Asia under pressure in responding to Trump’s trade war chaos

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The 90 day pause on President Trump’s Liberation day tariffs were to expire on 9 July but their implementation has been pushed back to 1 August. Trump has sent template letters to close to two dozen countries, with more letters promised, in an attempt to bring negotiations to a head. With only two deals done instead of the 90 deals in 90 days that were promised, the White House has declared these letters are ‘deals’. Meanwhile 50 per cent tariffs on copper and 200 per cent on pharmaceuticals have been announced with steel and aluminium tariffs also doubled to 50 per cent from early June.

As damaging as the tariffs will be to global trade and the world economy, the immediate damage is from uncertainty. Major investment decisions are on hold or cancelled for many companies in the United States — very few companies do not rely on trade — and, though to a lesser extent, globally.

So far only the United Kingdom and Vietnam have concluded deals with Trump’s White House, with details of the latter yet to be revealed beyond a blanket 20 per cent tariff on all Vietnamese goods entering the United States, and 40 per cent if they are trans-shipped from elsewhere via Vietnam. A framework deal with China to keep talking while temporarily reducing tariffs, has also been agreed. That only reduces uncertainty temporarily. Most of these ‘deals’ will not be recognised by the WTO and are inconsistent with even the most generous reading of international trade law. And Trump could rip them up at any time, just as he ripped up every trade agreement the United States had ever signed on Liberation Day.

One certainty in the haze of trade policy chaos is that US tariffs are here to stay. They are Trump’s favourite tool that he thinks will achieve any number of objectives. And reducing tariffs will not be easy for Trump’s successor. Biden did not reduce Trump’s earlier tariffs on China. Trump’s tariffs have created an entire industry of businesses and vested interests in exploiting the rents they deliver to it.

The United States has changed. It is now a revisionist power. From the enforcer of the global trade rules it has become its spoiler.

Relying on Trump Always Chickens Out (TACO) is not a strategy.

The European Union may be next to receive a letter from Trump. Europe has threatened retaliation. Meanwhile China and the European Union are engaged in a trade skirmish of their own over trade in electric vehicles and other goods. Escalation will add to global trade uncertainty and pressure on other markets.

US tariffs are already diverting huge volumes of Chinese trade to other markets and further Liberation Day tariffs that will be applied — even those imposed on countries like Vietnam that concluded a ‘deal’ — will put pressure on other markets. That’s how tariffs spread and how global contagion becomes a dangerous risk.

But further weakening or collapse of the global trading system and a world of might is right is not inevitable. How the rest of the world responds will be key to whether Trump’s trade war spreads around the world. Those that have most to lose — small and medium economies that are open and rely on trade — have an incentive to coordinate to hold the line against protectionist contagion. 

Southeast Asia’s successful integration into value chains means they export a lot to the United States and their trade surpluses with the United States — what Trump thinks of as other countries’ ripping America off — is why they have been so harshly targeted.

New modelling by the East Asian Bureau of Economic Research at the ANU and the Centre for Strategic and International Studies in Jakarta show that Liberation Day tariffs would reduce Southeast Asian GDP by 2.3 per cent and shrink employment by 5.9 per cent.

Global contagion of tariffs rising by 15 percentage points would decimate Southeast Asian economies with GDP falling 11 per cent and employment falling 25 per cent, posing a direct threat to political security. Southeast Asian economies have succeeded with integrating into the global economy and have high trade dependence, with an average trade to GDP ratio over 100 per cent. Trade is a primary source of development, prosperity and security for the region.

The average tariff increase during the collapse of global trade in the 1930s in response to the US Smoot-Hawley Tariff Act was 15 percentage points. A repeat of that is certainly not out of the question as other countries deal with the fallout from Trump’s tariffs, which are generally higher than 15 per cent.

The Association of Southeast Asian Nations’ (ASEAN) response to Trump so far has been exemplary. What it does next will be crucial not only to regional but also to global outcomes.

The EABER-CSIS modelling shows that if the Regional Comprehensive Economic Partnership (RCEP) members (Australia, China, Japan, New Zealand, South Korea and ASEAN) implement the commitments they made in RCEP and avoid raising tariffs on each other and the rest of the world even as their exports are cut out of US markets, ASEAN economies will grow 1.9 per cent and employment by 2.1 per cent.

That would lead the defence of the trading system and boost other efforts like the proposal to connect the CPTPP and EU trade blocs. RCEP accounts for just under one-third of global trade and GDP, so its staying open to trade can act as a shock absorber in a protectionist world.

ASEAN and its East Asian partners have a vital interest in holding the line on protectionist contagion through defence of, and doubling down on, the multilateral trading system.

Shiro Armstrong is Professor and Director of the East Asian Bureau of Economic Research at the Crawford School of Public Policy at the Australian National University.