Trump’s second term has seen a dramatic escalation in trade tensions with China, with the potential for significant and long-lasting changes to trade patterns. In this edition of InFocus, Economist Sam Jochim analyses changes in China’s trade patterns during Trump’s first term, the impacts of these changes on Southeast Asian economies and the potential for another ‘China shock’ in Trump’s second term.
US-China trade war
A year into his first term as President of the US, Donald Trump made the first move in a tit-for-tat trade war with China that is now in its seventh year.1 As it stands, Trump’s second term has witnessed the US and China impose additional tariff rates of 30% and 10% respectively on imports of all goods from each other (see Figure 1). At the start of May, these rates were 145% and 125% respectively. The lower rates reflect the outcome of talks held in Geneva from 9 to 12 May between delegations headed by Treasury Secretary Scott Bessent, US Trade Representative Jamieson Greer and Chinese Vice Premier He Lifeng.2
The lower tariff rate will remain in place for 90 days, after which there is great uncertainty about what will happen. The best outcome would be a deal between the US and China that makes the lower tariff rates permanent with a slim possibility that rates are lowered further. Such a deal would be difficult to negotiate in 90 days. Trade deals of this magnitude take years to negotiate and so it is our base case that the pause is extended until an agreement on a way forward is reached.
However, it is also possible that the 90-day pause does expire, in which case additional tariffs imposed on imports of goods from China by the US will rise to 54% and those imposed by China on the US will rise to 34%. In the same vein, it is reasonable to expect tariffs to rise above these rates again. Nobody knows what will happen, though it is pragmatic to assume tariffs will settle above the level they were at before Trump’s second term began.
There are different factors motivating this trade war, many of which have little to do with trade itself. EFG Chief Economist Stefan Gerlach has previously discussed how tariffs play a central role in a broader economic vision that seeks to reshape how the US government raises and allocates revenue.3 Trump has also used tariffs as a bargaining tool to address national security concerns such as illegal immigration and illegal drugs entering the US.
Tariffs can also be used to protect home industries, a motivation which Trump repeatedly referenced on his campaign trail. In addition, Trump hopes to use tariffs to reduce the US’s trade deficit. In this respect, China is viewed as the worst offender (see Figure 2).
Trade decoupling
Before Trump first took office in 2017, trade between the US and China had been relatively steady (see Figure 3). From 1993 to 2016, the US, on average, was the destination for 19% of Chinese goods exports. There was a notable spike after China formally applied to join the World Trade Organization in 1995 and officially joined in 2001. After Trump took office for the first time, a trade decoupling began, with the US receiving 14.7% of Chinese goods exports in 2024.
The share of US goods imports accounted for by China exhibit a similar trend (see Figure 4).
The US is a major export destination for China and the trade decoupling shown above represents a significant trend for Chinese trade. Given this information, one might assume that China’s share of world exports has fallen since Trump’s first term. However, the opposite is true (see Figure 5).
China shock 2.0?
That the share of China’s exports going to the US has declined since 2017 but its share of world exports has increased reflects a shift in where China is selling its goods. The goods China once sold to the US are now being exported to other economies (see Figure 6).
For the most part, ASEAN economies have been the recipients of these goods.4 Since Trump’s first term, these economies have overtaken the US to become the main destination for Chinese exports.
This trade reorientation has had significant implications for many of these economies. For example, Indonesia’s textile industry has struggled to compete with cheap Chinese textiles entering its market. This has resulted in bankruptcies and layoffs.5 The macroeconomic impacts of such events are not insignificant. From 2017 to 2024, employment in Indonesia’s textile industry declined by around 283,000 persons and the quarterly production index which averaged 68.93 in 2017 fell to 57.28 by 2024.6
This phenomenon is not limited to Indonesia, with similar examples in Vietnam, Thailand, Malaysia and other ASEAN economies. The term ‘China shock’ was first used to describe the impact of the rise in China’s share of US imports in the 90’s on the US labour market (see Figure 7). When Trump began imposing higher tariff rates on Chinese goods in 2018, China pivoted to other markets, beginning a new ‘China shock’ centered in ASEAN economies.
This helps to explain why ASEAN economies have been pushing back against cheap Chinese goods imports. Last year, Malaysia introduced a 10% sales tax on low-value goods, and e-commerce platforms Temu and Shein were ordered to suspend selling in Vietnam. Additionally, in February 2025, Thailand introduced a 7% value-added tax on low-value goods imports.
However, imposing measures aimed at reducing imports of China’s low-value goods carries risks for ASEAN economies. Nine of the ten ASEAN countries are members of China’s ‘Belt and Road’ initiative, which sees China invest in their infrastructure.7 By country, China represents the second largest source of foreign direct investment (FDI) into ASEAN economies when excluding intra-ASEAN investment (see Figure 8).
While the US is the main source of FDI into ASEAN economies, China remains important. Beijing is seeking to strengthen its investment ties with Southeast Asia, as evidenced by the signing of an investment agreement by China and Indonesia’s sovereign wealth funds. Furthermore, President Xi visited Cambodia, Malaysia and Vietnam in April in an effort to strengthen economic and diplomatic ties.
While the timing could be coincidental, it is likely that it represents a strategic move by China to prevent significant trade reorientation by ASEAN economies. Thus, Trump’s additional tariffs have greater potential to increase China’s exports to ASEAN economies and exacerbate a ‘China shock’ that has been felt by these countries since his first term began in 2017.
Summary
In summary, trade tensions between the US and China have escalated since Trump’s second term began. When Trump imposed tariffs on US imports of goods from China in his first term, China’s exports to the US fell but its share of global exports rose. This was due to an increase in exports to ASEAN economies.
Trade reorientation has had significant consequences for Southeast Asia, with many bankruptcies and layoffs due to an inability to compete in domestic markets with China’s cheap goods. Several ASEAN economies have imposed measures aimed at preventing this, but their dependence on Chinese investment somewhat limits their capacity to effectively do so. As a result, the renewed escalation of the US-China trade war has the potential to exacerbate ‘China shock 2.0’. To quote an ancient African proverb, “When elephants fight, it is the grass that suffers.”
1The Appendix includes a timeline summarising the key actions by China and the US that have led to the current situation.
2See the 20 May Macro Flash Note: https://tinyurl.com/4dfw4w8m
3See the 30 April Macro Flash Note: https://tinyurl.com/y5r826vh
4ASEAN stands for Association of Southeast Asian Nations and includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
5See https://asia.nikkei.com/Business/Companies/Indonesian-textile-maker-declared-insolvent-with-2.1bn-in-debts
6Employment decline calculated using industry share of employment data and total employment data. Quarterly production index equal to 100 in 2010. Data available at BPS-Statistics Indonesia
7The Philippines is the only ASEAN economy not in the ‘Belt and Road’ initiative, having exited in 2023.
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