The economic implications of Donald Trump’s presidency for Southeast Asia
With the inauguration of President Donald Trump for a second term, the new administration’s approach to the global trade system, to the US-Chita rivalry, and in the broader conduct of trade and economic policy will have powerful ripple effects throughout Southeast Asia, writes Stephen Olson.
21 January 2025

After one of the most unusual campaign cycles in US history, former President Donald Trump returned to the White House on 20 January after a surprisingly decisive electoral victory. Throughout the campaign and in the aftermath of the election, President Trump has clearly articulated his intended trade policy.
Should Trump follow through with even just a portion of what he has promised, his second term in office will constitute the most protectionist US presidency in almost 100 years. According to Trump, the most “beautiful” word in the dictionary is “tariff”, and he intends to apply across-the-board global tariffs of 10-20% on all countries. China will face at least 60% tariffs. He has vowed to “steal” jobs from other countries and to potentially weaken the US dollar so as to make imports more expensive and US exports cheaper. Countries that attempt to diversify away from the US dollar in trade transactions will face additional tariffs or other punitive measures.
The new administration’s approach to the global trade system, to the US-China rivalry, and in the broader conduct of trade and economic policy will have powerful ripple effects throughout Southeast Asia. Policy makers and business leaders in the region should prepare for certain scenarios to unfold.
Further decline in the rules-based global trade system
In practical and functional terms, the rules-based global trade system, established in the aftermath of the Second World War through the creation of the General Agreement on Tariffs and Trade (GATT) and its successor organisation, the World Trade Organization (WTO), will be further atrophied – perhaps to the point of obsolescence.
Instead of steadily moving towards a reduction in trade barriers and a more robust set of global trade rules – as had happened over the last eight decades – we will be moving towards a world in which tariff and non-tariff barriers are on the rise, and trade rules are more frequently and more blatantly disregarded, almost to the point of irrelevance.
The efficacy of the WTO, intended to act as a global trade referee, has already been badly battered in recent years as a result of institutional dysfunction and divisive viewpoints among members.
The dispute settlement system, considered to be a crown jewel of the WTO system, has been rendered largely inoperative as a result of the US blocking the reappointment of Appellate Body judges, a process begun under the Obama administration and continued by both the Trump and Biden administrations. The US justification is that the judges have been guilty of judicial overreach in creating their own laws to fill in gaps in existing WTO laws. At least some WTO members beg to differ and view it as a case of simple obstructionism on the part of the US. In either case, the net result is that the ability of the WTO to enforce its rules has been badly compromised.
The most direct solution – update the trade rule book so that the judges would not need to fill in the gaps – is, in practical terms, unavailable. All major updates to the rule book require consensus agreement across the entire WTO membership, and given the complexity of the issues and the wide divergence in viewpoints among members, a comprehensive renegotiation of trade rules is not even being considered. While the GATT, the WTO predecessor organisation, successfully concluded eight rounds of multilateral trade negotiations, it is questionable whether a single round will ever be concluded under the WTO.
The WTO will nonetheless continue to make important contributions in areas like trade facilitation, capacity building, and transparency-enhancing trade policy reviews. It is however unlikely that it will ever live up to its original defining vision of being an effective global trade referee capable of enforcing trade rules and providing the primary platform for negotiating global trade liberalisation and updated trade rules. Long before the election of Trump, questions about the WTO’s relevance were already being openly broached, not just by critics but also by the organisation’s own Director General.
Given the WTO’s already badly weakened state, a further assault on trade rules by the Trump administration would render the organisation effectively moribund. The orderly global trade system, propelled by a shared commitment to pursue trade liberalisation and eschew protectionism, would begin to disintegrate.
Consider the likely sequence of events if Trump moves forward with the idea of applying the massive tariff which he has floated. Given the economic harm they would inflict and the egregious violation of trade rules they constitute, US trade partners would have no choice but to retaliate; the WTO would meanwhile be incapable of delivering meaningful remediation. This would trigger a series of countervailing strikes by Trump, who would not tolerate any appearance of “weakness” on the part of the White House. At that point, the most significant global trade war since the 1930s would be underway and the rules-based trade system would be left in tatters.
What this means for Southeast Asia
The implications for Southeast Asia would be dire. For most countries in the region, access to a stable rules-based global trade system characterised by steadily decreasing trade barriers, has historically been the primary driver of economic development and rising standards of living. From the mid-1960s through the first decade of the 21st century, per capita GDP at least tripled in most of Southeast Asia, driven by access to trade and participation in global supply chains.
From a trade governance perspective, the rules-based system allowed countries in the region to access effective remediation against economically damaging unfair trade practices put in place by much larger countries, as was the case when Thailand successfully challenged US tariffs on shrimps in 2006.
If Trump moves forward with his promised trade policies, we will start to tilt back in the direction of the pre-1948 system, which was characterised by a law-of-the-jungle mentality that “might makes right” and that the “big fish eat the little fish”. While this process has already begun, it will intensify under Trump. Trade rules will be even more flagrantly violated, and trade restrictions more freely applied.
For a region comprised primarily of trade-dependent “little fish”, this evolution will be ominous. Higher tariff and non-tariff barriers will dampen export opportunities and the Trump administration will have no inclination to moderate any damaging trade policies deemed to be “unfair” or a violation of WTO trade rules.
The art of the (mercantilist) deal
Trump considers himself to be the consummate negotiator, who thinks that everything is about the “art of the deal”. It is entirely possible that he intends to use prohibitively high tariffs as leverage to negotiate a series of mercantilist trade agreements. We know that Trump views trade as a zero-sum game in which one country “wins” and the other country “loses”. The scorecard he uses to judge who is winning or losing is the trade balance; a surplus indicates you are winning; a deficit indicates you are losing.
Expect Trump to pursue mercantilist trade agreements with key partners patterned after the Phase One agreement negotiated with China during his first term. This agreement attempted to “fix” the US trade deficit with China by requiring, among other things, that China purchase specified levels of various US products. It failed to accomplish those goals, but Trump attributes the failure to bungling by the Biden administration and to the pandemic.
Partners appear to be already preparing for this strategy. The EU established what is unofficially known as a “Trump task force” before the election so as to not be caught flat-footed in the event of a Trump victory. One of the specific policies under consideration is to counter-retaliate quickly and then approach the Trump administration early in its term to propose some type of a “deal” to forestall or at least reduce the tariffs aimed at the EU.
Mercantilist trade agreements are almost always a bad idea. Whenever trade outcomes are dictated by government fiat rather than market forces, a series of economic inefficiencies are honeycombed throughout the involved economies. A host of unanticipated and usually negative ripple effects are inevitably spawned, and self-serving interest groups are further empowered within political systems to seek greater advantage, usually at the expense of others.
Despite the significant drawbacks of such agreements, however, if the alternative is the most damaging global trade war in almost 100 years, at least some countries would be willing to engage. This seems to be the calculation the EU is making. High trade surplus countries in Southeast Asia such as Vietnam, Malaysia, Thailand, and Indonesia will have to assess Trump’s receptivity, and to ascertain whether such a strategy would be available or prudent in their cases.
Intensifying US-China tensions
Tensions between the US and China will almost certainly intensify, at least initially, as Trump flexes his muscles to appear “tough” on China. The proposed 60% tariffs could only be the beginning and might even go higher. Additional trade and investment restrictions, especially on technology, are all but certain, if for no other reason than to demonstrate that he is “tougher” than Biden-Harris.
China will be prepared to retaliate forcefully. China feels that it has been restrained thus far, but if Trump does what he has threatened, the gloves will come off.
In at least some respects, Southeast Asia will suffer collateral damage from any intensification in US-China tensions. While largely positive relocations of Chinese production facilities into Vietnam, Malaysia, Indonesia, and other countries in the region are likely to continue as a means of circumventing rising US tariffs, the benefits for the region might ultimately prove to be less than the pain caused.
The motivation for the relocation of China production facilities, both China-owned as well as China-based foreign firms, is to use Southeast Asian countries as platforms for export to the US. This will only further widen the trade surplus many countries in the region enjoy with the US. Trump views trade as a zero-sum game, and large and growing trade surpluses with the US will be seen as a red flag.
High trade surplus countries such as Vietnam will come under close scrutiny and could face additional punitive tariffs. Countries that are suspected of being used for transshipment of Chinese products to the US will also face scrutiny and potential tariffs.
Countries in the region that rely on the US for military support could also face trade actions as leverage to shoulder more of their own defence. The Philippines, for example, is a treaty ally of the US, meaning the US is obligated to come to its defence; however, the Philippine defence budget has hovered around 1% of GDP, far below the 3% that Trump has pushed NATO allies to attain. Longstanding US defence arrangements allow partners to “take advantage” of the US in Trump’s view, and he has talked openly about the need for US allies to “pay”. In Trump’s calculation, tariffs (which he mistakenly views as being paid by the exporter) would be an effective way to extract “payment”.
A false dawn in US-China tensions
Regional leaders and executives should prepare for the possibility of a “false dawn” in US-China rivalry. After an initial period of intensifying tensions, almost certainly stretching through the first 12-18 months of the Trump administration, some type of a follow-up negotiation to the Phase One agreement is plausible. Should a new agreement be reached, it would spawn a pronounced uptick in relations and Trump would undoubtedly proclaim that he had “fixed” the US-China relationship. Remain sceptical. Any such agreement would provide only a short-lived false dawn. If past is prologue, this agreement would focus on superficial issues such as specified purchases of US products, but leave underlying systemic challenges unaddressed. It would only be a matter of time before these underlying frictions forcefully reassert themselves.
The core challenge facing the US and China is: how to reconcile two fundamentally different economic systems under a single set of global trade rules – rules that were predicated on the mistaken assumption that all major trading nations would be “just like the US”. China’s centrally managed economy and model of state-directed capitalism pose governance challenges not anticipated by a system built for free market economies in which there is a clear dividing line between business and government.
It is entirely unclear how or if this fundamental challenge can be resolved, but it is certain it will not be resolved by a “quick deal” cut by Trump to bind China to bring down the trade surplus through enforced purchases of US products.
Supply chain complications for Southeast Asia
Against the backdrop of intensifying US-China tensions under Trump, technological advancements are heightening the relevance of economic security considerations, in particular when it comes to products containing dual-use technologies. This holds important implications for Southeast Asian countries deeply embedded into regional and global supply chains.
An increasing portion of what was previously considered to be “ordinary” products now contain dual-use technologies. Automobiles are no longer a simple means of transportation from Point A to Point B, they are essentially sophisticated computers with four wheels attached. Refrigerators are no longer a simple device to keep orange juice cold, they contain sophisticated software to monitor households – and even let us know when we need to buy more orange juice!
The prevalence of these highly sophisticated technologies in an increasing number of smart products means a further proliferation in trade regulations, licensing requirements, restrictions and sometimes even barriers. The Biden administration’s move to ban Chinese software in US cars is indicative of the direction we are heading, and Trump is unlikely to be more lax.
This means headaches, complications, and perhaps even diminished economic opportunities for Southeast Asia countries that participate in supply chains ranging from automotive to consumer electronics. Given their prominence in regional supply chains, Vietnam, Malaysia, Thailand, and Indonesia could be especially hard hit.
Sideswiped by USMCA
The revised North American Free Trade Agreement (NAFTA) now known as the US-Mexico-Canada Agreement (USMCA) is a world away from Southeast Asia, but it could hold important implications during the Trump administration, especially as tensions with China mount.
The USMCA’s six-year review is scheduled to take place in 2026. This provides members with an opportunity to review the operation of the agreement, negotiate changes, and then determine whether to extend the agreement for an additional 16 years. Trump has made clear his intention to drive a hard renegotiation bargain especially when it comes to the agreement’s rules-of-origin.
With tariffs on China rising, there has been growing concern that China is circumventing tariffs through Mexico. This can take place in one of two ways. Inputs and components are shipped from China to Mexico and then incorporated into products which enter the US duty free from Mexico under the terms of USMCA, provided they meet existing rules of origin. This is especially true in the automotive sector.
Chinese companies are also beginning to establish production facilities in Mexico so that anything they produce is considered a Mexican product for purposes of gaining duty-free entry into the US. Neither scenario will be acceptable to Trump and his negotiators will seek remedies during the renegotiation.
These concerns helped motivate the initial renegotiation of NAFTA under Trump’s first term, and a push to tighten things further will be front and centre during the 2026 review.
Although any tightening of the rules of origin or other modifications to the agreement would be primarily targeted at China, Southeast Asia producers, especially in automotive products, will be sideswiped, finding their competitiveness in the North American market circumscribed. Thailand, Indonesia, and Vietnam are key cogs in China’s automotive supply chain and have benefited along with China from the over 62% increase in Chinese automotive exports to Mexico in 2023.
Withdrawal of engagement in Southeast Asia
Trump will pull the US out of the Biden administration’s signature trade initiative, the Indo-Pacific Economic Framework (IPEF) agreement, at his earliest convenience. It would be politically untenable for him to embrace the signature initiative of his defeated rivals, and his articulated trade policies fly in precisely the opposite direction. Ironically, this is the same pattern that unfolded at the start of his first administration. He inherited the Obama administration’s signature trade initiative for the region, the Trans-Pacific Partnership (TPP), and pulled the US out on his first day in office. Expect a repeat performance with the IPEF.
US influence, credibility, and influence in the region will be badly damaged, while China’s role and influence will be further cemented. For most countries in Southeast Asia, their best interests are served by balancing between the US and China and avoiding scenarios in which the influence of one side or the other grows overly preponderant. A further US abdication of its traditional role in the region under Trump will make that balance considerably more difficult to strike.
Keep in mind
It is worth noting that some of Trump’s anticipated policies, such as the elimination of Biden’s green subsidies, will reduce trade distortions. This could create pockets of blue sky for some trade partners, and that needs to be factored into assessments. But overall, Trump’s policies seem likely to yield a more distorted playing field and darker skies for trade.
One wildcard in the mix is whether whatever tariffs end up being implemented might fuel inflationary pressures in the US, and if so, whether that would cause any moderation on Trump’s part. Keep in mind, however, that Trump’s strongly held (and economically dubious) assumption is that US consumers do not pay the cost of tariffs, so those concerns would be unlikely to sway Trump, at least initially.
The first Trump presidential term ramped up global trade and geopolitical volatility to a degree rarely seen in the post-war era. The second Trump presidency is likely be more tumultuous. During the first two to three years of his first term, Trump was more willing to appoint and defer to experienced mainstream Republican officials. These were the so-called “adults in the room”. They acted as guardrails to mitigate against some of Trump’s most extreme impulses. By the end of his first term, Trump concluded that these more experienced mainstream officials were unnecessary encumbrances who were all too often frustrating the achievement of Trump’s objectives.
From day one of the second Trump term, his administration will be staffed by officials – from the cabinet down into the federal bureaucracy – selected largely based on their fealty to execute the Trump vision. There is little ambiguity on this point. It is spelled out explicitly in the Project 2025 plan. This 900-plus page document was produced by the Heritage Foundation with the participation of over 140 previous Trump administration officials and overlaps with many priorities Trump has already signalled. It is expected to be a foundational document for Trump 2.0. A number of the primary authors of Project 2025 have already been appointed to key executive branch positions, including Russell Vought as Director of the Office of Management and Budget.
While policy makers and business leaders in Southeast Asia weathered the first Trump term and have that experience as a point of reference to draw upon, they should anticipate greater turbulence in Trump’s second term. The orderly trade system which has been essential to growth and development in the region will be shaken to its foundation, compromising the traditional developmental path that countries in the region have successfully pursued for decades. US-China tensions will escalate, making it more difficult to effectively balance between the two big powers – a stance which serves the best national interests of most in Southeast Asia. Participation in regional and global supply chains, a bedrock of growth for many in the region, will be significantly complicated in the best case, and potentially curtailed in the worst case.
Challenging times can also create opportunity. As Trump’s “America First” approach results in a receded US engagement both regionally and globally, vacuums and policy space will open. At least some of the leadership vacuum will be filled by China, but Southeast Asian countries that are so-inclined and have the wherewithal to do so, will find more opportunities to project national interests, particularly in the area of trade and trade governance. This could take place in the context of regional trade groupings and negotiations, or in Geneva at the WTO as Trump’s presidency further heightens the sense of urgency surrounding reforms at the beleaguered institution.
The first decision point for a number of countries in the region will come with Trump’s virtually certain withdrawal from IPEF. Will Southeast Asian member countries press forward with the agreement, perhaps modifying it to make it more reflective of regional interests (as was done with the CPTPP), or will the framework be allowed to collapse under its own weight once Trump lowers the boom on US participation?
This is an adapted version of ISEAS Perspective 2025/2 published on 9 January 2025. The paper and its references can be accessed at this link.
Stephen Olson is a Visiting Senior Fellow at ISEAS - Yusof Ishak Institute and a Non-Resident Fellow and Visiting Lecturer at the Yeutter Institute of International Trade.
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