The impacts of US tariff hikes on Southeast Asian economies
US tariff hikes on Chinese goods have raised US imports from Southeast Asia. The medium- and long-term impacts are more uncertain and potentially disruptive; the region must be on guard.
The US recently announced a ballooning of tariffs on Chinese goods. The move will see tariffs quadrupling on electric vehicles (EV), tripling on lithium-ion EV batteries, battery storage and battery parts, and doubling on solar cells — as well as new tariffs on critical minerals.
Specifically, the US will raise Section 301 tariffs on Chinese goods imports, which have operated since 2018 to “encourage the elimination of the People’s Republic of China’s unfair technology transfer-related policies and practices”, and have affected US$370 billion worth of Chinese goods imports.
Although the new tariff hikes will only affect up to US$18 billion worth of Chinese goods imports, or 4.2% of total US imports from China, it signals the US’s persistent efforts to decouple from China’s supply chains in some low-carbon technologies.
The US-China battle in the low-carbon technology sector is no longer just about mitigating climate change and grabbing new economic opportunities but also securing strategic interests. Solar photovoltaics and wind have been winning the renewable energy race, accounting for 84% of global energy capacity expansion in 2023 — and China has been the key driver in this expansion.
How will the new tariff hikes affect Southeast Asian economies?
... we can expect more investigations on companies in Southeast Asia that are suspected to be conduits of Chinese goods.
SEA companies or ‘conduits of Chinese goods’?
The US’s swath of trade and investment measures to derisk, decouple and diversify away from China’s supply chains in chips and low-carbon technologies have benefited the US allies and partners including those in Southeast Asia.
For example, after a series of tariffs on Chinese solar panel manufacturers on grounds that China was engaged in dumping (flooding the US with under-priced goods), discriminatory or unreasonable trade practices, and forced labour among the Uighurs, the share of US solar equipment imports from China has been completely phased out and, in turn, shifted to Southeast Asia. Cambodia, Malaysia, Thailand and Vietnam now make up about 75% of total US solar panel imports.
However, with some Southeast Asian countries becoming intermediary countries for Chinese goods to the US, and potential petitions coming from US companies that might lose out from continued flows of cheap Chinese goods imports, we can expect more investigations on companies in Southeast Asia that are suspected to be conduits of Chinese goods.
A 2022 investigation on the eight solar panel parts manufacturers in Cambodia, Malaysia, Thailand and Vietnam found five guilty of violating US laws. In July 2024, these five companies will be subject to the same tariffs as those faced by Chinese solar manufacturers, which range from 50 to 250% of the import values. Eventually, there will also be some shifts in manufacturing capacity away from firms on the target list of investigation and tariff imposition into firms that are not on the list.
Transition to non-Chinese alternatives challenging
Southeast Asian companies plugged into China’s supply chains through backward and forward linkages in low-carbon technologies targeted for tariff actions will be adversely impacted.
Currently, Southeast Asian economies rely heavily on Chinese industrial inputs. If the US makes it more difficult for products with high Chinese content to enter the US, then Southeast Asian manufacturers who sell to the US domestic markets and rely heavily on Chinese intermediate inputs might be forced to either find new non-US markets or use more of non-Chinese intermediate inputs.
However, transitioning to non-Chinese alternatives may prove challenging and is likely to occur over the medium to long term. This is because the supplies for many low-carbon technologies are very concentrated in China and a select few Chinese firms. For example, China is the largest producer of graphite — one of the critical minerals targeted under the new US tariff hikes — and processes about 90% of the world’s supply of this mineral, which accounts for a third of an EV’s entire weight.
It [the region] would likely suffer lower efficiency, higher prices and slower transition rates to renewable energy, while potentially contributing to a global oversupply.
Defragmentation of supply chains in the region may take place with regional countries attracting FDI and R&D in low-carbon technologies back home, as companies reduce the intensity of imported Chinese intermediate inputs in their production. But, again, this can only take place in the medium to long run.
The region would be forced to become increasingly self-reliant and build new production capacity due to geopolitics and national security, rather than competitive advantage, efficiency, economies of scale and price factors. It would likely suffer lower efficiency, higher prices and slower transition rates to renewable energy, while potentially contributing to a global oversupply.
More appetite for regional and plurilateral agreements
The medium and long-term impacts in the region will however be differentiated across countries depending on the free trade or economic agreements they have with the US. Singapore is the only country in the region with a free trade agreement (FTA) with the US and we may see more investment into Singapore and goods going through Singapore.
Seven ASEAN members are part of the Indo-Pacific Economic Framework together with the US, which will be increasingly used by ASEAN members without a bilateral US FTA for economic diplomacy to plug into the US supply chains. For instance, Indonesia has tried to sign a limited FTA with the US in critical minerals — albeit without success so far — similar to the limited FTA that Japan and the US signed to strengthen EV battery critical minerals supply chains.
The more hawkish the US’s tariff actions on Chinese imports, the more eager countries in Southeast Asia are to strengthen the regional and plurilateral agreements including the Regional Comprehensive Economic Partnership (RCEP)...
More ASEAN countries may also try to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) to get preferential access to more markets. Notably, Indonesia is considering joining the CPTPP this year.
The more hawkish the US’s tariff actions on Chinese imports, the more eager countries in Southeast Asia are to strengthen the regional and plurilateral agreements including the Regional Comprehensive Economic Partnership (RCEP), especially in an environment where the World Trade Organization Appellate Body and Dispute Settlement Mechanism are still dysfunctional.
The convolution of regional and plurilateral agreements, with some members having better access to the US markets than others, may ensure that ASEAN economies without a bilateral US FTA could still have access to US markets while strengthening their intra-regional trade, supply chains and production ecosystem.
Larger disruption ahead?
Moreover, if in the medium term the US tariffs fail to spur the US domestic industries in the targeted sectors, this may reverse the overall aims of the Inflation Reduction Act. Instead of reducing inflation, creating jobs and combating climate change, the tariffs could end up blocking inputs to production, increasing prices for US consumers, and slowing down transition to renewable energy and electrification.
Higher inflation in the US means higher interest rates for longer, which has resulted in significant currency depreciation in many Southeast Asian economies, necessitating regional central banks to increase interest rates.
Although some Southeast Asian economies are currently benefiting from the US-China trade war, they should be prepared for a larger disruption where the short-run benefits could be reversed if the trade war escalates, especially under a Trump 2.0 scenario.
This article was first published in Fulcrum, ISEAS – Yusof Ishak Institute’s blogsite.
