Trump tariffs and Asean’s Plan B

THE world is reeling from the tariffs announced by US President Donald Trump on Apr 2. What was dubbed “Liberation Day” sent markets down markedly, not least in the US itself. Asia and Singapore are not exempt.

Many questions arise. Most immediately, some ask how the rates were calculated, with measures ranging between near-50 and a low of 10 per cent. The impacts on manufacturing and supply chains and on foreign investment are further considerations. Many long-term issues remain unsettled.

Are more measures coming from the US – whether using tariffs or other means to directly control specific resources and goods? Will the US close off its market from the rest of the world? Or is the goal to make America a great manufacturer again?

Ending globalisation or renegotiating terms?

While the tariffs have now been announced, a high degree of uncertainty remains. Trump’s patterns are unpredictable not only because of temperament, but as a kind of strategic gambit. So, too, is his ability to walk back from previous statements.

It is unclear how complete and permanent these tariffs are. Consider how China, Canada and Mexico were already hit earlier, and now China again. Canada and Mexico have tried to leverage their status under the United States-Mexico-Canada Agreement that Trump signed off during his first term.

Furthermore, some countries might respond by raising their own tariffs against the US, as has China. Trump might react by introducing further tariffs, leading to a full-blown, escalating war.

Others will lean towards quite a different strategy. They will reduce trade surpluses by buying more American goods, seeking to appease Trump. They can hope that the initial tariff levels can be stabilised or even negotiated downwards, perhaps for specific sectors and goods.

Markets and inflation in the US will also bear watching. Most thought Trump would back away if the measures dented the American economy. He has not, and publicly warns instead that pain will need to be endured in the transition. But if the pain is prolonged and a recession results, as some fear, Trump might recalibrate, if not fully reverse course.

My guess is that Trump does not want to give up growth and the many benefits of globalisation. Rather, he wants to renegotiate its terms. All should recognise that the US is the key player and genuflect accordingly.

From the end of World War II and into the 1970s, the US was the world’s manufacturing giant. This has been eroded and more than a few once-famous American manufacturers have slipped. But even today, by some measures, the US remains a significant player and efforts will be made to bring manufacturing visibly back.

Recalculating expectations and locations

What should Asia and Singapore do – both governments and companies based here?

There will be recalculation for those who export to the US. Where final goods are destined for the American market and increased costs can be passed onto consumers, this will be an option – especially if there are few direct made-in-America competitors.

With tariffs at different levels for different countries, this can affect the competition among Asians and emerging markets inter se. For instance, in Asean, Vietnam suffers 45 per cent tariffs while Malaysia is hit at a relatively low 24 per cent. Most of South America, however, are at the baseline level of 10 per cent. Such differences will be a factor for investors who look to export to the American market.

Yet tariffs alone are not always determinative. Other factors come into the picture for global manufacturing, including workers with the right skills and at the right price. Technology, automation and robotics are changing that equation, too. Foreign direct investment tends to be stickier in some sectors, while others – such as contract manufacturing models – can prove more footloose.

Calculations about investment destinations will be more complex, and not only because of the tariffs announced. Uncertainty for the middle and longer term is an even greater factor. Asean can no longer assume to be the easy first and final answer for those looking to diversify from China.

Asean’s Plan B

Yet there is still good reason to look at the region. While Asean economies are presently geared towards the US and global markets, the region has a Plan B.

Asean and most of Asia are connected by free trade agreements, such as the Regional Comprehensive Economic Partnership that links Asean to the north-east trio of China, Japan and South Korea, as well as southwards with Australia and New Zealand. This comes on top of Asean’s own economic community.

This exists not just on paper. Manufacturing and supply chains link up the region, and are anchored by Asian and European manufacturers and not just American brands. Increasingly, too, there is cross-border infrastructure for transport, energy and digital needs.

What is perhaps weakest in Asean’s Plan B is its dependence on American demand for final goods. While Asia has a large potential in its emerging middle-class consumers, their current consumption levels remain relatively low.

Efforts to stimulate demand by Asians for products produced within the region will assist. Another plus for Plan B would be to increase and ease connections to the European Union, which remains a major market.

There are of course concerns about improving market access among Asians. One is the potential risk that China’s exports diverted from the US could swamp many countries, especially given deflationary pressures from its own slowing economy. More broadly, we cannot be naïve about the competition among Asians in a number of sectors.

Some will want to protect domestic producers and there will be differences among Asians. But the vital need is to use existing World Trade Organization rules for those exceptions, and to manage and resolve disputes based on rules rather than the unilateral use of tariffs.

No one can presently stop Trump from behaving like Trump. What we can and must avoid is others in Asia behaving like mini-Trumps.

Instead, the key effort would be to pursue national reforms to increase competitiveness. Such efforts should include improving the ease of doing business, the efficiency of infrastructure and finance, and getting a better fit for education, training and technology to meet the requirements of good jobs.

These – unlike tariffs – cannot be created overnight. But they are the hard and necessary work that can revitalise Asean, despite higher tariffs.

Some proclaim that globalisation is finished, and so would be the export-oriented economies in our region. That may be overstated. What is clear is that the global economy is in transition, and that the US under Trump is anything but a stabilising factor.

The tariffs announced the day after April Fool’s Day underline how politics matters to business, and could be a watershed. But it remains to be seen what decisions and adjustments are made by other countries and companies. Whether it is retaliation, appeasement or Asean’s Plan B as outlined, these developments will take more time to unfold.

The writer is chairman of the Singapore Institute of International Affairs and senior consultant with the WongPartnership law firm