Donald Trump's tariffs on China could shift production further into South-East Asia

As expected, the tariffs imposed by the United States on China have taken effect, and the global trade landscape is preparing to undergo a reshaping. Justin Wolfers of the University of Michigan stated this week, "You can think of it as a giant global game of musical chairs." This foreshadows new challenges and opportunities for the global trade environment, requiring businesses to adapt and innovate.

U.S. President Donald Trump this week imposed a 10% tariff on Chinese goods, significantly lower than the 60% he previously threatened, but still impactful. Simultaneously, the U.S.'s neighbors, Mexico and Canada, received tariff exemptions, while China took retaliatory measures against U.S. goods, further escalating trade war tensions. These actions mark a new phase in global trade relations, demanding careful navigation by all involved parties.

Trump's first presidential term and trade tensions with China led to a significant relocation of international and Chinese companies to Southeast Asia. The COVID-19 pandemic and subsequent lockdowns accelerated this trend. To achieve diversification, many new factories have opened in countries such as Vietnam, Thailand, Malaysia, Indonesia, and Cambodia. These shifts are reshaping global supply chains and production layouts, requiring businesses to consider new operational strategies.

Baker McKenzie, an international law firm, pointed out that some multinational corporations are "quietly exiting" China and Mexico to offset the impact of tariffs, while others are choosing to transfer only part of their production to achieve diversification. Deborah Elms, head of trade policy at the Singapore-based Hinrich Foundation, stated that Chinese companies are undoubtedly diversifying their operations. China's exports to the rest of the world continue to soar, including regions with previously low penetration rates, such as Africa and Latin America. These enterprises are actively seeking new market opportunities, showcasing their resilience and adaptability.

Sportswear and fashion brands, including Nike, Adidas, and Puma, have already moved to Vietnam, which is considered one of the main beneficiaries of the last U.S.-China trade war. Malaysia, as a strategic logistics and shipping hub, has also benefited from its competitive labor costs. However, Jayant Menon, a senior fellow at the ISEAS-Yusof Ishak Institute in Singapore, warned that an escalation of the trade war between the U.S. and China could adversely affect Chinese exports, U.S. inflation, and Southeast Asian economies, as the region's electronics supply chain remains centered on China. This highlights the complex interdependencies within the global economy.

Dr. Menon stated that Trump is likely to continue the measures recently announced by former President Biden, which target the ownership and nationality of companies rather than geographical location. If these measures continue or increase, they will primarily negatively impact the Southeast Asian region. Dr. Elms stated that if products manufactured in a third country contain Chinese components or raw materials, they may now be subject to tariffs. This complexity may slow down companies' expansion into other markets and may force some companies to question whether it is worth continuing to export to the lucrative U.S. market. She believes that the tariff chaos in Trump's initial weeks in office may lead more and more companies to think "it's not worth it." The potential for further disruption is a significant concern for businesses worldwide.

Vivienne Bath, a professor of Chinese and international business law at the University of Sydney, stated that corporate diversification is partly due to geopolitics, trade wars, or anticipated trade wars, but also to cope with future supply chain decoupling and the difficulties brought about by Chinese government policies and regulations. Another influencing factor is competition in wages. Rising labor costs and a shrinking young workforce in China have exacerbated the uncertainty of U.S. trade relations. Khun Tharo, program manager at the Center for Alliance of Labor and Human Rights in Cambodia, stated that Cambodia has attracted a large amount of investment from China in the past two decades and has the opportunity to benefit from production shifts, especially in the garment, footwear, and travel goods industries. However, Cambodia remains heavily dependent on raw materials from China, Vietnam, and Indonesia, and lacks influence in holding companies accountable for respecting labor rights. Future sustainability remains uncertain, requiring further efforts to strengthen local capabilities and ensure responsible business practices.