This article first appeared in Forum, The Edge Malaysia Weekly on May 19, 2025 - May 25, 2025

Financial markets have recovered much of the ground lost after US President Donald Trump launched his trade war against the rest of the world. The agreement of May 12 between China and the US to bring down tariffs and pursue further negotiations seems to have convinced investors that the world can avoid the painful consequences of what will still be a highly protectionist global economy.

This view is simply far too optimistic. We have to look beyond just the trade war and consider the entirety of the changes being wrought in the US and elsewhere if we are to get a good sense of where the world economy is heading. We would argue that when the dust settles, the world will still be in a difficult place — marked by much worse protectionism than before, as well as by geopolitical and financial stresses.

But a more troubled world need not mean that individual countries in our region will be equally hurt. Three factors will determine which countries might perform better. The first will be the ability to negotiate better trade outcomes with big players such as the US and China. The next factor will be how much policy space a country has to contain the near-term shocks that are likely. A final factor will be the capacity to sniff out and exploit opportunities that will still pop up even in a difficult global environment.

Taking these factors into account, we believe that some countries in this region can defy the odds and deliver a healthy economic outlook.

Trump is still the firm believer in America-first protectionism that he has been for decades. That will not change. In his mind, he needs higher tariffs and restrictions on trade to achieve his key goals — promote domestic manufacturing, raise government revenues and reduce the trade deficit. In fact, his recent trade agreement with the UK gives us an insight into what to expect in future agreements.

•     There was no give on the baseline 10% tariff rate.

•     Many details were not resolved, affecting trade in agriculture as well as in pharmaceuticals, steel and aluminium. Given the ongoing US investigations into these sectors, there is a high likelihood of high sector-specific tariff rates in these areas as well as in semiconductors.

•     The deal appears to leave the UK in violation of one of the foundational principles of the World Trade Organization (WTO) — the most-favoured-nation rule whereby a trade concession granted to one partner must be extended to all other trading partners unless that concession is part of a formal free trade agreement.

If this is the case, then even after deals are done with China, the European Union and others, the average tariff rate in the US will still be considerably higher than the 2.5% level it was at when Trump took office. Our guess is that it will settle at around 15% to 18%. That will be high enough to prompt other trading partners to impose retaliatory tariffs. The US’ actions could also encourage other countries to follow its example in casting aside WTO rules.

Moreover, China is likely to be hit harder with protectionism than its competitors. This is because China is also engaged in a contest for global power and influence with the US and its allies — and therefore will be subject to restrictions motivated by military and security considerations that China’s competitors will not have to deal with. In addition, China’s surging exports to Europe and to emerging economies are already arousing a backlash leading to tariffs, countervailing duties and other restrictions. Data for China’s trade in April showed that exports to Southeast Asia and other emerging regions are continuing to spike up — it is almost certain that this trend will provoke even more trade measures against China.

Apart from trade, we also need to take into account other threats to the global economy: Geopolitical tensions continue to rise while question marks linger over the long-term direction of the US dollar as the world’s reserve currency, which could lead to volatility in bond and currency markets.

Taken together, all this makes for a challenging global environment.

Three factors are set to shape a country’s ability to win trade deals with the US, which preserve their export capacity.

•     Diplomatic skill and trade negotiation capacity are clearly important. Vietnam, Singapore and Malaysia, for example, have shown themselves adept at securing high-level talks with US officials fairly quickly.

•     Strategic value to the US: A country that offers the US military bases and other forms of security collaboration will be better positioned to win a good trade deal. The Philippines and Singapore do well on this score. Thailand is a treaty ally of the US in name but their relationship has suffered of late. Thailand’s expulsion of Uighur refugees to China has reportedly angered US Secretary of State Marco Rubio, who has been passionate about Uighur affairs. A country that commands a pivotal geographic position commanding critical sea lanes of communication (for example, Indonesia, Malaysia and Singapore) will also have some bargaining power. A country like Vietnam, which has a powerful military that has stood up to China in the past, could be seen as having strategic value as well.

•     How severe are US trade grievances against a country: The Trump administration is greatly concerned with the bilateral trade deficit. Except for Singapore, other Southeast Asian economies have large and growing trade surpluses with the US. But the level of tariffs and non-tariff barriers a country imposes on the US is also a point of concern as is the fear that Chinese goods are using that country as a back door into the US market. Vietnam, Thailand and Malaysia could have difficulties with the US on this score. A final point of contention with the US is the allegation of “currency manipulation”. The US Treasury has regularly reported on which countries it feels are managing their exchange rates in order to gain an unfair advantage over the US. But this list of countries has changed over time. Countries with persistent and large external surpluses as well as a large hoard of foreign exchange reserves are often slammed for currency manipulation even though the concept of “manipulation” is a difficult one to prove. For example, Singapore conducts its monetary policy by uniquely using the speed of appreciation of its exchange rate as the tool of policy. The intention is to provide a monetary anchor to stabilise the economy and contain inflationary pressures, not as a means of gaining an export edge, which is anyway not really pertinent when talking about the high-technology exports that Singapore specialises in.

Putting it all together, our best guess is that despite having some issues with the US, Vietnam, Malaysia and Singapore will emerge better than their neighbours in terms of securing trade deals with the US that are palatable.

Despite the market cheer, there is little doubt in our minds that the global economy will slow and so weaken the region’s economic growth prospects this year and maybe even next year. The question is whether the regional countries have the policy space for supportive measures to support domestic demand.

Where monetary policy is concerned, it does appear that most countries have the scope to cut rates and reduce reserve requirements (or in Singapore’s case, the ability to reduce the speed of appreciation of the Singapore dollar).

However, fiscal policy is more constrained in the region, except for Singapore whose stratospheric levels of government savings allow it to provide substantial support to its economy during a downturn. Many countries in the region are focused on getting fiscal deficits down so as to restrain the ratio of public debt to economic output.

It is an ill wind that blows nobody any good, as the saying goes. We see two potential silver linings for Southeast Asia in the dark clouds of the trade war.

First, if it does indeed turn out that China is hurt more by protectionism, then the case for supply chains to be configured and for production to be shifted out of China will remain. And, if that is the case, we would argue that Southeast Asia will still be one of the primary beneficiaries of that trend. Already, recent years have seen Asean’s share of global foreign direct investment overtake China’s share — a result of such production shifts. That is because Southeast Asian economies have been working hard to strengthen their fundamentals — infrastructure is being improved, restrictions on foreign direct investment have been eased, red tape has been cut and labour regulations have been eased. There will, of course, be intense competition to host the new production facilities from places such as India, Turkey, Mexico and Morocco, all of which have their strengths. But Southeast Asia’s long and productive experience with global manufacturers should stand it in good stead.

Second, trade is not just in goods but also in services. The good news is that trade in services has been growing rapidly and is less susceptible to protectionism. That is why the WTO has slashed its forecast for growth in global merchandise trade volumes by close to three percentage points to a contraction of 0.2% in 2025, while only modestly reducing its expectation for the increase in global commercial services exports, which it places at 4%, a cut of just one percentage point.

Not only that, but secular trends seem to be supporting a continued expansion in services trade. For example, the growing antipathy to immigration into developed countries despite labour shortages in certain segments is producing a growing demand for offshored services — services activities that can be carried out in low-cost areas such as India or the Philippines and delivered virtually to the customer in developed markets. There are significant shortages in skilled labour in areas such as finance, information technology and professional services. The Organisation for Economic Co-operation and Development (OECD) reports that job vacancy rates in services have remained high in its richer member economies as domestic labour supply cannot keep up with the expanding demand.

To top it all, Southeast Asian economies enjoy a global edge in exportable services. While the Philippines has seen strong growth in services, others such as Malaysia, Indonesia, Vietnam and Thailand rank highly in the AT Kearney ranking of the best services locations.

There has been progress in trade talks. The US and China have stepped back from a potential trade war and a US-UK trade agreement has been finalised. Similar broad but not detailed agreements are possible between the US and others such as India in the coming weeks. But the most realistic scenario is still of a much more protectionist world and one where there will still be a debilitating level of uncertainty caused by trade-related and other stresses.

Consequently, the world economy is set to slow. Countries in this region are likely to cut rates to support domestic demand but most lack fiscal firepower to provide really substantial stimulus. In the short term, therefore, not much can be done to offset trade-induced economic weakness.

The good news is in the long term. Production will continue to be relocated out of China and Asean offers a good value proposition to the firms that are moving. Moreover, the continued expansion of services trade will give the region further opportunities for growth. As long as the region continues to ensure political stability, credible policies and continued improvement in critical areas such as infrastructure, the region should still be able to emerge well from the current global turbulence.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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