Asian economies are the collateral damage of the US-China trade war

In the wake of President Trump’s Apr. 2 Liberation Day announcement, one thing is clear: Virtually all trading partners of the U.S will be subject to universal 10 percent duties, and China currently faces a 30 percent tariff, down from the highest tariff rate of 145 percent, following several rounds of retaliation against the U.S. 

Beyond that, there is considerable uncertainty about what the magnitudes of tariff rates will be for most countries after President Trump announced a 90-day suspension of reciprocal tariffs. As economists assess how various regions will be impacted, however, many believe Asian economies will be among the hardest hit. 

One reason is that the U.S. is Asia’s principal export market, while China is the dominant economy in the region and a leading supplier of imported goods. Accordingly, Asian economies are likely to feel the impact of slowdowns both in the U.S. and China. 

The latest International Monetary Fund projections call for U.S. growth to soften to 1.8 percent this year from 2.8 percent last year, and for China’s growth to slow to 4 percent from 5 percent. The IMF sees growth in emerging Asia softening to 4.5 percent this year from 5.3 percent in 2024.

Another consideration is that the criterion the United States Trade Representative used to calculate reciprocal tariff rates was the size of a country’s bilateral trade surplus with the U.S. relative to its exports. On this basis, the reciprocal tariffs for Asian economies were the highest of any region.  

For example, Morgan Stanley economists estimate that the weighted average tariff on Asian goods jumped from 4.8 percent in January to nearly 44 percent last month. 

Reuters reports that six countries that are members of the Association of Southeast Asian Nations (ASEAN) had received reciprocal tariffs that ranged from 32 percent to 49 percent. ASEAN is China’s largest trading partner, while the regional bloc is the fourth-largest trading partner of the U.S. 

Vietnam was hit with a reciprocal tariff of 46 percent because it had become a conduit for multinational companies to evade U.S. tariffs in the U.S.-China trade war during Trump’s first term. When it offered to slash duties on U.S. goods to zero, Trump advisor Peter Navarro dismissed the offer on the grounds that it did not deal with non-tariff barriers. 

Beyond this, many observers are wondering how ASEAN members will alter their export-oriented development strategies and trading patterns if tariffs are not rescinded. Previously, ASEAN benefited from free trade policies in the U.S. and other industrial countries and was the fastest-growing region in the world.  

The main challenge policymakers in the region confronted was the Asian Financial Crisis in the late 1990s. The Southeast Asian economies had a history of stable exchange rates, but they experienced steep currency depreciations and financial contagion in 1997-1998 when a property boom went bust.  

During the boom period, they ran sizable current account deficits, but capital subsequently flowed out of the region when property values plummeted. To reduce the risk of future crises, their currencies were kept undervalued and they ran large trade surpluses and accumulated large holdings of dollar-denominated assets.   

By comparison, prospects for a financial crisis are much lower today:  Most countries in the region are either running current account surpluses or are maintaining balanced trade, and their currencies have strengthened considerably against the dollar. Accordingly, they do not face the threat of capital flight. 

Rather, the biggest concern for policymakers in Southeast Asia is that they are caught in the crosshairs of the U.S.-China trade conflict.  

China is seeking to make political capital from Trump’s tariffs by positioning itself as the defender of free trade and a rules-based trading system. Xi Jinping recently toured countries in the region to convey that message.  

At the same time, Reuters reports that China’s Commerce Ministry has announced it will firmly oppose any party striking a deal at its expense and “will take countermeasures in a resolute and reciprocal manner.”  

Meanwhile, the U.S. is trying to prod these countries to be part of an alliance that would exclude China. For example, Treasury Secretary Scott Bessent claimed the U.S. holds a substantial advantage over China in the trade conflict, and he added that he expects the U.S. to be able to strike “good deals” with many of its trading partners. 

For their part, Southeast Asian governments have long tried to avoid having to choose sides between the U.S. and China. Officials believe their countries are being unfairly punished for helping U.S. companies shift their production out of China.   

There are several ironies in the current situation. 

One is that Asia’s export-oriented development strategies have long been favored by the U.S. government, because they foster economic efficiency and rapid growth. By comparison, the import-substitution policies that Latin American countries embraced in the 1950s through the 1980s were associated with economic inefficiency, slower growth and high inflation. 

Today, however, the U.S. government is embracing those very policies. 

Another irony is that the U.S. government is trying to strengthen ties with Asian economies while it has threatened punitive tariffs on them. One of Trump’s initial actions in his first term was to scrap the Trans-Pacific Partnership, a proposed trade agreement involving 12 countries around the Pacific Rim.

The agreement’s stated goals were to reduce trade barriers, promote investment and establish common standards in areas such as intellectual property, labor and environmental protection. The unstated goal was to increase the influence of the United States in the Pacific Rim while lessening China’s influence in the region. 

Unfortunately, that goal is now at risk due to U.S. actions.  

Nicholas Sargen, Ph.D., is an economic consultant for Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden School of Business. He has authored three books, including “Global Shocks: An Investment Guide for Turbulent Markets.”