Worse than promised and feared, Trump 2.0 has slapped the world’s steepest tariffs on Asia, with the highest being on China at 54% (20% from existing duties and 34% in new “reciprocal” rates), while Cambodia, Laos, Vietnam, Myanmar, Sri Lanka, Bangladesh, Thailand, Taiwan and Indonesia all face fees above 30%. There were some sectoral exemptions, including commodities, pharmaceuticals, semiconductors, and energy.
There are three key questions on these tariffs:
1. Are they maximalist positions and what can countries do to “negotiate” them lower?
2. What will be the short-term direct and indirect impact, assuming they will stay at the announced levels?
3. What actions can Asian countries take to mitigate this impact in the short term and longer term?
The obvious targeting of developing Asia, particularly the poorest countries in the region, suggests this is not about reciprocal trade, but rather trade imbalances with the U.S. This makes it very difficult for Asian nations, particularly the poorer ones, to meet U.S. demand to reduce tariffs in the short term as the benchmark is buying more American goods than they export to the U.S.
Given that U.S. goods are much more expensive, and the purchasing power is lower for countries targeted with the highest levels of tariffs, this option is not optimal. Vietnam, for example, stands out in having the fourth-largest trade surplus with the U.S., and has already lowered tariffs vis-a-vis the America ahead of the announcement — without any reprieve. Vietnam can try to buy more Boeings and Lockheed Martin goods, but the asymmetric nature of U.S. and Vietnam’s purchasing power makes it difficult for Vietnam to lower tariffs using the trade balance as a benchmark.
What about the idea of putting to bed accusations over the rerouting of Chinese goods? This will be very difficult for Asian countries to do as they must first define what “rerouting” is — as in whether it is pure transshipments or whether it includes imports of Chinese intermediates.
As China is deeply integrated in Asian supply chains and is a top trade and investment partner for many Asian countries, it is difficult for Asian nations to decouple themselves from China or choose between the U.S. and China. This means that closing some loopholes is possible, but for the Trump administration to accuse these countries of rerouting, it must also establish criteria for Asian countries to be able to address this issue. This could be via Chinese direct investment or through goods. In other words, the ASEAN and China supply chains are integrated and difficult to fully detangle.
Thus, if tariffs remain at the announced levels, Southeast Asia will be the hardest hit region, with Vietnam as the biggest loser. The pain won’t be limited to exports; it will also dampen investment, particularly from companies leveraging Southeast Asia to arbitrage Trump tariffs. Vietnam, a poster child for the “China plus one” strategy, risks becoming a victim of its own success, as Trump’s tariffs have effectively undermined this approach for the region.
As the world’s largest importer, the U.S. will be difficult to replace. China’s consumption shift remains targeted and will be unlikely able to absorb its supply surplus, which will flood the region as U.S. trade barriers rise. While Washington’s tariffs make it harder to substitute away from low-cost, high-tariff Asian countries in the short term, the resulting higher costs will weaken U.S. purchasing power and reduce import volumes.
This lack of alternatives might soften the immediate impact but won’t prevent demand destruction in the U.S. from hitting Asian growth — particularly for major exporters like Vietnam, Thailand, China, Malaysia, Japan, and South Korea. In response, Asian countries are aggressively courting new trade partners, with the European Union negotiating deals with Thailand, Indonesia and India. While mitigating the loss of U.S. trade in the short term is difficult, countries are seeking diversification across global markets.
What about retaliation? So far, except for China, most Asian countries have been rather cautious as they wait to see if they can negotiate some carve-outs and concessions. Given the asymmetric nature of trade, the room to do so is limited, and therefore, this option is limited. While public retaliation is unlikely, U.S. brands and companies may experience a negative impact from people turning away from their products.
Other options — such as rate cuts, targeted support for affected sectors and currency depreciation — are also on the cards. For China, the rapid devaluation of the yuan can offset costs of tariffs, but it will also incur capital outflow costs. For the rest of the region, the ability to do so is limited but can be used to offset some tariff costs. Beyond monetary options, Asian countries can use fiscal expansion and infrastructure investment to both shore up demand and beef up competitiveness with more investment in critical sectors such as energy to lower input costs.
Thus, in the short term, Asian countries must swallow the bitter pill of hefty tariffs from the U.S. via a lower growth outlook as external demand and investment slow.
As trade ties with the U.S. cool, Asian nations are likely to respond by becoming closer to China, as well as other big blocs such as the EU and the Middle East.
Later this month, for example, Chinese President Xi Jinping will visit Vietnam, Malaysia and Cambodia. The message from Beijing will be that China is not just geographically at the center of Asia, but also here to stay as a strategic superpower in trade, investment and security.
Whilst Trump may score a “win” by “liberating” the U.S. from cheaper Asian goods, geopolitically, he will slowly and rapidly lose Asia to China.
This article was written by Trinh NGUYEN at Natixis, and was first published by Nikkei Asia.