Southeast Asia’s economic model at risk due to U.S. tariffs
The region’s vibrant and globally connected economy is being pressured to overhaul its integration within global supply chains.
In a nutshell
- Southeast Asia’s economic model is being severely challenged
- The China+1 tariff circumvention option has been eviscerated
- The region will likely try to adapt, with uneven success
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The 2025 United States tariff regime features several aggressive reciprocal tariffs on Southeast Asian economies, with some reaching up to 40 percent. The measures have triggered deep anxiety across regional economies, presenting the region with its most significant economic challenge in decades.
Nations like Cambodia, Vietnam, Thailand and Indonesia, which built their economic growth models on low-cost manufacturing and open access to Western markets, particularly the U.S., are now facing unprecedented disruption. While Southeast Asia has weathered previous trade wars through adaptation, the scale and intensity of President Donald Trump’s tariffs threaten to force structural changes beyond mere supply chain adjustments.
As these economies reel from the immediate consequences such as canceled export orders, factory closures and inward investment contraction, a critical question looms over the region: What are the long-term implications for Southeast Asia’s export-led economic architecture?
The Southeast Asian economic model
Few other regions of the world have become as reliant on economic globalization and free trade as Southeast Asia. Indeed, many Global Majority states, such as India and those in South Asia, Africa and Latin America, have sought to emulate the foreign direct investment (FDI)-driven and efficient manufacturing export model of the economies of the Association of Southeast Asian Nations (ASEAN).
Southeast Asia’s economy, with a combined gross domestic product (GDP) just shy of $4 trillion in 2024, is collectively the world’s fifth largest. The region’s growth was built on sweeping economic reforms that embedded openness to foreign investment and free trade. These countries strategically adopted rapid changes in information and communications, while also absorbing advances such as containerization to support exports.
Concurrently, the region secured broad access to the giant U.S. market – a trade relationship that represented the largest share of its end-user exports – even as China emerged as its primary trade partner over the past decade. More than 80 percent of ASEAN’s exports to the U.S. are in the form of goods. This state of affairs has suddenly become a crisis for the region, now that President Trump has raised the prospect of “re-industrialization” and the reshoring of manufacturing.
The tumultuous change in U.S. policy came at a time when ASEAN’s exports to the U.S. had reached a record high, with $477 billion worth of goods last year. As a result, Mr. Trump’s “Liberation Day” tariffs hit Southeast Asian economies especially hard. The April announcement of import duties as high as 49 percent on Cambodia, 46 percent on Vietnam and 32 percent on Indonesia, were equivalent to or even exceeded those even initially placed on China.
The impact of the reciprocal tariffs resulted in short-term dislocation for businesses utilizing ASEAN as a low-cost, efficient export platform to the U.S. The longer-term effects of the tariffs are becoming apparent, prospectively marking the death knell of the region’s economic model.
Many Southeast Asian governments believe they are being unfairly punished by the Trump administration for having welcomed the extensive shifts of production from China into their economies, as multinationals sought to escape Washington’s intensifying trade tensions with Beijing.
New tariff rates provide limited relief, but the damage is done
On August 1, the Trump administration issued revised, lower tariff rates for Southeast Asian economies. Countries that had agreed deals with Washington include Vietnam and Malaysia, and saw their basic tariff rates reduced to 20 and 19 percent, respectively, while Indonesia, Thailand and Cambodia also secured deals at 19 percent. All were lower than the April tariff levels.
Only the Philippines later received a higher rate of 19 percent, relative to its initial 17 percent duty, while Brunei was subject to 25 percent. Washington hit Myanmar and Laos with a 40 percent tariff, among the highest reciprocal tariffs worldwide, albeit less than what was previously announced. Only Singapore benefited from the 10 percent baseline on Liberation Day, which was maintained.
The reduction in tariffs has been considered by the region’s governments as a welcome relief and even portrayed as a kind of win relative to what existed beforehand. It was also seen as a success when compared with competing economies, such as India and Brazil, which have been subject to 25 percent and 50 percent rates, respectively.
Several other Global Majority economies in Africa and Latin America have also been subject to higher tariffs than those imposed on Southeast Asia at the beginning of August.
Economic forecasts initially predicted a sharp 2.5 percent drop in ASEAN’s GDP in the aftermath of Liberation Day. Following the August adjustment, however, most analysts revised their outlook to reflect less negative impacts.
Even so, several research institutes warn that a global contagion of protectionism could push average worldwide tariffs up by 15 percent, posing a clear threat to Southeast Asia’s long-term economic growth. Such an event could lead to an 11 percent decline in the region’s economic output and hit employment by as much as 25 percent, leading to potential political instability.
Separately, complexities relating to other tariffs on certain Southeast Asian economies revolve around various geopolitical factors. These include the U.S. potentially imposing a 10 percent tariff on BRICS nations for their “anti-American policies.” This measure would affect Indonesia, which became a full member of the grouping at the beginning of this year, in addition to Vietnam, Thailand and Malaysia, given their status as BRICS partner states.
Amid the haze of tariffs and levies announced almost daily to serve President Trump’s geopolitical aims, one certainty remains: U.S. tariffs are here to stay. Once such policies are in place, the political will to remove them will be minimal to non-existent. This was the case after the imposition of President Trump’s tariffs on China during his first administration. Notably, his successor and Democrat rival, President Joe Biden, never removed them.
This time around, there will be no prospect of evading tariffs by employing measures such as the “China+1” strategy. That approach saw both Chinese-owned and international businesses with operations in China establish production in alternative low-cost jurisdictions – especially in Southeast Asia – to avoid the tariffs imposed on Beijing from 2018 to 2020 and the broader trade tensions that followed.
Tamping down on tariff circumvention
Regarding the operation of trade deals with the U.S., ASEAN’s most significant challenge will be balancing its economic ties between the U.S. and China.
The region, generally, acts as a connector between the American and the Chinese economies. This was particularly pronounced after the first Trump administration triggered deployment of the China+1 strategy. To circumvent American tariffs on Chinese exports into the U.S., significant investment flows were redirected away from China and channeled into Vietnam, Cambodia, Malaysia and Indonesia.
Southeast Asian economies have otherwise developed deep trade and investment ties with China, built mainly on regional trade agreements. As a result, China has become ASEAN’s largest and fastest expanding source of imports, comprising almost a quarter of the region’s total last year, up from only 16 percent a decade ago. Growing imports suggest that ASEAN’s economy is becoming more intertwined with China.
At the same time, the proportion of FDI by U.S. companies has risen substantially since 2019, making up as much as one-third of inward direct investments into the region in 2024.
With U.S. investors setting up specialized manufacturing hubs in industries such as electronics across the region, they have moved into areas previously dominated by Chinese and Japanese investors. This suggests that ASEAN has also played a major role in the application of the China+1 strategy by U.S. multinational corporations.
As Southeast Asia absorbed this scaled-up relocation of supply chains from both U.S. and Chinese manufacturers, President Trump dismissed the region’s exports as little more than Chinese goods concealed and routed through third countries. While Washington has yet to fully disclose its rules on what it calls “transshipment,” President Trump has warned that cross-border transactions originating in China with little or no value added, aimed at evading duties, will face countermeasures.
So far, the trade deal between the U.S. and Vietnam is the only one to include a specific penalty tariff of 40 percent on transshipped imports into the U.S., potentially added to the base rate of 20 percent, though the exact details are yet to be finalized.
Given Vietnam was the first Southeast Asian country to negotiate with the U.S., and the first of three globally to strike a deal, the introduction of a 40 percent circumvention rate may become the benchmark for the region and beyond. Its application to Vietnam was likely due to the country acting as the principal global conduit for transshipments out of China. In 2024, Vietnam imported $144 billion worth of goods from China and exported $136 billion worth of goods to the U.S.
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In light of this virtual matching of trade flows, Vietnam also has one of the world’s largest trade surpluses with the U.S., worth more than $120 billion last year. It has often been singled out as a hub for the rerouting of Chinese goods to the U.S., a phenomenon which prompted President Trump’s trade advisor, Peter Navarro, to refer to Vietnam as “essentially a colony of Communist China.”
Compared to the 2018-2020 trade war, which primarily targeted China while allowing Southeast Asia to benefit from redirected investment, the 2025 U.S. tariff regime may deliver broader and more structural damage. The transshipment requirements likely to be incorporated into each U.S. trade deal leaves little room for the export substitution strategies that worked previously. Without urgent efforts to diversify markets, accelerate regional integration and upgrade industrial capabilities, Southeast Asia faces the prospect of economic fragmentation.
The coming years may force ASEAN to confront an uncomfortable truth: The export-led growth model that served it so well in an era of globalization may become untenable in a coming age of economic nationalism.
Scenarios
Somewhat more likely: Partial diversification and growing divergence in ASEAN
Under this trajectory, Southeast Asia undergoes uneven adaptation, where more advanced economies successfully pivot, while less industrialized nations stagnate.
Having already absorbed manufacturing relocations from China during the first Trump administration’s tariffs, Vietnam possesses the infrastructure and workforce to retain critical electronics production despite higher U.S. duties. Major electronics producers such as South Korea may accept reduced margins rather than abandon billions in existing investments, though future expansion could shift to Mexico or the parts of Latin America with whom the U.S. maintains lower tariffs and strong political relations.
The textile sector appears especially vulnerable, with a 15-20 percent contraction likely. Buyers will shift to producers in South and Central American countries that enjoy friendly U.S. relations and face only the 10 percent baseline tariff.
Over time, Vietnam will compensate by deepening trade with the European Union through its EU-Vietnam Free Trade Agreement and boosting domestic tech startups – a transition aided by its young, digitally savvy population.
Thailand and Malaysia will follow similar but slower paths. Thailand’s automotive industry leverages Japanese partnerships to lobby for exemptions on key components, preserving its export hub status but sacrificing growth potential.
In other sectors facing a 19 percent U.S. tariff, painful concessions have been made, such as lifting all restrictions on American agricultural imports to avoid higher reciprocal tariffs.
Malaysia’s semiconductor packaging industry will likely survive due to technical lock-in effects – the high cost of requalifying chips elsewhere – but will lose new investments by Taiwan, Japan and South Korea to U.S. high-tech sunbelt states.
Both Thailand and Malaysia will increasingly serve Chinese rather than Western markets, particularly in electric vehicle (EV) supply chains, albeit with lower profitability due to China’s excess production capacity.
For Indonesia and the Philippines, adaptation will prove more fraught. Indonesia’s nickel-based EV battery ambitions collide with U.S. tariffs on Chinese vehicles, forcing awkward compromises – perhaps accepting U.S. mining investors to secure partial exemptions. The Philippines’ semiconductor exports will decline steadily as firms prioritize U.S.-based locations, though its English-speaking skilled workforce will maintain appeal for service exports like healthcare and business-process outsourcing.
Neither nation will manage to meaningfully boost domestic consumption fast enough to offset trade losses, resulting in GDP growth slipping below 4 percent annually.
This scenario could be dire for Cambodia, Laos and Myanmar. Lacking Vietnam’s scale or Thailand’s industrial base, these nations will see garment factories shutter en masse as brands relocate to lower cost African or Latin American jurisdictions benefiting from lower baseline tariffs.
Additionally, Chinese Belt and Road Initiative (BRI) investments will dry up amid China’s own economic slowdown, leaving half-built infrastructure and pressing debt servicing obligations. By 2030, these economies could revert to pre-industrialization reliance on raw material exports and subsistence agriculture, with Cambodia’s GDP per capita stagnating at current levels.
This probable outcome would exacerbate ASEAN’s internal inequalities. The region would fragment into three tiers: Vietnam and Thailand as resilient manufacturing adapters; Indonesia and Malaysia as partial pivoters with stagnant wages; and Cambodia, Laos and Myanmar as developmental casualties.
In this scenario, intra-ASEAN trade will rise marginally but fall short of offsetting lost U.S. and EU demand. With Europe already showing anemic appetite for global imports, ambitions of EU-style economic integration are likely to stall.
Somewhat less likely: Radical rebalancing and regional self-sufficiency
A consequential alternative sees Southeast Asia successfully decoupling from relatively high U.S. dependence through forced industrialization and consumption-driven growth. This scenario requires unprecedented policy coordination – a sharp break from ASEAN’s consensus-driven inertia.
Vietnam emerges as the engine of regionalization, using its manufacturing base to supply ASEAN neighbors with electronics and machinery rather than exporting globally. Indonesia mandates that all nickel be processed domestically into batteries, creating a closed-loop EV ecosystem with Malaysia and Thailand.
The ASEAN secretariat, typically toothless, gains new powers to coordinate tariff reciprocity against U.S. measures and standardizes product regulations, mimicking the EU’s single-market playbook.
Domestic consumption surges as governments implement wealth redistribution policies: Thailand’s digital wallet scheme boosts spending power, while Indonesia’s commodity windfall funds universal healthcare.
This transformation would rely on three enablers. First, China would need to bankroll the transition through BRI 2.0, offering technology transfers without the debt traps of earlier projects. Second, Japan and South Korea would increasingly integrate with their Southeast Asian supply chains. Third, ASEAN elites would accept short-term GDP contractions for long-term autonomy – a sacrifice rarely made by developing economies. Even under ideal conditions, the region would still trail Western technological innovation, perpetuating dependency in advanced sectors like artificial intelligence and aerospace.
Most likely: The realistic middle path
The actual outcome will likely blend elements of both aforementioned scenarios. Vietnam and Thailand will diversify exports while tolerating slower growth. Indonesia and the Philippines will muddle through with partial industrialization ramping up growth through higher domestic consumption and services economies. The poorest ASEAN members will require bailouts from wealthier neighbors to avoid collapse, perhaps through expanded Chiang Mai Initiative currency swaps.
Southeast Asia’s era of unfettered export-led growth is ending. The 2025 tariffs are unlikely to decimate the region’s economies but will force painful choices about integration, inequality and geopolitical alignment that decades of globalization had deferred.
The ultimate impact may not be visible in export statistics but in the lives of workers: Entire generations could lose the chance to move out of poverty through the factory-led development model that once powered the region’s growth.
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