trump's tariff agenda continues to defy firm forecasts. Still, it remains worthwhile to explore how the US president's trade wars have impacted South-east Asian economies and could continue to do so going forward.
South-east Asian economies are strategically important to both China and the United States as trading partners, geographical interests and military bases, particularly for the US. Yet, for the past decade, the region has repeatedly found itself caught in the middle as these two global powers compete for economic supremacy.
With a population of over 690 million – or around 8 per cent of the world's population – Asean accounts for over 3.5 per cent of global gross domestic product and 7.4 per cent of global exports, demonstrating the bloc's increasing importance to the world's economic activity. Asean is China's largest trading partner, while ranking as the US' fourth-largest trading partner, after Mexico, Canada and China.
First Trump term: Unintended beneficiaries
During Trump's first presidency, tariffs of 10-50 per cent were imposed on various categories of Chinese products, primarily aimed at addressing concerns over intellectual property theft, forced technology transfers, and the substantial trade deficit with China. While tariffs were subsequently halved on the premise that China would import an additional US$200 billion from the US, only around US$30 billion in additional US goods were actually imported to China between 2020 and 2024.
The tariff on Chinese imports created an unexpected opportunity for Asean and Mexico through supply chain realignment. Vietnam and Mexico emerged as particular beneficiaries. Vietnam's exports to the US surged from just US$49 billion in 2018 to US$137 billion in 2024, while Mexico's exports rose from US$344 billion to US$506 billion over the same period. The rapid increase can be attributed to the relocation of Chinese manufacturing facilities and rerouting of goods, reflected in the parallel rise in goods imports from China to both Asean countries and Mexico, predominantly in partially finished or finished goods.
China's supply chain realignment strategy proved remarkably successful. Mexico is now the largest exporter to the US, replacing China in 2023, while the Association of Southeast Asian Nations (Asean) now ranks as the fourth-largest exporter to the US after Mexico, China and Canada.
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Strategic positioning and political complexity
This shift was hardly surprising, as Asean has long been strategically important to China from multiple angles: as manufacturing bases, investment destinations and for political influence. The region's significant overseas Chinese population and close proximity to China have helped Asean countries grow closer to the country over the years. Since 2018, the bloc has become a critical hub for Chinese companies seeking to mitigate tariff exposure from the US-China trade war. Chinese firms have rerouted exports through Asean or established factories in countries like Vietnam, Cambodia, Thailand and Malaysia to bypass tariffs, making the definition of 'origin of goods' and 'value-adding' increasingly opaque.
Deja vu: The second Trump term
Fast-forward to 2025, and investors face a deja vu moment as Trump's second presidential term took off with the strongest push yet for broad-based tariffs, maintaining significant focus on China. This reflects growing concerns about America's enormous total trade deficits with the world, which have grown to just shy of US$1 trillion. The US now understands the implications of imposing tariffs on China alone – the supply chain realignment has rendered previous tariffs ineffective in reducing the trade deficit.
Asean economies once again find themselves caught in the crossfire between the world's two largest powers. This time, however, the implications are far more significant. The realignment of China's manufacturing supply chains has created jobs and entire industries over the past five years. Another shift could unwind parts of this manufacturing ecosystem and threaten people's livelihoods.
The geopolitical balancing act
There is also a broader geopolitical challenge. With escalating US-China tensions, Asean faces increasing pressure to align with one side or the other. Thailand and the Philippines, as examples, are notably taking a more muted stance towards geopolitical alignments. This balancing act is particularly delicate – both countries host existing US airbases while also relying heavily on China for investments, tourism and manufacturing. Given China's strong dominance as a trade partner and investor in the region, plus with the US serving as both a major export destination and source of political influence for many Asean economies, this equilibrium requires careful navigation.
Asean must continue to strengthen intra-regional ties and leverage trade deals such as the RCEP and CPTPP to insulate itself from global volatility. The path forward for Asean economies must be both strategic and deliberate to safeguard the region's long-term interests.
The group should focus on maintaining a delicate balance between the two global superpowers by adopting a neutral stance, while simultaneously strengthening internal resilience through enhanced intra-regional trade and improved competitiveness in manufacturing, trade and foreign direct investments.
To prepare for potential geopolitical decoupling, Asean should diversify its network of economic partners and deepen institutional integration, drawing lessons from the European Union to strengthen its collective influence on the global stage.
For businesses and investors, this evolving landscape presents dual-edged prospects: risks of supply chain disruptions, but also significant opportunities to position Asean as a key hub in future global trade and supply chain.
Implications for bond investors
While the temporary pause in new trade tariffs has brought some relief to bond investors, we view Trump 2.0 as bringing unprecedented growth risks for Asean. We expect a further economic decoupling between China and the US, which will negatively impact global growth as trade declines. In the near term, this uncertainty warrants further rate cuts from Asean central banks as inflation stabilises, growth slows and unemployment inches higher. Local currency bonds should therefore remain well-supported.
We also expect to see some net international investment position flows from US assets returning to Asia, lending further support to local currency asset prices and Asian currencies. However, we remain mindful of the longer-term effects on potential economic growth from supply chain realignment and global slowdown, which can have lasting impacts on Asean economies.
The writer is portfolio manager, Asia Fixed Income, at M&G Investments
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