In the two US trade deals with Southeast Asia so far, there has been an obvious, unacknowledged presence of a third party: China.
US President Donald Trump announced a 20 percent tariff on Vietnam’s own exports, but 40 percent on any “transshipping” of production elsewhere. In the more recent agreement with Jakarta, he tightened the screws further: If there is any rerouting of output from a higher-tariff country, then the evaded duty would be added to the 19 percent rate for Indonesia.
The thinking is this: Chinese firms would try to avoid US tariffs of 55 percent by sending their goods to the US from an affiliated factory in Asia with maybe a little bit of final assembly and packaging that does not add much value to the final product.
Illustration: Yusha
In advertisements on Chinese social media, some freight forwarders are offering to alter product labels, masking the place of manufacture.
So-called “origin washing” is illegal under WTO rules, and heightened US sensitivities have already led Vietnam, Thailand, Indonesia, Malaysia and Taiwan to bolster their certification regimes over the past few months. However, the extent of transshipment from the region is overstated by the White House.
When Senior Counselor to the President for Trade and Manufacturing Peter Navarro described Vietnam as “essentially a colony of communist China” during an April interview with Fox News, he probably did not make a distinction between rerouting of Chinese exports and their reallocation. The latter, in which production has shifted from the People’s Republic of China to Vietnam, is wholly legitimate. It is also the far bigger story.
“The evidence suggests that Vietnam has not served as a one-stop place allowing China to reroute its exports to the US to circumvent tariffs on a significant scale,” an IMF working paper said last month.
The manufacturing powerhouse has been “increasing its domestic value added and reducing Chinese value added in its strategic sector exports to the US,” the researchers added.
Hanoi achieved this partly by attracting more foreign direct investment from China, especially after trade relations between Beijing and Washington began to deteriorate during Trump’s first term.
When it comes to disputes about rerouting versus genuine exports, the Trump administration has shown a flair for unilateral action. In 2020, Hong Kong complained to the WTO about a new US requirement that imported goods produced in the city must be marked “Made in China.” The WTO ruled in Hong Kong’s favor by rejecting the US claim that it had acted to protect its national security. The US appealed the decision.
Expect the focus on transshipment to be sharper in the second term, with measures ostensibly meant to stop origin washing deployed to prevent outsourcing. There is precedent. The US-Mexico-Canada Agreement signed during Trump 1.0 has significant provisions to keep Chinese production out of Mexican assembly lines.
Asian supply chains run deep.
Financial Times journalist Patrick McGee said in his book Apple in China that a single company from Cupertino, California, poured hundreds of billion US dollars into the world’s factory, double the US resource transfers to post-World-War-II Europe under the Marshall Plan. Such large-scale investments automatically raise a country’s ability to add more value locally to final exports. After a sharp rise since Beijing’s WTO entry in 2001, foreign content in Chinese exports was 22 percent in 2008. By 2020, it had fallen to below 16 percent.
A similar journey awaits other nations in the region, as Chinese firms themselves set up factories wherever they can find cheap, abundant labor — and avoid prohibitive US tariffs. This relocation is very different from putting a “Made in Indonesia” label on sneakers made in China.
Trump’s advisers must be aware of this distinction. If they are still pushing for punitive tariffs on transshipment, the logical conclusion is that they want to smash Asian supply chains altogether. Trump does not want Apple Inc CEO Tim Cook to replace manufacturing in China with another non-US location such as India. The broader geopolitical goal is not just to disentangle Western multinationals from Asia, but also stymie emerging Chinese superstar firms such as BYD Co and Xiaomi Corp, which might copy the same playbook, implement their own China+1 strategies and go on to become trillion-dollar companies, challenging the dominance of US capitalism.
If that is what this quest for supremacy between two superpowers is all about, then the prognosis for Southeast Asia — which is caught in the crossfire — is far from sanguine. Any relief Vietnam or Indonesia might feel from a relatively lighter load of about 20 percent tariffs might be misplaced.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.
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