Taipei, Taiwan – Southeast Asia’s export-driven economies are facing new uncertainty from United States President Donald Trump’s trade war, as his administration cracks down on exports directed through third countries to avoid his tariffs on China.
Under an executive order issued by Trump last week, goods imported into the US face a punitive 40 percent tariff, plus penalties and any applicable country-of-origin duties, if US Customs and Border Protection determines they have been “transshipped”.
The tariff is set to go into effect on Thursday, along with Trump’s latest country-specific tariffs ranging from 10 to 41 percent.
While China is the main target of the new tax on transshipments, which applies to all redirected goods irrespective of country of origin, Southeast Asia could suffer much of the fallout because of the region’s highly integrated supply chains with Chinese manufacturers, trade experts say.
The fallout will depend on exactly how the Trump administration defines transshipments, which is still unclear, said Puan Yatim, an associate professor at Universiti Kebangsaan Malaysia’s Graduate School of Business.
“If Washington maintains a narrow interpretation – targeting only those goods that are imported from China, minimally processed or relabeled and then re-exported to the US – the economic impact on ASEAN may be limited,” Yatim told Al Jazeera, referring to the Southeast Asian regional bloc.
“However, a broader and more punitive interpretation – where goods with any significant Chinese input are also deemed in violation – could prove economically devastating for countries like Vietnam, Indonesia, Cambodia, and Malaysia,” she added.
Chinese manufacturers have for years been steadily expanding into Southeast Asia as part of a strategy known as “China Plus One”.
The strategy has helped Chinese firms avoid US tariffs, exploit cheaper labour, and diversify their supply chains – a particular concern during China’s COVID-19 lockdowns.
From 2020 to 2024, Chinese foreign direct investment into the 10 ASEAN nations grew from $7.1bn to $19.3bn, according to ASEAN data.
During the same period, exports from China to Southeast Asia rose from $385bn to $587bn, according to the Carnegie Endowment for International Peace.
The surge in Chinese exports, including goods illegally mislabeled to conceal their origin, has placed Southeast Asia in the Trump administration’s crosshairs.
“[Companies] need intermediate imports from China to create products which get shipped to the US, but because companies have been embroiled in illegal transshipments in the region, there’s a huge bias in the Trump administration that ASEAN is the predominant channel,” Priyanka Kishore, principal economist at Asia Decoded in Singapore, told Al Jazeera.
A key example of trade that invoked Washington’s ire centred on the solar cell industry.
Following a years-long investigation, the US Department of Commerce in April announced tariffs of up to 3,500 percent on Southeast Asian manufacturers alleged to have illicitly exported Chinese goods.
Southeast Asia is now in a “sticky situation” where it must appease the US – the region’s top export market – while not alienating China, Kishore said.
Beijing has threatened to “resolutely take countermeasures” against countries that agree to trade deals with the US that go against its interests.
In May, Malaysia announced that it would no longer allow nongovernmental organisations such as chambers of commerce to issue certificates of origin, as part of its efforts to ensure the integrity of its exports.
Vietnam similarly agreed to a 40 percent transshipment tariff in a framework deal reached with the US in May, while Indonesia’s Trade Minister Budi Santoso said last month that his country was opposed to transshipping.
Despite Southeast Asian governments’ efforts to mollify the US, the transshipment tariff could create major compliance issues for the private sector, said Steve Okun, founder and CEO of APAC Advisors in Singapore.
A top concern will be how the US treats products made with components from multiple countries.
US tariffs are typically determined by the location where a product underwent “substantive transformation”, but if the Trump administration were to apply duties based on the presence of even small amounts of Chinese components, compliance and enforcement would be extremely difficult, Okun said.
“You’re going to have to be doing due diligence on supply chains that you never had to do before,” Okun told Al Jazeera.
The changes would “potentially redefine trade,” he said.
A strict interpretation of transshipping could further dim Southeast Asia’s appeal, at a time when the Trump administration is already chipping away at its China Plus One competitive advantage with his tariffs on the region’s economies, said Richard Laub, CEO and cofounder of Dragon Sourcing, a global procurement service provider.
Under Trump’s latest tariffs, Singapore is subject to a 10 percent rate, while Malaysia, Thailand, Cambodia, Vietnam and Indonesia are subject to rates of 19 or 20 percent – less than the 30 percent rate proposed for China under the White House’s latest tariff framework.
Trump’s transshipment tariff potentially eats into that advantage.
“A lot of the Chinese supply strategy has been to establish some kind of facility abroad with limited content, limited value, adding those facilities to basically circumvent those transshipments. I suspect that that will come to a standstill,” Laub told Al Jazeera.
A Washington, DC-based consultant who advises businesses on trade and supply chain issues in China, said he had observed a similar phenomenon, but to the detriment of US exporters.
“We are seeing [multinational corporations] from around the globe, particularly those that served the China market from the United States, doing more to localise supply chains for China in China,” the consultant told Al Jazeera, asking not to be named.
Companies in sectors that rely on materials like foreign-sourced steel – which is subject to separate tariffs – have found manufacturing becoming too expensive in the US and started moving manufacturing out of the country, the consultant said.
“This is a terrible outcome and the opposite of what the administration intends,” he said.
Nick Marro, principal economist for Asia at the Economist Intelligence Unit, said despite the uncertainty, the direction of the policy in Washington is ambiguously bad for Southeast Asia.
“Clearly, the US is concerned about transshipments,” Marro told Al Jazeera.
“Clearly, it is moving to crack down on them, and so for those investors, those companies, those governments that have staked their premise on things like China Plus One, we are now seeing a reassessment, and that is something which investors have to be integrating into their strategies.”
