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How will Trump’s potential tariffs affect Southeast Asia?

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Southeast Asia is worried about Donald Trump’s threat of universal tariffs and a new trade war with China. Five of the region’s six largest economies run a trade surplus with the United States.

But experts say the situation may not be so bad. The region, which tries to remain geopolitically neutral, saw an increase in gross trade with both China and the U.S. between 2017 and 2020 during Trump’s first presidency. Vietnam, Indonesia, Malaysia, and Thailand have benefited as companies from China, Japan, South Korea, Taiwan, and the U.S. have expanded their production bases in Southeast Asia to avoid U.S. tariffs.

Experts say exports and economic growth will take a hit in the short term, but the region could benefit from trade diversion and substitution.

What is Trump’s tariff threat?

The goal of Trump’s trade policy is to bring manufacturing jobs back to the U.S. and decouple supply chains from China. Trump and his advisers claim that China’s trade advantage is due to “currency manipulation, intellectual property theft and forced technology transfer”.

During his first term, Trump used executive powers to impose tariffs of up to 25% on $250bn of electronics, machinery and consumer goods imported from China. Beijing retaliated with similar measures on U.S. agricultural, automotive and technology exports.

Now Trump has proposed a 60 per cent tariff on all Chinese goods entering the U.S. and tariffs of up to 20 per cent on imports from everywhere else.

How bad could it be for Southeast Asia?

According to Oxford Economics, about 40 per cent of Cambodia’s exports go to the U.S., making it the largest exporter in Asean as a percentage of total exports, followed by Vietnam with 27.4 per cent and Thailand with 17 per cent. Thanavath Phonvichai, president of the University of the Thai Chamber of Commerce, said the Thai economy could take a 160.5 billion baht ($4.6 billion) hit if Trump fulfils his promises.

Vietnam has the world’s fourth-largest trade surplus with the United States. This imbalance has been growing rapidly as Chinese, Taiwanese and South Korean companies have used Vietnam to avoid Trump-era tariffs. Vietnam’s fortunes could change just as quickly, especially if the U.S. continues to classify Vietnam as a ‘non-market economy’, which requires higher tariffs.

Uncertainty over Trump’s tariffs could cause companies to pause or halt investment plans in Southeast Asia. U.S. companies accounted for about half of Singapore’s $9.5 billion in fixed-asset investment last year, according to the city-state’s Economic Development Board. In his congratulatory letter to Trump, Prime Minister Lawrence Wong was quick to remind him that the United States enjoys a “consistent trade surplus” with Singapore.

Any blow to the Chinese economy will have repercussions for Asean countries that depend on Chinese consumption, export demand and tourism. A reduced appetite for Chinese goods will also affect Southeast Asian suppliers of inputs to Chinese producers. Indonesia, Southeast Asia’s largest economy, will suffer the most because it exports 24.2 per cent of its goods to China, mainly commodities.

Unable to send their goods to the U.S., Chinese exporters may turn to Southeast Asia, where governments have faced complaints from local producers hurt by dumping in metals, textiles, and consumer goods.

What is Southeast Asia’s advantage?

Southeast Asia’s current manufacturing boom started because of the trade war. Over time, analysts expect trade substitution and diversion to outweigh the hit to growth.

“We think a stronger crackdown on China could lead to more supply chain diversion as Chinese companies trade and invest more in Asia,” said Jayden Vantarakis, head of ASEAN research at Macquarie Capital.

“Electric vehicle factories, which some Southeast Asian governments are aggressively pursuing, could provide an economic buffer. Demand for EVs is also growing outside the U.S., so I think there could be a net benefit for Indonesia. Smaller countries that are trying to be carbon neutral, especially as petrol prices get more expensive, will try to take over the supply and buy more electric cars,” said Sumit Agarwal, a professor at the National University of Singapore’s School of Business.

Trump’s promised tariffs could embolden Asean governments to impose anti-dumping duties on Chinese goods, as Thailand did on rolled steel this year. Stricter U.S. rules of origin could also give governments an opportunity to ensure that more high-value parts are produced and assembled locally.

How will Southeast Asian currencies and markets be affected?

Trump’s tariffs could reduce pressure on Southeast Asian central banks to ease monetary policy further.

“Essentially, Trump’s victory is inflationary for the world because of his planned tariffs, so the global monetary normalization or easing cycle will probably not be as sharp as previously thought, including in the Philippines,” said Miguel Chanco, chief emerging Asia economist at UK-based Pantheon Macroeconomics.

Speaking to Nikkei Asia, Chanco said Southeast Asian currencies will not strengthen as much as previously expected, partly because markets are re-pricing the pace of easing by the U.S. Federal Reserve and thus the dollar will continue to strengthen.

Among Southeast Asia’s six major economies, the Thai baht and Malaysian ringgit have been the worst-performing currencies since Trump’s victory, losing 3.2 per cent and 2.9 per cent respectively against the U.S. dollar through Wednesday.

Thai brokerage InnovestX recommended stocks that would benefit from a strong dollar and weak baht. These include companies with significant export earnings, such as CP Foods and Delta Electronics, or tourism-related companies such as Airports of Thailand, property developers and hoteliers.

Governments are already taking steps to reduce their over-dependence on the U.S. or China by deepening ties with other countries and regions and emphasizing their neutrality.

Southeast Asian economies in particular are also expected to focus on building resilience by strengthening intra-ASEAN trade.

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India plans to increase water drawing from Indus river

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India plans to significantly increase the amount of water it draws from a major river that feeds farmland in Pakistan’s lower basin. This move, according to four people familiar with the matter who spoke to Reuters, is part of retaliatory measures holding Islamabad responsible for a deadly attack on tourists in April. The Indus Treaty has still not come into effect.

Delhi suspended its participation in the 1960 Indus Waters Treaty, which regulates the use of the Indus river system, after an incident in India’s Kashmir region where 26 civilians were killed, an event India described as a terrorist act. Pakistan denied involvement, but although the two nuclear-armed neighbors signed a ceasefire agreement last week after the most severe clashes in decades, the treaty has not re-entered force.

Following the April 22 attack, Indian Prime Minister Narendra Modi instructed officials to speed up the planning and execution of projects on the Chenab, Jhelum, and Indus rivers, which are three water sources within the Indus river system allocated for Pakistan’s use.

Two people said one of the significant plans being discussed is to double the length of the Ranbir canal on the Chenab river, which extends from India to Pakistan’s agricultural heartland, Punjab. The canal was built in the 19th century, long before the treaty was signed.

India is permitted to draw a limited amount of water from the Chenab river for irrigation purposes, but the expanded canal, which experts say could take years to build, would increase India’s water drawing capacity from approximately 40 cubic meters per second currently to 150 cubic meters per second.

Details of the Indian government’s discussions regarding the expansion of Ranbir had not been previously reported. The discussions began last month and are continuing after the ceasefire, said one of the individuals.

The ministries of water and external affairs, as well as Modi’s office, did not respond to Reuters’ questions. NHPC, India’s state-owned hydroelectric company which carries out many projects in the Indus system, also did not respond to an email requesting comment.

In a fiery speech this week, Modi said, without referring to the treaty, “Water and blood cannot flow together.” Indian Ministry of External Affairs spokesperson Randhir Jaiswal told reporters on Tuesday that India would “suspend the treaty until Pakistan credibly and irreversibly denies its support for cross-border terrorism.”

Pakistan’s ministries of water and foreign affairs did not respond to requests for comment. Foreign Minister Ishaq Dar told lawmakers this week that the government had written a letter to India stating that the suspension of the treaty was illegal and that Islamabad considered the treaty to be in force.

Islamabad had announced after India suspended the treaty in April that it would consider “attempts to stop or divert the flow of water belonging to Pakistan” as “an act of war.”

Approximately 80% of Pakistan, including nearly all hydroelectric projects serving its 250 million population, is dependent on the Indus river system.

David Michel, a water security expert at the Washington-based Center for Strategic and International Studies, said that Delhi’s efforts to build dams, canals, or other infrastructure facilities that would block or divert significant amounts of water flow from the Indus river system to India would “take years to materialize.”

However, Pakistan experienced a preview of the pressure it could face from India: After India began maintenance work on some Indus projects, water levels at a key intake point in Pakistan briefly dropped by up to 90% in early May.

The Indus system originates near Lake Mansarovar in Tibet, flows through some of the world’s most geopolitically tense regions, passes through northern India and eastern and southeastern Pakistan, and empties into the Arabian Sea.

The treaty is considered one of the world’s most successful water-sharing agreements, having survived several major wars and long-standing tensions between India and Pakistan.

Islamabad had previously opposed several Indian projects in the Indus system, while Delhi had stated after the Kashmir attack that it had been trying to renegotiate the treaty since 2023 to take into account population growth and the increasing need for clean hydro energy.

The treaty largely limits India to building low-impact hydroelectric projects on the three rivers allocated primarily to Pakistan. Delhi is free to use the waters of the other three rivers, which are tributaries of the Sutlej, Beas, and Ravi rivers, as it wishes.

According to two government documents seen by Reuters and interviews with five people familiar with the matter, in addition to the plans to expand the Ranbir canal, India is also considering projects that would reduce the amount of water flowing from the rivers allocated to Pakistan to that country.

An undated note prepared by a state company for officials evaluating irrigation plans stated that water from the Indus, Chenab, and Jhelum rivers could be “distributed” to rivers in three northern Indian states.

One of the individuals, who said that this document, details of which had not been previously made public, was prepared for discussions with energy ministry officials after the April 22 attack, also stated that Delhi had prepared a list of hydroelectric projects in its Jammu and Kashmir region aiming to increase the current capacity of 3,360 MW to 12,000 MW.

Delhi also prepared a list of hydroelectric projects in the Jammu and Kashmir region. These projects aim to increase the current capacity of 3,360 MW to 12,000 MW.

The list prepared by the Ministry of Power and seen by Reuters was undated. A person familiar with the document said the list was prepared before the Kashmir incident but was actively being discussed by government officials.

According to two people close to the matter, the planned projects include dams, which would be a first for India in the Indus river system, capable of storing large amounts of water.

According to the Ministry of Power document, India has identified at least five potential storage projects, four of which are located on tributaries of the Chenab and Jhelum rivers.

Pakistan’s Finance Minister Muhammad Aurangzeb told Reuters on Monday, “Water should not be used as a weapon. We do not want to consider any scenario that does not take into account the re-entry into force of this agreement.”

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India, Pakistan military chiefs to discuss ceasefire next steps

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The military operations chiefs of India and Pakistan will meet today to discuss the next steps for the nuclear-armed neighboring countries, following a ceasefire along the border that has seen the most severe clashes in approximately 30 years.

No explosions or missile attacks were reported overnight following initial ceasefire violations. The Indian army announced that Sunday marked the first peaceful night on the border in recent days, despite some schools remaining closed.

The Saturday ceasefire in the Himalayan region, announced by US President Donald Trump, followed four days of intense clashes and diplomatic initiatives.

A senior Indian army official stated that the Indian army had sent a “hotline” message to Pakistan on Sunday regarding the previous day’s ceasefire violations, informing New Delhi of its intention to respond to such incidents.

A Pakistan army spokesperson, however, maintained there were no violations.

The Indian Ministry of External Affairs announced on Saturday that the Directors-General of Military Operations from both sides would meet on Monday at 12:00 PM (06:30 GMT).

Pakistan did not comment on the meeting plans.

After relations deteriorated when India blamed Pakistan for an attack that resulted in the deaths of 26 tourists, the two former rival countries targeted each other’s military facilities with missiles and drones, leading to the deaths of dozens of civilians.

Pakistan denies the accusations and calls for an impartial investigation.

India announced on Wednesday that it had attacked nine “terror infrastructure” targets in Pakistan and Pakistan-controlled Kashmir, though Islamabad stated these were civilian targets.

While Islamabad thanked Washington for its role in securing the ceasefire, it welcomed Trump’s offer to mediate the Kashmir dispute with India. However, New Delhi did not comment on US involvement in the ceasefire or talks to be held in a neutral location.

India, maintaining that disputes with Pakistan should be resolved directly between the neighboring countries, rejected any third-party intervention.

Hindu-majority India and Muslim Pakistan govern parts of Kashmir in the Himalayan region but claim sovereignty over the entire territory.

India accuses Pakistan of being responsible for the insurgency that began in its part of Kashmir in 1989, but Pakistan maintains it only provides moral, political, and diplomatic support to Kashmiri separatists.

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China’s April exports defy tariff expectations with 8% rise

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China’s export growth showed resilience in April, defying expectations that the effects of the trade war with the US would begin to be felt. According to statistics released by China’s customs administration on Friday, exports increased by 8.1% year-on-year in dollar terms.

This increase was below the 12.4% growth recorded in March. However, according to data released by the customs administration on Friday, this increase was well above the 1.9% growth forecast in a Reuters poll of economists.

Imports, meanwhile, fell for the third consecutive month, contracting by 0.2% last month.

Exports to the US fell by 21% last month, while imports from the US decreased by 13.8%.

Exports to China’s largest trading partners, the Association of Southeast Asian Nations and the European Union, increased by 20.8% and 8.3% respectively.

The figures were released after Washington and Beijing entered a trade war.

US President Donald Trump last month implemented tariff increases of up to 145% on most products imported from China and said he would impose new tariffs even on low-value packages from the country. Beijing responded with a 125% tariff.

The two countries will begin trade talks in Geneva on Saturday. The US will be represented by Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer, while China’s delegation will be led by Vice Premier He Lifeng, the country’s top economic official.

This will be the first high-level meeting between the two sides since January, when Chinese Vice President Han Zheng attended Trump’s inauguration ceremony. Bessent said the trade war was “unsustainable.”

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