Caught in the crossfire: Asian businesses brace for US-China trade war fallout

The intensifying tariff battle between the United States and China has raised concerns that businesses in Asia, particularly those integrated into global supply chains, will face rising costs and economic uncertainty as they navigate the shifting trade landscape. Beijing on Tuesday unveiled its latest round of retaliatory tariffs after US President Donald Trump’s administration imposed a 10 per cent levy on Chinese imports last week. They include a 15 per cent tariff on US coal and liquefied natural gas, and a 10 per cent tariff on crude oil, agricultural machinery and certain automobiles, effective Monday. Trump had also threatened to impose 25 per cent tariffs against Canada and Mexico but agreed to pause after both nations pledged to bolster border controls in line with his demands. The moves have intensified uncertainty worldwide and raised the possibility that the US Federal Reserve – which serves as a benchmark for Asian central banks – will slow monetary easing to curb inflation. Analysts said the knock-on effects of such a shift could be particularly pronounced in Southeast Asia. “Yes, the region’s central banks are likely to slow their rate cuts if the Fed does – otherwise Asian currencies may fall sharply against the US dollar,” Mansoor Mohiuddin, chief economist at Bank of Singapore, told This Week in Asia. Many small and medium-sized businesses across Asia have since last year pinned hopes on their central banks lowering interest rates, after having followed the US Federal Reserve in a rate-hiking cycle that started in March 2022. Asian currencies have weakened against the US dollar since Trump introduced the tariffs amid concerns that rising import costs could drive inflation back up in the US. “The latest round may only be the first in a broader trade war. If the US dollar strengthens further against Asian currencies as a result of America’s extra 10 per cent tariffs on Chinese exports then it will drive up the cost of global trade for businesses in Asia,” Mohiuddin said. “Firms in the region may delay investments given the risk of the US imposing tariffs on countries in Asia beyond China. This would hurt growth over time,” he added. Though Washington’s levies on China were still much lower than the 60 per cent duty that Trump had threatened on the campaign trail, analysts said the broader risks were multifold. “If the US-China trade war intensifies, with escalating retaliatory tariffs and supply chain disruptions, it is likely to push up the overall cost of global trade,” said James Ooi, a market strategist at Tiger Brokers. “Asian businesses – particularly those integrated into the US-China supply chains – will bear the brunt of some of these cost increases and may face squeezed margins,” he added. Replacing the US as a major export market would be difficult James Ooi, Tiger Brokers’ market strategist Southeast Asian firms had gained amid Western efforts to diversify from China, a trend that deepened during the Covid years as global manufacturers adopted the “China+1” strategy – spreading their bets to make a range of products, from Apple AirPods to Intel chips, in countries such as Vietnam and Malaysia to reduce geopolitical and supply chain risks. “The US is a key export destination for Southeast Asia, partly due to the ‘China+1’ strategy. If US trade tariffs accelerate deglobalisation and incentivise manufacturers to relocate to the US, export-dependent Southeast Asian economies could face long-term challenges,” Ooi said. “Replacing the US as a major export market would be difficult, given its large market size and demand,” he added. Analysts said the risk of punitive measures had grown as Trump’s “Make America Great Again” agenda pointed towards a heavier emphasis on manufacturing within the United States. Many Southeast Asian businesses also relied on both China and the US as key export destinations, they pointed out. “If the US were to extend tariff measures to Asian countries, particularly in Southeast Asia, the affected nations might allow their currencies to weaken against the US dollar to keep their exports competitive,” Ooi said. However, depreciating currencies would drive up the cost of imports – including essential commodities such as crude oil and natural gas as volatility in financial markets was unlikely to settle down soon, analysts said. Trump is expected to wield the threat of tariffs on other nations to negotiate better trade terms and reduce surpluses with the United States, they added. “With markets now forced to second-guess President Trump on further trade policy actions, US trade policy uncertainty has reached the highest level in 40 years, except for the summer of 2019 when the US-China trade war was at its peak,” said Peter van der Welle, a multi-asset strategist at asset management firm Robeco. “We expect market volatility to remain elevated in the near term in reflection of a significant risk of another high impact trade announcement towards China, Europe and Japan,” he said. Danger for Asian economies The spectre of tariffs looks set to linger over Asian economies, as most run trade surpluses with the US and imports from the region have risen in recent years, according to an ANZ report released on Friday. The report identified Taiwan, Vietnam, South Korea and Malaysia “as the most vulnerable ones in the region to high tariffs under a second Trump administration”. For Asian businesses, the rapid pace of tariff increases is surprising, but the escalation in tensions was not, as many had anticipated that Trump’s administration would be antagonistic towards China, said Trinh Nguyen, a senior economist at Natixis Corporate & Investment Banking. China had already begun lowering rates and restructuring supply chains to avoid tariffs, with more investments heading to receptive neighbours in Southeast Asia, she said. The delay of US tariffs on Canada and Mexico had been seen as a positive sign for risk assets “as it seems that Trump’s tariffs may have more bark than bite or may be less than previously feared,” she added. “What it means is that he is unlikely to target Southeast Asia or [other countries in Asia like] India,” Nguyen said, noting that India had pre-empted potential tariffs by cutting import duties in its federal budget, including on large-engine motorcycles like those made by Harley-Davidson – a move seen as a goodwill gesture after Trump previously criticised Delhi’s tariffs on them as an example of unfair trade practices. “Southeast Asian countries are likely experiencing a reprieve for now given the focus is on immigration and China. Should President Trump target the entire global trade regime, then it would be negative for Southeast Asia as big traders like Vietnam will be negatively impacted,” she said.

Caught in the crossfire: Asian businesses brace for US-China trade war fallout

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}As trade tensions between Washington and Beijing rise, analysts warn of inflation, weaker currencies and slower growth in Asia

As trade tensions between Washington and Beijing rise, analysts warn of inflation, weaker currencies and slower growth in Asia