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22
Mar 2017

Trump and Southeast Asia

Donald Trump’s presidency has rekindled global fears of a retreat to protectionist trade policies and a weaker role for the US in underpinning global economic and security institutions. Although Southeast Asia did not feature prominently in the President’s campaigns, the region will be impacted to different degrees, both directly and indirectly, by Trump’s policy agenda. Already, the US withdrawal from the TPP is a significant setback for trade and supply chain connectivity in the region. A slowdown in China’s growth due to increased US protectionism will also produce ‘second-round’ effects on regional growth. In the political arena, Southeast Asian nations face the prospect of a more aggressive Chinese foreign policy if the US moves to unwind its ‘pivot’ to Asia.

Economics and Geopolitics

In particular, Singapore and Vietnam are likely to be the most adversely affected economically and geopolitically from a more inward-looking US under Trump. Other economies such as Indonesia and Thailand will be less severely impacted, due to their greater reliance on domestic demand, and reduced exposure to a more assertive Chinese foreign policy in the region.

A rise in trade-protectionism will undermine Singapore’s trade-driven growth and reduce the inflow of US FDI in the economy. Trump’s pronouncements of a more self-interested US foreign policy could also weaken the international economic framework which has supported Singapore’s development as a small, open economy. In addition, the failure of the TPP may produce geopolitical ramifications in Singapore, which views the agreement as a means to counterbalance growing Chinese influence in the region. The pull-back of the US effectively signals its reduced interest in the region, which in turn could lead to diplomatic challenges for Singapore in managing Chinese expectations in a more volatile geopolitical landscape.

Meanwhile, Vietnam will also encounter increasing economic and foreign policy challenges during Trump’s term as president. Economically, the US is among Vietnam’s largest trading partners, and the TPP is viewed as an incentive for reforming the country’s inefficient SOEs. The failure of this agreement could therefore stall the process of streamlining bloated public enterprises which dominate the economy, and ultimately weigh on the country’s growth potential. At the same time, Vietnam had been promoting ties with the US under the Obama administration to strengthen its position in territorial disputes with China. This pillar of support may no longer be as reliable under Trump and Vietnam may find itself less able to counter Chinese assertiveness over its territorial claims in the South China Sea.

Electronics and Autos

That said, Southeast Asia will broadly remain a dynamic and fast-growing region thanks to improved macroeconomic policies to tame inflation, improving intra-regional trade, and robust consumer demand attributed to the growing ranks of urban, middle-class households in developing economies such as Indonesia, Vietnam, and the Philippines. While export-oriented industries such as electronics will face headwinds due to rising barriers to trade, the outlook for key consumer industries in the region, particularly autos, remains positive.

Over the past several years, Southeast Asia has enhanced its regional supply chains in the electronics sector and established itself as a major global electronics manufacturing base. A rise in US protectionism, portended by its withdrawal from the TPP, will trigger a slowdown across the electronics value chain in Southeast Asia. This includes Thailand, which is a large assembly base for consumer electronics, Malaysia, which is a major electronics manufacturing hub, and Singapore, which specialises in high-value processes such as integrated circuits and R&D operations. Moreover, a realisation of Trump’s promise to raise import tariffs on China will significantly hurt its electronics sector, given that electronics products account for about half of total Chinese exports to the US. In turn, this will have a negative bearing on Southeast Asian manufacturers supplying components to China for assembly. Granted, US is not the only key final market for consumer electronics manufactured in Southeast Asia, and signs of recovery in Japanese consumer demand could partially mitigate the effects of increased US protectionism. Nevertheless, the outlook for electronic components produced across Southeast Asia will face slower growth prospects under the Trump administration.

In terms of investments, Trump’s efforts to revive manufacturing in the US through a range of tax incentives could also reduce the outbound flows of US FDI into Southeast Asia’s electronics sector. As such, the pace of technological transfer through capital investments is likely to decelerate. However, it is worth noting that Southeast Asia is also poised to benefit from rising outbound investments from well-capitalised firms within Asia that seeking to expand their international presence. For instance, Taiwan’s FDI into Southeast Asia has doubled over the past five years, with plenty of room for further growth as China’s slowdown pushes Taiwanese enterprises to explore new markets and production bases in the region. Vietnam and Singapore are the top investment destinations for Taiwanese corporates, and the former is likely to increasingly displace Thailand at the lower end of the electronics value chain based on its improving cheap labour costs and strong growth.

The auto sector dynamics in Southeast Asia contrast sharply with that of its electronics sector. In the auto sector, growth will be propelled primarily by fast growing consumer segments in developing and frontier markets such as Indonesia and Vietnam, and Cambodia and Laos, respectively. These economies are witnessing a steady expansion of of middle class households in tandem with surging economic growth, stabilising inflation, and gradual improvements in business environments. Additionally, accelerating intra-regional trade under the Asean Economic Community will directly benefit major auto producers in the region, namely Thailand and Malaysia, as reduced import tariffs facilitate access to the above-mentioned consumer markets. Vietnam is on the verge of halving its auto import tariffs from Southeast Asia, and other regional economies are set to follow suit in the near term.

The favourable demand outlook in Southeast Asia’s auto sector also bodes well for foreign investments, and global producers are increasingly looking to set up production facilities in order to tap on the region’s potential. This not only expands the range of commercial and private vehicles available on the market, but also allows regional producers to benefit from fresh capital injections and increased technological capabilities. This is because foreign investors are typically required to enter into joint ventures with local producers, as was the case with Peugeot’s recent expansions in Malaysia and Vietnam. In Malaysia, Peugeot’s bid for a stake in Proton will help to ease the latter’s capital shortage, as a foreign partnership was identified as a condition for Proton to receive additional transfers from the government. Meanwhile in Vietnam, the French auto producer has finalised plans for a new assembly line and two new SUV models in 2017, under its long-term 2016-2020 expansion plan in the country.