This article first appeared in Forum, The Edge Malaysia Weekly on June 8, 2026 - June 14, 2026

Just as hopes for an end to the Middle East war rise, the drums of another war are beating. The world is edging closer to a new trade war as the US and Europe search for ways to cope with China’s surging export competitiveness, and as China threatens to hit back. It will be difficult to find a resolution to these disagreements because the roots of these potential trade conflicts are complex. Unlike a similar challenge in the 1980s involving the US, Japan and Germany, there will be nothing like the Plaza Accord that helped avoid a trade war. Rather, things will get much worse before they get better.

Worsening tensions among Southeast Asia’s most important trading partners will increase the risk of protectionism spilling over to hurt the region’s exports: After all, the Americans and Europeans fear that Chinese exports will be rerouted via Southeast Asia or other regions, and will be adopting aggressive measures to prevent that. This could be damaging to the region. In addition, the uncertainty around trade will slow business investment.

The US and European Union are coming close to imposing a further wave of protectionist trade measures, for different reasons.

In the US, President Donald Trump has several motivations to reignite the trade war

His summit meeting with China’s President Xi Jinping last month gave rise to hopes that the two countries would sort out their differences over trade — at least by enough to allow their trade truce to be extended when it expires in October. However, this may not stop Trump from mounting aggressive trade measures against other countries.

For political reasons, he needs to distract attention from the misjudged war on Iran, which is eroding Trump’s political support just as he prepares for the mid-term elections in November. Taking the initiative to impose tariffs and other trade restrictions on China, Europe and other countries will make him appear to be in charge again and help shift political attention to an issue which Trump may think he has more control over.

Moreover, after the Supreme Court negated his first set of tariffs, Trump has decided to use other legal provisions that allow him to impose tariffs, such as under Section 301 of the Trade Act of 1974. The investigations and other preparations to use these provisions will be completed soon and a new wave of tariffs is likely to be enacted by July.

Tariffs are also needed to fill the fiscal hole created by the loss of roughly US$130 billion of tariff revenues owing to the Supreme Court ruling. The US administration has to find the money to pay back the now illegal tariffs while meeting additional fiscal demands arising from the Iran war. The Pentagon is asking for an additional US$200 billion in defence spending for this fiscal year. For the next fiscal year starting in October, Trump is seeking a 50% increase in the military budget to US$1.5 trillion. These fiscal demands come on top of the weaker revenue base resulting from the tax cuts and rebates that Trump’s signature budget law of last year promised.

Growing unease in the bond market over the US fiscal position is making this need for additional revenues more urgent. In mid-May, the US Treasury had to accept a yield of 5.046% on the bonds it issued, the highest yield since 2007. The administration needs to convince financial markets that it has the fiscal position under control — and for that, it needs large sources of revenue which currently only tariffs can provide given the political impossibility of raising taxes.

The Trump administration is serious about ramping up trade actions. Vietnam has come under pressure, for example. The US Trade Representative has described Vietnam as a “Priority Foreign Country” on intellectual property rights — this is a status reserved for nations with “the most egregious IP-related acts, policies and practices with the greatest adverse impact on relevant US products”. It is the first time in 13 years that a country has been so described, suggesting that the US is now willing to reach deep into its protectionist toolkit to justify its trade aggression. Vietnam is probably just the first of many targets for a new trade campaign by the US.

Europe’s concern is more with China

Separately, Europe’s agitation over China’s growing export competitiveness is reaching a critical level. Its Industrial Accelerator Act could allow it to use coercive measures to get exporters such as China to set up production facilities in Europe and transfer technology to Europe.

There is growing angst in Europe over its industrial base being undermined as a result of China’s trade strategy. Europe saw its solar panel industry collapse as a result of Chinese competition and is now watching in horror as its once-impregnable position in automobiles is up-ended. In addition, Europe’s trade deficit with China burgeoned to US$113 billion in January-April 2026, up by around a quarter from the same period in 2025.

It is determined to fight back and intends to do so by going beyond traditional complaints to the World Trade Organization (WTO) and the use of anti-dumping levies. In moves seen as targeting China mainly, the European Commission has drafted new rules requiring companies in sectors such as chemicals and industrial machinery to diversify their supply chains. Commissioner for Trade and Economic Security Maros Sefcovic is reported to have prepared tariffs on Chinese chemicals and machinery imports.

For its part, China has vowed to retaliate vigorously against these planned measures, setting the stage for an ugly trade confrontation in the coming weeks.

First, Europe, the US and many other countries are beginning to feel that China is pursuing an asymmetric and unfair trade strategy. The republic’s Made in China 2025 national plan and Xi Jinping’s “dual circulation” strategy were hugely successful but come across as wanting the rest of the world to be dependent on China while it becomes self-sufficient in most areas of high-value economic activity. The growing sentiment is that conventional trade measures do not work and that far more aggressive measures are needed to press China into changing its approach.

Second, the other related change in recent years has been the far greater focus on national security and resilience of supply chains. This policy concern has been reinforced by what happened with the closure of the Strait of Hormuz, which exposed how reliant the rest of the world was on the Persian Gulf region as a source not only of oil and gas but also of aluminium, helium and fertilisers. Governments are now even more determined to reshape their economies so as to preclude excessive reliance on limited sources of key items.

A third change is in what policymakers understand as the drivers of export competitiveness. China’s recent export success is not just due to low costs but to its incomparable economies of scale, its long-term investments in frontier technologies and its success in creating complex ecosystems that others cannot easily replicate, such as the Pearl River Delta.

Further complicating things is a fourth factor — we are in a world where the normal equilibrating mechanisms that help to mitigate the effects of a country achieving immense competitiveness are no longer functioning as they used to. Previously, a successful exporter would see its currency appreciate and its domestic costs rise as rapid growth in its export sector consumed scarce domestic resources of labour and other factors of production. But this is not happening in China’s case.

•     Far from appreciating, China’s yuan has actually depreciated significantly in recent years. Since the pandemic ended in late 2022, the real effective exchange rate of the yuan (a measure of underlying currency value) has fallen by around 13% — when China’s growing export prowess should have caused it to appreciate.

•     Rather than rising, China’s domestic costs have been driven down by deflation due to its overcapacity and over-investment. So, the gap in cost competitiveness between China and its trading partner is not closing, it is actually widening.

•     In the past, it might have been possible for, say, European governments to negotiate with individual Chinese companies seeking to export their goods to Europe and press them to locate production to Europe and transfer technology. But the Chinese state has tremendous control over its private-sector companies and is unlikely to allow this equilibrating mechanism to work either.

Finally, underlying all this is a more fundamental set of imbalances, arising from structural and policy features of the big economic powers:

•     The US has been a chronic undersaver and this is getting hugely worse. In April, the personal savings rate fell to 2.6%, compared with the 2000-2019 average of 5.2%. The US government is dissaving as a result of its burgeoning fiscal deficit. That brings its national savings rate down, just as the huge success of its technologically proficient companies is resulting in its investment share of gross domestic product (GDP) rising. The gap between America’s investment and savings is therefore widening. And that means that its external deficit will grow, fuelling policymakers’ concerns.

•     On the other hand, the EU is under-investing. Its overregulated economy is deterring private investment, leading to chronic underperformance in productivity and technological progress, which are important underpinnings of export competitiveness.

•    Finally, China is underconsuming or oversaving. Its household sector is saving more — the bursting of the real estate bubble destroyed wealth, which has to be rebuilt by cutting back on consumption and raising savings. Inadequate social safety nets and weak income growth also restrain consumption.

These imbalances are deeply rooted in the structures of these three economies. Reducing the imbalances that lie at the heart of trade disputes cannot be achieved quickly or easily.

Only an intense negotiation involving major compromises by all the major parties can resolve these disagreements. But the increased distrust among the big powers does not encourage the kind of give and take needed to work out a new grand accord.

In the mid-1980s, the threat of a trade war pitting the US against export powerhouses such as Japan and Germany was averted by the Plaza Accord. In essence, the successful exporting nations agreed to allow their currencies to appreciate substantially, which eventually helped to bring the US trade deficit under control. But that was an agreement among the western powers who shared common values and were strategically dependent on each other. The relationship among the US, China and Europe does not have these factors that would allow for a compromise.

The WTO, which might have had a role in mediating to find a compromise, is in no condition to do so. America has undermined the WTO through its vetoing of judges for the latter’s arbitration function while its unilateral trade war has marginalised the latter as a forum to work out trade issues.

The region will soon face the grim reality that the new trade war will expose it to collateral damage: the US and Europe will view exports from the region containing Chinese components as a means of China indirectly exporting to their markets.

Countries in the region need to step up diversification of their economies in order to better withstand worsening trade frictions. But the real upside will come not from individual actions but by Southeast Asian countries better coordinating their trade strategies so that they can negotiate collectively with these far more powerful trading powers. Asean will also need to work together with other friendly parties such as Japan and South Korea to gain strength in numbers.

Unless Asean does these, it will be a party with limited bargaining clout and will not be at the top table of global negotiations on trade. As Canada’s Prime Minister Mark Carney said, if you are not at the table, you will be on the menu. That is a fate it must avoid.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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