Trump’s tariffs and China’s subsidies: Southeast Asia caught between a rock and a hard place

President Trump’s sweeping “Liberation Day” tariff hikes on goods entering the US market have created heightened uncertainty, unsettling global businesses and investment decisions. Although their legality is under review by the US Supreme Court, with a decision pending until 14 October, many countries continue to sustain export growth. Chinese exports, in particular, were buoyed by market orientation and state subsidies. A key challenge for Southeast Asian economies is how to manage a surge in Chinese exports to the region.

Trade data suggests that most economies still posted export growth in the second quarter, largely due to frontloading (dispatching their exports to their destinations earlier). China’s total exports rose 4.8 per cent year-on-year and 11.9 per cent quarter-on-quarter, while the US recorded gains of 6.2 per cent year-on-year and 5.5 per cent quarter-on-quarter. Among major exporters, only Canada’s exports contracted, falling 7.2 per cent year-on-year and 9.4 per cent quarter-on-quarter. This likely reflected its heavy dependence on the US market. In Southeast Asia, Singapore, Malaysia, Thailand, and Indonesia recorded strong growth, averaging 14.4 per cent year-on-year and 6.5 per cent quarter-on-quarter.

The US import picture was less positive. Imports fell 13.5 per cent quarter-on-quarter, though they still grew 0.7 per cent year-on-year. China bore the brunt of this adjustment: its exports to the US plunged 23.9 per cent year-on-year and 13.5 per cent quarter-on-quarter as average US tariffs on Chinese imports rose to 57.6 per cent. As a result, the US share of China’s total exports dropped from 13.7 per cent in Q1 to 10.6 per cent in the second quarter of 2025. The decline affected a wide range of goods. This included machinery and mechanical appliances, electrical equipment, furniture and bedding, toys and games, plastics, apparel and footwear, vehicles, and iron and steel.

Yet, despite the mounting US trade restrictions and the sharp decline in exports to its largest market, China’s overall export performance remained remarkably resilient. Most major categories still grew in the second quarter. Much of this growth was redirected towards Southeast Asia. Exports to Southeast Asia rose sharply, lifting the region’s share in China’s total exports to 18.5 per cent in the second quarter, up from 17.1 per cent in the first quarter and 16.7 per cent a year earlier. Exports to Europe, particularly Germany and the Netherlands, also helped cushion the decline in the US market. Exports to Japan, South Korea, and India also grew quarter-on-quarter, even if these markets did not see a consistent rise in their overall share of China’s exports.

Holding Up

Table 1. Exports from China, Selected Main Export Destinations

Source: Data from Trademap, calculated by the author

This resilience reflects not only market reorientation but also sustained industrial policy support. Both central and local governments in China continue to intervene heavily in domestic industries, despite global concerns that such policies distort competition, create excess capacity, and destabilise trade. These interventions, estimated at up to 4 per cent of GDP, have supported exports and strengthened domestic value chains, though they may not always boost productivity.

Since 2 April – the day that the US announced the Liberation Day tariffs — Global Trade Alerts data suggests that Chinese authorities have introduced 118 new industrial interventions, of which 102 remain in force. Roughly 90 per cent of these measures are subsidies, and 74 per cent of these come from local governments. Many were targeted at the machinery, electrical equipment, and vehicle sectors. Together, they account for nearly half of China’s exports. In the second quarter, exports of Chinese machinery products to ASEAN surged by 25.8 per cent quarter-on-quarter, electrical equipment by 20.4 per cent, and vehicle exports by 29.8 per cent. This underlines how subsidies have reinforced China’s pivot towards Southeast Asia as an alternative export destination.

Reorient and Subsidise

Table 2. China’s Export Growth in Q2-2025, Top 10 Export Products

Source: Data from Trademap, calculated by the author

How should ASEAN countries respond to these developments? Increased imports from China may still be beneficial for local consumers and producers; this reduces the incentive for Southeast Asian governments to intervene in their export markets. However, when China’s industrial policies begin to harm their domestic industries, ASEAN governments can, in principle, turn to trade remedies such as safeguards, anti-dumping and countervailing duties to shield against surges and unfair practices. These instruments, though permitted under WTO rules, have seen limited use, partly because their short-term benefits often outweigh the costs of restricting them. Meanwhile, rising Chinese exports also risk crowding out ASEAN’s own export opportunities to the US, particularly as Washington tightens scrutiny over transhipment and rules of origin.

"For ASEAN, the challenge is twofold: to manage immediate shocks from shifting trade flows, and to build stronger collective rules and institutions to secure fairer, more sustainable trade in the long term."

Another option is to leverage regional frameworks like the Regional Comprehensive Economic Partnership (RCEP) or the ASEAN–China Free Trade Agreement to negotiate clearer rules governing industrial policies. This includes subsidies, especially as multiple large economies are now openly adopting such strategies. Such mechanisms could, in theory, help discipline industrial support in sectors where China holds a structural advantage. However, few free trade agreements currently contain provisions on subsidies. One notable exception is the EU–Japan Economic Partnership Agreement, which includes a dedicated chapter on state subsidies. Incorporating similar provisions into ASEAN-led agreements would require member states to place collective discipline above narrow national interests. This is challenging, given that cheap Chinese imports have uneven effects: benefiting some economies while undermining competitiveness and market access for others. Still, stronger coordination on how ASEAN responds to rising industrial policies will be crucial for building longer-term regional resilience.

Trump’s return has reintroduced turbulence into global trade, but China’s policy activism and ASEAN’s fragmented response are equally shaping current dynamics. For ASEAN, the challenge is twofold: to manage immediate shocks from shifting trade flows, and to build stronger collective rules and institutions to secure fairer, more sustainable trade in the long term. The question now is whether the region can summon the political will to act together or whether it will remain vulnerable to the decisions of larger powers.

Deasy Pane is a Wang Gungwu Visiting Fellow at ISEAS - Yusof Ishak Institute, an Economist at Indonesia's National Development Planning Agency (BAPPENAS), and a Senior Fellow at the Center for Indonesian Policy Studies (CIPS).

Copyright: Fulcrum, 2025.