Washington Tariffs and ASEAN’s Drift Toward China-Led Regionalism

The Southeast Asian nations have historically maintained a neutral position in the geopolitics of the Indo-Pacific. They have continued benefitting from China through trade, investment, and economic growth, and the US for defense and security. The US also played a key role in economic growth in these countries through promoting multilateral investment and trade. However, the recent tariffs and protectionist policies imposed by Washington on its trading partners have disrupted the decades-long carefully constructed balancing act of the ASEAN.

 Washington’s Tariffs on ASEAN

The Liberation Day Tariffs came as an unexpected blow to an economically secure and stable region that was benefitting from manufacturing, foreign investment, and export-led growth. Their response was to negotiate rather than retaliate. Most Southeast Asian countries, after negotiations, ended up with 19% to 20% reciprocal tariffs and conditions to remove restrictions on US exports.  These tariffs served the purpose of discouraging transshipping. Vietnam suffered the most because of its high involvement in the transshipment of Chinese products and its significant trade surplus with the US. The tariffs levied on Vietnam, reduced from 40% to 20%, were conditional, with strict manufacturing criteria that will force them to build new supply chains. The Philippines, a security partner of the US, faced similar treatment. Indonesia managed to secure a significant reduction in tariffs, from 32% to 19%, with the condition of restriction-free US exports. Thailand and Cambodia also negotiated a reduction from 36% to 19% in exchange for a halt in their border conflict and other demands favoring the US. Singapore was hit by 10% tariff rates despite having no tariffs on US exports. And Myanmar, Brunei, and Laos ended up with the worst rates, having failed to negotiate a better deal, which would not be too painful because the US is a minor export market.  Although the overall rates are between 19% and 20% for most countries and exclude most goods not produced in the U.S., such as rubber, various forms of oil derivatives, integrated circuitry, and more, they will slow economic growth of some of these export-driven economies that are heavily reliant on American markets. The most significant cost will be the way out of restrictions on transshipment, for which they will need to reevaluate their supply chains.

 ASEAN’s Shift Towards Regionalism

The tariffs were a surprise for the Southeast Asian countries, and to avoid being blindsided in such a manner once again, these nations now appear to be looking inwards to reassess strategy and moving toward consolidating and utilizing regional trade agreements. Initially ASEAN benefitted from and encouraged multilateral trade policies, forming healthy economic relations with Japan, the EU, Australia, China, and the US. The US had always supported this stance and formed solid multilateral and bilateral relationships with these states. Some examples are its participation in East Asia, ASEAN, and APEC summits; trade agreements; the creation of the Trans-Pacific Partnership (TPP); and at times intervention in domestic policy as well to promote democracy, rights, and freedom in some of these countries. It looked to the United States as an influential power and, to some extent, allowed the influence to shape the regional economic affairs because it was mutually beneficial. Small economies tend to benefit more from multilateralism, and the US viewed Southeast Asia as a low-cost production alternative. In the event of the tariffs, these countries have been forced to change their long-term development plans and models. Although the region chose to negotiate rather than retaliate in response to the tariffs, the focus will now be on strengthening the region. During the 58th ASEAN Foreign Ministers’ Opening Ceremony speech, Malaysia’s prime minister emphasized regional autonomy and cohesion. On May 25, ASEAN agreed on the free flow of goods among member states and pledged enhanced regional integration and connectivity. The US play at targeting ASEAN to hurt China has possibly done significant damage to trade relations between the US and the region.  With comprehensive regional trade agreements already in place, these countries would find it most lucrative in the long run to expand markets within ASEAN. A diversified supply chain within the region combined with a shift in markets would prove to be the most beneficial solution for Southeast Asian businesses. This market shift would most likely be away from the US towards Asian markets such as China through already established regional trade agreements such as the CPTPP.

 China’s Role in Regional Unification

The role of China in the region’s economy has always been significant. During the previous two decades, China-ASEAN investment and trade have improved to historic levels, making ASEAN China’s largest trading partner. ASEAN benefits greatly from trading goods manufactured by Chinese firms in their countries. In turn, they provide a favorable environment for production, which is now being threatened by the tariffs and subsequent conditions imposed by Washington. Through its inter-regional development projects, most notably the BRI, China has established a model of growth and economic cooperation, with an emphasis on neighborhood diplomacy and regional development.  Right after Washington announced the tariffs this year, the Chinese president made visits to Vietnam, Malaysia, and Cambodia. Beijing recognizes that strong ties with neighboring countries are of great strategic importance. Specifically in the context of the economic tensions with the US. The tariffs laid the groundwork on which China’s regional strategy will rest: US economic coercion and unilateral decision-making in contrast with China’s commitment to regional stability and economic cooperation. China's tour of Southeast Asia focused on delivering the same message: China will provide the stability and leadership that the region, and by extension, the rest of the world, needs right now.

 ASEAN’s balancing act is being forced to tip towards China as a result of the uncertainty caused by the tariffs and trade restrictions imposed by Washington this year. Although ASEAN have not taken a unified stance on the issue, they would prefer stability in the long run. China has proven to be a stable regional economic ally. Moreover, the region has pre-existing trade agreements, which ASEAN will hope to revitalize and gain from.