But a more troubled world need not mean that individual countries in our region will be equally hurt. Three factors will determine which countries might perform better: The first will be the ability to negotiate better trade outcomes with big players such as the US and China. The next factor will be how much policy space a country has to contain the near-term shocks that are likely. A final factor will be the capacity to sniff out and exploit opportunities that will still emerge even in a difficult global environment.
Taking these factors into account, we believe that some countries in this region can defy the odds and deliver a healthy economic outlook.
Trade tensions eased, but protectionism persists
Trump remains a firm believer in America First protectionism, a stance he has held for decades. That will not change. In his mind, he needs higher tariffs and restrictions on trade to achieve his key goals — promote domestic manufacturing, raise government revenues and reduce the trade deficit. In fact, his recent trade agreement with the UK gives us an insight into what to expect in future agreements.
There was no give on the baseline 10% tariff rate.
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Many details were not resolved, affecting trade in agriculture as well as in pharmaceuticals, steel and aluminium. Given the ongoing US investigations into these sectors, there is a high likelihood of high sector-specific tariff rates in these areas, as well as in semiconductors.
The deal appears to leave the UK in violation of one of the foundational principles of the World Trade Organization (WTO) — the most-favoured-nation rule, whereby a trade concession granted to one partner must be extended to all other trading partners unless that concession is part of a formal free trade agreement.
If this is the case, then even after deals are done with China, the European Union and others, the average tariff rate in the US will still be considerably higher than the 2.5% level it was at when Trump took office. Our guess is that it will settle at around 15%-18%. That will be high enough to prompt other trading partners to impose retaliatory tariffs. American actions could also encourage other countries to follow America’s example in casting aside WTO rules.
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Moreover, China is likely to be hit harder by protectionism than its competitors. This is because China is also engaged in a contest for global power and influence with the US and its allies, and therefore will be subject to restrictions motivated by military and security considerations that China’s competitors will not face. In addition, China’s surging exports to Europe and emerging economies are already sparking a backlash, resulting in tariffs, countervailing duties, and other restrictions. Data for China’s trade in April showed that exports to Southeast Asia and other emerging regions are continuing to surge; it is almost certain that this trend will prompt even more trade measures against China.
Apart from trade, we also need to take into account other threats to the global economy. Geopolitical tensions continue to rise, while questions linger over the long-term direction of the US Dollar as the world’s reserve currency, which could lead to volatility in bond and currency markets.
Taken together, all this makes for a challenging global environment.
Who will land the best US trade deals?
Three factors are set to shape a country’s ability to win trade deals with the US, which preserve their export capacity.
Diplomatic skills and trade negotiation capacity are clearly important. Vietnam, Singapore, and Malaysia, for example, have demonstrated their ability to secure high-level talks with American officials fairly quickly.
Strategic value to the US: A country that offers the US military bases and other forms of security collaboration will be better-positioned to win a good trade deal. The Philippines and Singapore perform well in this regard. Thailand is a treaty ally of the US in name, but their relationship has suffered of late. Thailand’s expulsion of Uighur refugees to China has reportedly angered US Secretary of State Marco Rubio, who has been passionate about Uighur affairs. A country that commands a pivotal geographic position commanding critical sea lanes of communication (e.g., Indonesia, Malaysia and Singapore) will also have some bargaining power. A country like Vietnam, which has a powerful military that has stood up to China in the past, can also be seen as having strategic value.
How severe are US trade grievances against a country? The Trump administration is greatly concerned with the bilateral trade deficit. Except for Singapore, other Southeast Asian economies have large and growing trade surpluses with the US. However, the level of tariffs and non-tariff barriers a country imposes on the US is also a point of concern, as is the fear that Chinese goods are being used as a backdoor into the US market. Vietnam, Thailand and Malaysia could have difficulties with the US on this score.
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A final point of contention with the US is the allegation of “currency manipulation”. The US Treasury has regularly reported on which countries it feels are managing their exchange rates in order to gain an unfair advantage over the US. But this list of countries has changed over time. Countries with persistent and large external surpluses, as well as a large hoard of foreign exchange reserves, are often slammed for currency manipulation, even though the concept of “manipulation” is a difficult one to prove.
For example, Singapore conducts its monetary policy by uniquely using the speed of appreciation of its exchange rate as a policy tool. The intention is to provide a monetary anchor to stabilise the economy and contain inflationary pressures, not as a means of gaining an export edge, which is, anyway, not particularly pertinent when discussing the high-technology exports that Singapore specialises in.
Putting it all together, our best guess is that, despite some issues with the US, Vietnam, Malaysia, and Singapore will emerge better than their neighbours in terms of securing trade deals with the US that are palatable.
Monetary and fiscal support will offer limited downturn relief
Despite the market cheer, there is little doubt in our minds that the global economy will slow, weakening the region’s economic growth prospects this year and possibly even next year. The question is whether the regional countries have the policy space for supportive measures to support domestic demand.
When it comes to monetary policy, it appears that most countries have the scope to cut rates and reduce reserve requirements (or, in Singapore’s case, the ability to slow the appreciation of the Singapore dollar).
However, fiscal policy is more constrained in the region, except for Singapore, whose stratospheric levels of government savings allow it to provide substantial support to its economy during a downturn. Many countries in the region are focused on reducing fiscal deficits to restrain the ratio of public debt to economic output.
Can the region capture global gains?
It is an ill wind that blows nobody any luck, as the saying goes. We see two potential silver linings for Southeast Asia in the dark clouds of the trade war.
First, if it does indeed turn out that China is hurt more by protectionism, then the case for reconfiguring supply chains and shifting production out of China will remain. And, if that is the case, we would argue that Southeast Asia will still be one of the primary beneficiaries of that trend. Already, recent years have seen Asean’s share of global foreign direct investment overtake China’s share — a result of such production shifts. That is because Southeast Asian economies have been working hard to strengthen their fundamentals — infrastructure is being improved, restrictions on foreign direct investment have been eased, red tape has been cut, and labour regulations have been eased. There will, of course, be intense competition to host the new production facilities from places such as India, Turkey, Mexico and Morocco, all of which have their strengths. But Southeast Asia’s long and productive experience with global manufacturers should stand it in good stead.
Second, trade encompasses not only goods but also services. The good news is that trade in services has been growing rapidly and is less susceptible to protectionism. That is why the WTO has slashed its forecast for growth in global merchandise trade volumes by close to three percentage points to a contraction of 0.2% in 2025, while only modestly reducing its expectation for the increase in global commercial services exports which it places at 4%, a cut of just one percentage point.
Not only that, but secular trends seem to be supporting a continued expansion in services trade. For example, the growing antipathy to immigration into developed countries, despite labour shortages in certain segments, is producing a growing demand for offshored services — services that can be carried out in low-cost areas such as India or the Philippines and delivered virtually to customers in developed markets. There are significant shortages in skilled labour in areas such as finance, information technology, and professional services. The OECD reports that job vacancy rates in services have remained high in its richer member economies as domestic labour supply cannot keep up with the expanding demand.
To top it all, Southeast Asian economies enjoy a global edge in exportable services. While the Philippines has seen strong growth in services, others, such as Malaysia, Indonesia, Vietnam, and Thailand, rank highly in the AT Kearney ranking of the best service locations.
There has been progress in trade talks: the US and China have stepped back from a potential trade war, and a US-UK trade agreement has been finalised. Similar, broad, but not detailed agreements are possible between the US and others, such as India, in the coming weeks. However, the most realistic scenario remains one of a more protectionist world, where a debilitating level of uncertainty will still be caused by trade-related and other stresses.
Consequently, the world economy is set to slow. Countries in this region are likely to cut rates to support domestic demand, but most lack the fiscal firepower to provide a really substantial stimulus. In the short term, therefore, not much can be done to offset trade-induced economic weakness.
The good news is in the long term. Production will continue to be relocated out of China, and Asean offers a good value proposition to firms that are moving. Moreover, the continued expansion of the services trade will provide the region with further opportunities for growth.
As long as the region continues to ensure political stability, implement credible policies and make continued improvements in critical areas such as infrastructure, it should still be able to emerge well from the current global turbulence.
Manu Bhaskaran is the CEO of Centennial Asia Advisors
