The Return of the Trump Tariffs: How Will Southeast Asian Firms Respond?

The Trump administration’s dogged determination to reintroduce tariffs on Southeast Asia should spur long-run measures to diversify markets and reduce reliance on the US.

Arules-based order governing global commerce has given way to disorder, due mainly to an unpredictable but undeniably protectionist US trade policy under President Donald Trump. Even after the Supreme Court of the United States (SCOTUS) struck down Trump’s reciprocal tariffs in January 2026, his administration has been pursuing every means possible to reintroduce tariffs.

A Section 301 investigation into forced labour recently concluded with 10–12.5 per cent tariffs on most Southeast Asian countries, while another on structural excess capacity is currently ongoing (Table 1). Efforts are underway to expand existing sectoral tariffs under Section 232 to include critical minerals, robotics, pharmaceuticals, and aircraft and jet engines. These developments signal that previous tariff rates may return for most ASEAN countries — and they could be broader in coverage and more durable in legal authority, compared to the reciprocal tariffs’ “economic emergency” premise.

In addition, a recent White House report branded most Southeast Asian countries as apparent transhipment points for China. The report claimed that the 30 per cent increase in Southeast Asia’s exports to the US in 2025 was due to Chinese companies using the region as a conduit. If transhipment is confirmed, goods will be subjected to an additional 40 per cent levy or higher. Recent mixed signals compound the uncertainties. While the US debates China on tariff cuts for ‘non-sensitive’ items ahead of the Trump-Xi summit scheduled for September 2026, investigations against multiple trade partners continue and a trade war with Canada rages on.  

While attempts are made to repair the system and rebuild a rules-based order, exporting firms must navigate the current disarray. Based on exporters’ handling of Trump’s reciprocal tariffs first announced in April 2025, this author foresees a set of short-run and long-run responses to new tariffs.

Exporting firms have two options in the short run. They can pass the tariff to consumers through higher prices, or absorb some or all of it by cutting profit margins. Based on the experience of his first term, when China absorbed about 30 percent of steel tariffs, Trump had expected the same this time around. However, there was less incentive for exporters to absorb the reciprocal tariffs because not only China, but all countries, were being taxed. Therefore, the impact on relative competitiveness is reduced. Furthermore, the differences in reciprocal tariff rates across ASEAN countries narrowed over time, with most rates converging around the 20 per cent mark (Table 1).

Recent evidence indicates that exporters of reciprocal tariffed goods took the high or full pass-through option, resulting in higher prices for US consumers and producers. This market response, combined with the heightened volatility and uncertainty following the SCOTUS ruling, increases the likelihood that the recent Section 301 and any further tariffs will also experience high or full pass-through.

There are two long-run options. Over time, multi-national corporations (MNCs) can reduce their tariff exposure by reconfiguring their supply chains through relocation. MNCs have been doing so since Trump 1.0 raised tariffs on China, and Southeast Asia has continued to benefit from this relocation during Trump 2.0. This trend could continue if significant differences in the tariff rates imposed on China versus Southeast Asian countries persist. MNCs are waiting to see if US Customs, exploiting grey areas in verification processes, starts sweeping crackdowns on alleged transhipment. The trend of investment relocation to Southeast Asia could thus slow down or even reverse.

Firms may also avoid tariffs by reshoring, or relocating to the US. There is little evidence of reshoring, however. What has increased is the divide between corporate pledges to reshore and the relevant evidence in macro, investment or trade data. Entrenched supply chain ecosystems have made it either extremely costly or near impossible to reshore production or assembly for most complex manufactures.

ASEAN countries have been laying the groundwork for a future with reduced dependence on the US by intensifying intra-regional cooperation and pursuing inter-regional trade agreements.

Another long-run tariff response by firms is through diversifying markets to reduce reliance on the US. This can only happen gradually, as exemplified by the recent surges in exports to the US from Southeast Asia — despite widespread intentions to expand non-US trade. But the desire to reduce reliance on the US market would have increased after the uncertainty following the SCOTUS decision and the Trump administration’s express desire to use every means possible to reintroduce tariffs.

ASEAN countries have been laying the groundwork for a future with reduced dependence on the US by intensifying intra-regional cooperation and pursuing inter-regional trade agreements. The Regional Comprehensive Economic Partnership (RCEP) has been jolted into action, with a major General Review scheduled for 2027 to include digital trade, supply chain resilience and non-tariff barriers. These reforms could significantly boost intra-regional trade. Indonesia recently concluded a landmark Comprehensive Economic Partnership Agreement (CEPA) with the EU, while negotiations between the EU and Malaysia, Thailand and the Philippines have intensified. Indonesia has also concluded a CEPA with the United Arab Emirates, while ASEAN is increasing its engagement with the Gulf Cooperation Council by institutionalising structured summits.

The SCOTUS ruling in January 2026 on the illegality of the reciprocal tariffs has inadvertently increased the volatility of tariff rates and prompted the Trump administration to expand protectionism under more durable legal authorities. The short-run impact will be to add to US inflation through high or full tariff pass-through. Beyond that, MNCs may continue reconfiguring their supply chains that benefit Southeast Asia, while regional governments pursue intra- and inter-regional agreements that lay the groundwork to diversify trade away from the US market.

Source: FulScum