How US Tariffs Will Affect Asian Economy: 2025 Outlook

Sefton J Britto, Correspondent at Consultants Review

Trump, tariffs, and trade policy uncertainty are staging a comeback. While China remains at the heart of Donald Trump’s America First Trade Policy, other parts of Asia may soon find themselves in the crosshairs as well. The US Trade Representative's office is examining China's efforts to bypass tariffs through third countries and will likely be focusing on Southeast Asia as well. Nations that enjoy significant and constant trade surpluses from the US such as China, Vietnam, Japan, South Korea, Thailand, and India may soon be facing this level of scrutiny as well. The order now mandates the executive review of most free trade agreements including that of Australia, South Korea, and Singapore, besides targeting the currencies that manipulate or subsidize their international activity, thus likely putting more Asian economies into the mic.

Evaluating Total Exposure of Asia to the US

A somewhat straightforward measure of Asia's direct exposure to the US can be expressed as the share of exports to the US. An open economy such as Vietnam, Thailand, or Malaysia seems especially vulnerable to higher US tariffs. Above all, high-risk sectors include electronics, machinery, motor vehicles, and other manufactured goods.

In Vietnam one quarter of the GDP has fallen within the umbrella of its US export, which primarily contains staplings in textiles and electronics. In electronics, above 60% of Malaysia's exports go to the US. The current index of exposure in Thailand is mixed and includes electronics as well as products from rubber and machinery. Other Asian economies have a more diverse trade with the US, for instance, Singapore's exports to the US, where chemicals and pharmaceuticals accounted for about 14%, while India mainly exported precious stones, textiles, and pharmaceuticals. Motor vehicle exports of South Korea and Japan to the US are more significant than those of electronics.

With all these, there is a continued emphasis on increasing commodities such as energy, agricultural products, defense equipment, aircraft, and medical supplies imported from the US by the region as well as boosting its direct investments in US manufacturing.

Assessing Asia’s True Exposure to US Tariffs: Beyond Direct Exports

Total Asia exports to the US may significantly underestimate the actual exposure of the region against the country because many Asian economies are woven deep within global supply chains that carry both backward and forward integration. For example, it imports into Vietnam intermediate goods, assembles them, and then re-exports the finished products to the US, which in economics is called backward integration. It exports intermediate goods to Mexico, which later re-exports them into the US - thus representing forward integration.

To accurately gauge Asia's ultimate exposure to the US, it's necessary to estimate the value added by each country in its exports to the US, both directly and indirectly through third countries. Value addition is important not only because the country cannot manage the tariff-on-tariff situation in the US, but also can still face indirect possibilities for tariffs that may affect other countries due to the interconnectedness of backward and forward value added across global value chains.

China carries the most weight, with 1.8% of GDP accounted for by the value it adds to exports to the US. Other Asian nations at risk include Vietnam, Malaysia, and South Korea, all potential negative effects focused on electronics.

Misconception of East Asia’s Vulnerability to US-China Tariffs

East Asian countries would be principally affected by stricter tariffs imposed on trade with China. This does not apply on most of them, however apart from China's direct value-added exports, Australia and Vietnam are more exposed to China rather than Mexico or Canada. For Malaysia, Thailand, Philippines, Japan, India, South Korea and Singapore, the effects would be greater with higher US tariffs on imports from Mexico and Canada than with tariffs on China.

Estimates suggest that higher tariffs on Mexico and Canada will broadly affect Malaysia, Thailand, South Korea, and Singapore, especially in electronics parts. Also, given that Mexico functions as an auto assembly hub, tariff hikes on Mexico will hurt South Korea's exports of motor vehicles as well.

However, Vietnam clearly stands out as the most susceptible country to such exposure to the US tariffs at 8.9% of her GDP. Other countries within Asia that are equally under threat from the increased US tariffs are Thailand, Malaysia, Singapore, and South Korea.

The expected greatest impacts of the increased US tariffs will, however, fall on electronics, machinery, automobiles, and then textiles. These industries are deeply integrated across more than one country into the global chain values.