These export-reliant nations in Southeast Asia are expecting a lot of trouble because the US is intensifying its efforts to prevent illegal trading activities such as transshipment, that is to say, the rerouting of goods through third countries to avoid tariffs. US authorities are particularly targeting Chinese products that are simply getting a new label or are slightly processed locally.
Such products will be subject to a very high-40% tariff under the new regime if it is proven that they were transshipped. This is almost twice as high as the current tariffs imposed on many countries of the region. Due to the unclear character of transshipment, the governments and businesses are still trying to understand the U.S. Customs regulations while they are simultaneously explaining that even the most straightforward assembling of Chinese components might lead to the application of higher tariffs.
Amid these regional concerns, there is a fear among exporters that they have become tangled up in a cross-border issue. For instance, electronic products, machines, clothing, and numerous other goods use a significant number of Chinese components even though they are put together locally. If the new rules were very strict, this could mean that a large portion of these exported goods might be subject to heavy 40% tariffs, which in turn would make it difficult to compete by price and gain profit.
On the other hand, performance differs from place to place. The United States has yet to set out detailed instructions, so businesses currently have a short period of relaxation. Nevertheless, the advice of trade consultants, which, among other things, suggests producing at least 40% of the goods domestically, can be seen as a reflection of the ambiguous nature of the terrain. Some countries have already taken steps that are not reactive but proactive. For example, Malaysia has made the process of origin document issuance more centralized in order to ensure better compliance, while Thailand has done the same, but in heavily-exported categories by increasing the number of inspections.
The stakes for the economy are high. For example, in Indonesia, according to analysts, if the tariffs were to rise, the volume of exports to the U.S. would drop by billions of dollars, the decrease most likely being in the labor-intensive sectors such as textiles and leather products. The case of Vietnam is even more serious as it is not only heavily dependent on foreign-invested manufacturing but also on Chinese inputs. Therefore, without the properly defined origin rules, a significant share of the country’s exports may be reclassified as transshipped ones.
Moreover, this enforcement would scare away the “China Plus One” strategy, meaning the model of production that is based on the countries that are from or have the most reduced trade barrier rates with China, and which is becoming ever more popular with Southeast Asia in recent years. The region’s competitive edge that comes from low-cost assembly and integrated supply chains might be taken away by tariff uncertainty and higher compliance burdens.
In the end, businesses throughout Southeast Asia are gearing up for a time when supply chains will have to be super transparent, full of documents, and operate locally, which is a stretch of time that could change the regional trade flows, investment decisions, and the trajectories of the long-term economy.
