China holds the key in Asia

CHINA’S confrontational response to Donald Trump’s tariffs, announced on April 2, contradicts earlier expectations that the country might respond in a measured manner to preserve room for negotiation. The current tit-for-tat strategy is reminiscent of the 2018–2019 trade war.

While China responded moderately to earlier US tariffs in February and March, the Trump administration did little to acknowledge this.

It has been demonstrated once again by China that President Trump’s assertion – that the United States can easily resolve its trade imbalance with China by imposing aggressive tariffs – was misguided.

With exports to the United States accounting for only around 2% of its gross domestic product (GDP), China’s low dependence on the United States has enabled it to take a more assertive and confrontational stance in response to unilateral trade measures.

The upward spiral of tariff hikes appears to have reached its peak. China has indicated that it will not respond to any further increases in US tariffs following what it did in retaliation – raising tariffs to a maximum of 125% on US imports as it would be economically unfeasible.

On April 9, the Trump administration announced a 90-day tariff pause for most countries except China. Media reports suggest the United States is now shifting its trade strategy to “box in” China by incentivising other nations to diversify away from China’s supply chains in exchange for tariff exemptions.

If the initial rollout of the reciprocal tariff on April 2 framed the issue as the United States versus the rest of the world, the rapid escalation of bilateral tariffs between the United States and China from April 4-8 clearly re-framed the confrontation as a US-China conflict.

The 90-day pause now appears to mark a pivot in strategy – from bilateral confrontation towards potentially turning it into “China versus the rest of the world”.

However, we believe Trump’s hope of isolating China in Asia is unlikely to materialise, especially given the deep and evolving integration between China and other Asian economies, most notably the Asean region.

The trade war in 2018 ironically was a catalyst for China’s supply chain transformation and global market diversification. Since then, China’s share in global exports has increased, not decreased.

This was made possible by China’s efforts to reroute trade, expand its export base and upgrade its manufacturing ecosystem. Today, China’s global trade resilience is underpinned by technological innovation and its increasingly sophisticated industrial capabilities.

Asean has certainly benefited from multinational corporations’ relocation strategies in the wake of that trade war. Yet, rather than replacing China in the global value chain, Asean has become further embedded within it.

The region now serves as a satellite manufacturing hub, complementing China’s core production functions. For many global firms, investing in Asean has become an extension of China’s supply chain, not a substitution.

This is evidenced by the structural evolution in trade flows.

For instance, prior to 2018, China typically ran a trade deficit with Asean-6 countries (Singapore, Malaysia, Indonesia, Thailand, Vietnam and the Philippines) in machinery, mechanical appliances and electrical equipment (HS Code 16).

However, since 2019, this balance has flipped into a trade surplus, which ballooned to US$63bil in 2024. This sharp turnaround reflects the formation of a deeply integrated China-Asean core-satellite manufacturing model.

It’s a similar pattern in the vehicle and transport equipment sector. China’s trade surplus with Asean-6 in this category reached a record high of US$28.7bil in 2024, further underscoring the industrial alignment between both sides.

Given this backdrop, efforts to isolate China using tariff instruments may fall flat in Asia. China and Asean share strong mutual economic incentives to defend the existing global trade architecture and uphold open, rules-based supply chains.

Trump’s attempt to force a supply chain decoupling between China and Asia through reciprocal tariffs is likely to encounter resistance in Asean, where integration with China has deepened – not diminished – in recent years.

Rather than isolating China, these measures may only reinforce China’s regional leadership in manufacturing and supply chain networks.