Trump's return could increase tariffs, impacting China and Asean alike

There has been much speculation about the consequences of Donald Trump’s return as President of the US. Among the most talked about issues is the US trade policy and the likely imposition of higher tariffs (potentially up to 60 per cent) on China. Bilateralism and the violation of multilateral norms in the conduct of US trade policy with its partners are no longer new. However, a steep and selective increase in protective tariffs and an inherent disdain for institutions under Trump 2.0 is likely to create particularly difficult circumstances for Asean economies.

 

Containment of China has long been a centrepiece of US foreign policy. However, the economic aspects have been more pronounced in the last two decades relative to the dominance of strategic aspects in the preceding decades. Propelled by the spillover implications of the global financial crisis, global trade imbalances, and a growing realisation of the shift in the centre of gravity of the world economy to the East, Barack Obama adopted the US “pivot to Asia” strategy in 2011. The Trans-Pacific Partnership (TPP) was its key economic pillar. The TPP was envisioned as a high standard, ambitious trade agreement in accordance with the US liberal trade policy at the time. Contributing almost 40 per cent of global gross domestic product (GDP) and a third of global trade, the agreement had significant potential benefits of economic integration for the 12 member economies in the wider Asia-Pacific region. Furthermore, the TPP, with its focus on “behind the border” policies, was designed to ensure transparency and protection of intellectual property rights, labour rights, and the environment in trade and investment. The underlying motivation for the TPP was to limit China’s choices to either joining the agreement and abiding by the higher trade rules, and in the process be transformed into a more open, transparent market economy, or be excluded from the benefits of the preferential trade and investment agreement. The TPP was concluded and signed in February 2016.

 

However, in less than a year, with Mr Trump as the newly elected President, the US formally withdrew from the TPP, consequently derailing its entry into force. This was an early indication of US trade policy priorities under President Trump — a re-orientation inwards and the adoption of bilateralism as the preferred mode of trade negotiations. The TPP pullout also raised doubts about US interest in and commitment to strong engagement with the broader Asian region and the pursuit of regional economic alliances. This shift in US policy was also significant given the imperative to counter an increasingly assertive China and its expansionist claims in the South China Sea.

 

At this point, Japan displayed uncharacteristic leadership in Asia and convinced the remaining 11 members to go ahead with the trade agreement, thus giving a major impetus to the agenda of regional economic integration. In November 2017, the trade agreement was resurrected as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). The CPTPP has created a new liberal trade architecture with ambitious standards in areas beyond those mandated by the World Trade Organization. The agreement has seen recent enlargement with the accession of the UK. Several other countries have shown interest and some have formally applied for membership.

 

President Joe Biden sought to revive the multilateral approach to broader US regional economic engagement by launching the Indo-Pacific Economic Framework (IPEF) for prosperity in 2022. The 14-member IPEF has nine members from Asean and East Asia and four key pillars on trade, supply chain resilience, clean energy, and tax and anticorruption. However, as it lacks market access and deep liberalisation provisions, the IPEF is a far weaker instrument compared to the TPP/ CPTPP in setting trade rules and shaping the regional economic integration architecture. Thus far, the IPEF members have not been able to finalise a trade deal, while the agreement on supply chains that went into force earlier this year has only limited potential in terms of ensuring resilience (see my “Limits to Supply Chain Diversification”, Business Standard, November 30, 2023).

 

More importantly, Trump 2.0 may “knock-out” the IPEF as proclaimed by the President-elect during his campaign. It may also be worth recalling that Mr Trump’s interest in other Asian regional fora, such as the East Asia Summit and Asean-US Summit, were minimal in his earlier term. There is also little doubt that the second Trump term will see an intensified focus on “America first” and technology and geopolitical competition. This will likely mean a reversion in US foreign policy, with strategic issues outweighing the regional economic institutional engagement.  This would be a big blow to the Asean economies.

 

In the China+1 strategy of multinational corporations, the Asean economies have emerged as among the most attractive alternative locations for global value chain shifts. In the process though, there has also been an increase in the intensity of their supply chain linkages with China. Furthermore, Chinese firms are relocating production in proximate Asean economies to avoid the higher tariffs imposed by the US. However, there is a possibility that the increase in tariffs under Trump 2.0 may not just be on imports from China but also from Asean economies if produced by Chinese firms with minimum local value content. This would be a double whammy for the Asean economies.

 

As for Japan, its trade and supply chain linkages are not as dense as those of China with Asean economies. Additionally, China’s Belt and Road Initiative (BRI) continues to be important for these economies in overcoming their critical infrastructure deficits. Notwithstanding the slow pace of implementation and the downsizing of BRI projects due to doubts raised about their commercial viability, China is likely to remain the dominant financier of infrastructure projects in the region. Similarly, China has been the leading source of green energy and climate-related development finance and investments in the region.

 

To sum up, in the evolving geopolitical context of much-reduced institutional economic support from the US and given the limitations of Japanese economic leadership potential, Asean may well face a predicament of increased linkages with China, even when that implicitly implies heightened vulnerabilities.

 

The author is senior fellow, CSEP; professor of economics, SIS, JNU, and author of India’s Trade Policy in the 21st Century, Routledge: London, 2022. The views are personal