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ASEAN Response To A Trump-Generated Chinese Economic Tsunami – Analysis

By Mari Pangestu and Shiro Armstrong Southeast Asian domestic markets are about to be hit by a tsunami of cheap Chinese goods, unable to enter the United States if US President Donald Trump follows through on his promise of 60 per cent tariffs on all Chinese imports. US tariffs on Southeast Asian goods as part of Trump’s blanket 10 to 20 per cent tariffs on all imports will just compound the challenge. This prospect demands a collective response from ASEAN rather than countries looking to do individual deals with the White House, as happened to some extent in 2018. A decisive and early ASEAN response could lead a broader group of countries to keep global markets open. Governments in the region are already under pressure to protect against cheap Chinese imports as the US–China trade and technology war has escalated over the past half decade. With China’s 2024 trade surplus reaching a record US$992 billion, countries such as Indonesia have increased their use of safeguard and anti-dumping duties and strengthened efforts to stem illegal imports. Businesses have also been lobbying their governments for protection against calls of Chinese overcapacity and unfair competition. Many Southeast Asian companies have benefited from Chinese goods and capital being diverted to them for re-export to the United States. Whether value has been added before export or goods have simply been rebadged as Southeast Asian, they are now at growing risk of being targeted by US tariffs. Tariffs tend to be contagious. There will be a lot of pressure to retaliate and reciprocate, which will only make countries poorer. The US excuse for becoming protectionist was the shock from cheaper Chinese goods allowed into the United States when China joined the World Trade Organization (WTO) in 2001. But the United States was not the only country that saw an explosion of Chinese imports after China entered the WTO. Japan, Australia and other advanced economies weathered the shock and benefited. The China shock in the United States is more a story about the benefits of globalisation and technological development not being shared across American society. The United States as a whole gained vastly from China’s entry into the WTO while some communities and certain sectors lost, reflecting the inadequacy of US policies to deal with these losses. Southeast Asia also gained from China’s entry into the WTO and the ASEAN–China Free Trade Agreement, the first major FTA that China signed after it joined the WTO. There was a lot of opposition in Southeast Asia in the lead up to the FTA with China, with fears that industries would be wiped out from Chinese competition. Southeast Asian industry faced more direct competition from China than US industry did, but it wasn’t decimated. The ‘China shock’ was avoided in Southeast Asia because communities could adjust. Faster-than-average growth meant that adjustment was easier, with new opportunities opening through Southeast Asian firms joining regional value chains. Most who lost jobs and the assets were quickly redeployed. Global exports from ASEAN have increased by 480 per cent since the turn of the century when China joined the WTO. Trade between China and ASEAN has more than doubled since 2010, making China ASEAN’s largest trading partner. The gains from turbocharged globalisation were also more equally shared across society. No matter how flexible markets are, how rapid growth is and how good the social protections are, a sudden tsunami of cheap imports diverted from US markets will make adjustment difficult. A three-pronged strategy can protect Southeast Asia’s immediate and long-term interests. First, Southeast Asian nations need to develop a joint and common response. Great powers prefer to deal with countries individually, if they think of them at all. Indonesia is relatively large compared with its partners in the region, but will have more weight and leverage working with ASEAN which is larger than the sum of its ten Southeast Asian member parts. Acting together, ASEAN can exercise more effective agency and leverage globally, which will be crucial in responding to the United States. Second, ASEAN and its member states should respond with the tools and institutions it has available, within the regional and multilateral commitments that it has negotiated in its own interests. Existing trade remedy mechanisms protect domestic industries against surges of imports and unfair pricing. These measures are allowed in international trade agreements and don’t assign blame to other countries. They are about protecting domestic industry from injury due to rapid surges in imports and dumping. Such measures buy time to deal with the adjustment costs over a more manageable timeframe and provide space for countries to assess how to best support their manufacturing sector. Finally, ASEAN must also engage China. Dialogue with Beijing can flag the legal, legitimate safeguards that will be needed in response to any surges in trade, as well as finding enduring solutions that avoid escalation of protectionist measures, like investing in resilient supply chains. ASEAN has readymade arrangements and institutions that include China like the Regional Comprehensive Economic Partnership agreement. RCEP has established processes for government officials and ministers to meet, and a yet-to-be-activated leaders’ process that can coordinate action in the face of a crisis. Now is the time to bring this comprehensive economic partnership into play. Southeast Asia’s development has been a product of its successful integration into the global economy, made possible with confidence in a well-functioning rules-based multilateral trading system. That system is under threat, but it’s far from dead. ASEAN is important enough that its support for the system can boost it materially. Without a decisive response, the risks for ASEAN are high. About the authors: Mari Pangestu is Professor of International Economics at the University of Indonesia and Shiro Armstrong is Professor of Economics at The Australian National University. Source: This article was published by East Asia Forum and an earlier version of this appeared in the Straits Times.