Asia Must Brace For Impact And Opportunities Of Trade Tensions – Analysis

By Takashi Onoda

Since August 2024, there has been a wave of new tariffs on China-made products. The United States finalised a review of Section 301 tariffs, increasing the tariffs on a range of Chinese-made products. Canada also announced 100 per cent tariffs on electric vehicles (EVs), alongside 25 per cent tariffs on steel and aluminium products, while the European Union voted in favour of 45 per cent tariffs on EVs from China.

Trade tensions may further escalate between the United States and China. US President-elect Donald Trump has proposed a 60 per cent tariff on Chinese imports alongside a universal tariff of 10–20 per cent. US consumers will bear the brunt of these tariffs, facing higher prices on imported goods. Potential Chinese retaliation could further aggravate the economic strain.

Increased tariffs on Chinese imports will likely have negative global spillover effects, reducing real expenditures by US and Chinese households and dampening demand for foreign-made final goods. Damage to Chinese industries will propagate through global supply chains, decreasing demand for intermediate goods produced in third countries.

This spillover effect is expected to be more pronounced in countries with strong economic ties to China. The impacts of an extreme trade war between the United States and its allies — such as the European Union, United Kingdom, Japan, South Korea and Australia — and China have been studied with quantitative general equilibrium international trade models. In the study, I assumed a 30 per cent increase in trade barriers between the two groups with no change in trade barriers against third countries.

The findings revealed that South Korea and Taiwan’s electrical and optical equipment sectors would shrink significantly due to their deep input–output linkages with Chinese industries, leading to a real income decline comparable to that in China. Countries closer to US and European markets with weaker input–output relations with China — such as Brazil and Turkey — could experience net positive effects by capturing market share from China, depending on model parameters.

Though this scenario was more extreme in terms of the breadth of the US group and product coverage than the current conflict, it suggested that Asia is likely to experience more severe negative spillover effects.

While the negative consequences are clear, rising tariffs on Chinese goods also present opportunities for other Asian countries. These countries’ products may face higher tariffs due to Trump’s proposed universal tariff increase. But their relative competitiveness compared to Chinese products improves, potentially enabling them to replace Chinese exports to the United States. Asia has already felt the impact of US–China trade tensions, reflecting this force.

In 2012, the United States announced anti-dumping duties against washing machines imported from Mexico and South Korea. In response, major Korean appliance brands, Samsung and LG, shifted their export bases from Korea to China. In 2016, when the United States announced another anti-dumping duty — this time on China — these firms shifted their export bases againto Thailand and Vietnam. These shifts took place within their existing production networks, but they nonetheless boosted production and exports to the US market from each country.

Beyond the reallocation of production within existing networks or specific products, manufacturing supply chains in Asia are being re-optimised, as indicated by a surge of foreign direct investment in Malaysia. Manufacturing investment in Malaysia has increased significantly. The three-year average of approved capital investment from 2021 to 2024 more than doubled compared to between 2015 and 2017.

The surge is unlikely to end soon. A Japan Bank for International Cooperation (JBIC) survey conducted in 2023 with Japan-based firms revealed that approximately 10 per cent of firms with establishments in China felt that the US import restriction on Chinese products had affected their business and were concerned about trade developments. Nearly 60 per cent of firms expressed concern about the restriction, suggesting a large pool of firms could be prompted to relocate their facilities outside China if the trade war escalates further.

Southeast Asia has the potential to become a focal point in this re-optimisation, with this preference also being reflected by Japanese investors. In the same 2023 JBIC survey, Vietnam surpassed China for the first time, becoming the second-most promising country for Japanese firms’ overseas business.

Among firms selecting Vietnam, 22.2 per cent attributed their choice to ‘risk diversification’ and some firms identified Vietnam as a potential relocation destination from China. 20.6 per cent of voters for the Philippines — ranked eighth-most promising country for Japanese overseas business — highlighted the same factor. The escalation of the US–China trade war may further elevate risk diversification as a priority, enhancing these countries’ attractiveness.

Not all Southeast Asian countries stand to benefit equally from these shifts. According to the JBIC survey, firms consistently rank ‘stable political and legal practices’ among the top factors — alongside product quality, supplier capacity and existing relationships — when selecting suppliers. Countries with political instability and weak institutions may miss the opportunity to acquire buyers seeking alternatives to Chinese suppliers. Such business-friendly conditions are also critical in investment decisions. Strengthening these conditions will not only benefit the countries’ economies but also support the efficient functioning of global supply chains.

• About the author: Takashi Onoda is Deputy Director and Economist at the Japan Bank for International Cooperation.
• Source: This article was published by East Asia Forum