By Natasha Burrows & Kim Mai Tran —

Economists posit that the U.S.-China trade war will have long-standing economic and geopolitical impacts on Southeast Asia. The export-oriented, globally-integrated economies of ASEAN will suffer most from trade barriers and tensions, particularly Singapore, Thailand, and Malaysia. Ultimately, “winning” the trade war will require Southeast Asian countries to overcome protectionist inclinations and continue to deepen the regional integration and connectivity of their economies and adjust to shifting supply chains.

There is no doubt the economies of Southeast Asia are fundamentally tied up in the U.S.-China trade war. Southeast Asia extracts the raw materials or produces intermediate goods that are assembled in China and exported to western markets. And while the United States is shunning deeper economic integration, global trade volatility is driving ASEAN countries closer together.

Across the region leaders and policymakers are emphasizing the importance of ASEAN unity. At the World Economic Forum in Hanoi last month, Minister of International Trade and Industry Ignatius Darell Leiking of Malaysia, stated that, “We need to start taking the opportunity of what was already built several years ago and that is ASEAN. That is to work as a single ASEAN, to trade between ourselves and to make it seamless between ourselves. That could reduce the impact of the tariff war that is forthcoming.”

Indeed, the global trade tensions are occurring in a context of increasing intra-ASEAN trade and investment. Intra-ASEAN trade is the largest share of total trade in the region, at 24 percent of total trade. ASEAN is also a driving force behind regional economic cooperation and architecture. ASEAN is the basis of the Regional Comprehensive Economic Partnership (RCEP) agreement, which is currently in its 24th round of negotiation in Auckland, New Zealand. While unlikely, there is a possibility that RCEP negotiators reach a broader agreement at the Singapore ASEAN Summit in November. The agreement, between ASEAN nations and Australia, China, India, Japan, South Korea, and New Zealand, will encompass 25 percent of global gross domestic product, 45 percent of the world’s total population, 30 percent of global income and 30 percent of global trade when it is ultimately finalized.

Similarly, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)  will be a tool that fosters trade liberalization in Southeast Asia and the Asia Pacific and a tool for shaping policy and enhancing growth through greater foreign direct investment. Singapore has already ratified the deal and three other ASEAN members are signatories of the agreement (Brunei, Malaysia, and Vietnam). Other Southeast Asian countries, namely Thailand and Indonesia, are considering joining the deal. Political and business leaders in Southeast Asia understand the importance of trade liberalization and its effects on growth and development and are thus leading the way to keep the momentum of trade and globalization. While the trade war is not the driving force behind regional cooperation, it is certainly adding fuel to the fire.

Yet, this understanding is far from unanimous in Southeast Asia and a hard sell to constituents. The consequences of the 1997 Asian Financial Crisis are deeply ingrained in the collective memory of ASEAN states and economic and financial liberalization has left a bitter taste across the region ever since. A skewed discourse — and an easy one to sell — is that the trade war is a ripple effect of trade liberalization.

ASEAN’s two most populous countries, Indonesia and the Philippines, have already both incurred costs from the trade war and are prone toward illiberalism. As the trade war escalates, China weakens its currency to boost its exports, making goods even cheaper in Southeast Asian countries. As result, Southeast Asian economies have to strike a balance between controlling the trade deficit and being able to compete with cheaper Chinese goods on their domestic market. If currency devaluation accelerates, Southeast Asian economies will have to continue devaluating their currency to offset yuan devaluation against the dollar and prevent Chinese products from flooding their domestic market. In September, the Indonesian rupiah was trading at 15, 286 against the dollar (October 29, 2018), near its lowest level since the 1997 Asian financial crisis. The rupiah has lost around 9 percent this year, which President Jokowi attributed to rising interest rates in the United States, trade tensions between the United States and China, and financial crises in Turkey and Argentina. The Philippine peso has been following a similar pattern with the highest inflation rate in ASEAN in part caused by a weak peso. A weak peso makes imports, on which the Philippine economy relies, costlier.

With the election season in full swing in Indonesia, the onus is now on President Joko “Jokowi” Widodo to defend his economic record which is expected to be a critical factor in the race. Jokowi’s opponent Prabowo has been very vocal about the stagnating state of the economy, which he sees as a political opportunity to attack Jokowi along non-religious lines. Forestalling this, Jokowi has adopted hasty remedies that fall under broader protectionist measures– a “vote getter” in Indonesia, namely, the imposition of a 10 percent import tax on consumer goods.When talking about the positive effects of the trade war in Southeast Asia, leaders emphasize that production and supply chains might move out of China into the ASEAN region. This is reflected in a recent business survey by AmCham China which found that Southeast Asia is the top destination for relocating manufacturing out of China.

The current trade tensions between the United States and China will inevitably impact supply chains in Southeast Asia, especially in the electronics and automobile sectors. Countries like Vietnam, Singapore, or Malaysia ship considerable amounts of components or parts to China for assembly that are then exported to the United States. To be sure, assembly manufacturers in China will soon be looking at Vietnam and other attractive Southeast Asia economies to relocate. Chinese firms could thus elude U.S. tariffs by manufacturing and exporting from Southeast Asia.

More highly skilled workforces will become paramount for ASEAN countries to be fully integrated into global supply chains. Electronics manufacturing, still in need of intricate hand assembly, is expanding in Vietnam especially for low-cost electronics with lower labor costs. While Vietnam has the labor capacity and the adequate infrastructure, it lacks the supply base and skills to be a manufacturing hub at this time despite subsequent Chinese investment in that field and shifting supply chains. In terms of workforce, local companies in Southeast Asia ought to show enhance their capacity by upgrading workforce training and foster better employee retention. At a national level, governments should facilitate access to domestic and regional financing and implement policies that facilitate the manufacturing economy in its diversity.

In the past, given its support for APEC, ASEAN, and the Trans-Pacific Partnership, U.S. support for trade liberalization and regional economic integration was clear. However, today, U.S. leadership and policy is increasingly uncertain. At the IMF-World Bank meetings held from 8-14 October in Bali, Indonesian finance minister Sri Mulyani Indrawati said that the United States “needs to be very mindful that spillover from the effect of their policies is very real for many countries.”

While trade policy previously relied on developed markets, regional trade architecture in Southeast Asia could well become the gold standard globally for regional trade cooperation.

Long term, Southeast Asia might benefit from trade tensions, but this will require intra-regional coordination. ASEAN economic integration could facilitate intra-regional supply chains and investment flows into the region. The trade war breathes fresh impetus into regional trade deals like RCEP and CPTPP and could indirectly contribute in the bolstering of regional trade architecture given the perceived sense of emergency. To win the trade war, ASEAN states must ensure that the rhetoric of integration is operationalized.

Ms. Natasha Burrows is a research intern with the Southeast Asia Program at CSIS and completing her MA in Asian Studies at Georgetown’s School of Foreign Service.
Ms. Kim Mai Tran is a Research Associate with the CSIS Southeast Asia Program.