Experts: China Complicates Southeast Asian Trade Deals

Joe Damond, chair of international trade policy and global life sciences at Crowell Global Advisors and former deputy assistant USTR for Asia, said on a Washington International Trade Association podcast last week that China had expressed "grave concern" about the economic security provisions in agreements reached between the U.S. and Malaysia and Cambodia (see 2510270004). The provisions would require countries to put in place measures of equivalent or similar effect to measures applied by the U.S., effectively outsourcing U.S. trade policy toward China, he said.

Wendy Cutler, a former acting deputy U.S. trade representative and now vice president at the Asia Society Policy Institute, said that the agreements risk becoming a poisoned chalice for the Southeast Asian nations: “This is a nightmare for these countries.” She said that Malaysia and Cambodia now face limited options, if “they go back and ask to renegotiate, I kind of don't think that will be a great avenue. I don't think it'll go over well in Washington.” She said they can hope that implementation of the provisions is scrutinized lightly by the U.S., “but this introduces a very important dynamic in these negotiations.”

Cutler noted that China's displeasure is having international reverberations; she said that Mexico's recent legislation to raise tariffs on China, a move which appeared to be “clearly under U.S. pressure,” is "kind of on hold right now." With Vietnam and Indonesia now in the final stretches of negotiations, she added, this “is going to make it even more difficult” for both governments.

Damond said the tariff-alignment issue was already “the most sensitive remaining issue” for Vietnam and Indonesia even before Beijing spoke. “Now that China has publicly sent a shot across the bow, what does that do?” he asked. He agreed implementation is likely to become a battleground: “If you actually take steps to go forward and implement this by applying tariffs on China,” they are “not going to like that.”

Cutler questioned whether the negotiations could conclude this year, saying she continues to hear there’s “roadblock after roadblock,” with serious issues remaining unresolved. Damond added that national security establishments in Vietnam and Indonesia are deeply concerned, given both countries’ political relationships with China.

Mark Linscott, former assistant USTR for South and Central Asia and now a senior adviser with The Asia Group, said Beijing’s leverage is unavoidable. “These countries are between a rock and a hard place,” he said. He noted that partners may hope the U.S. applies a “light touch” on implementation, but he questioned what happens if they don't hold up their end of the deal. “What if they aren’t implemented? How does the administration react?” he asked. Terminating the agreements would allow the U.S. to raise its own tariffs, but he said the administration would be reluctant to do so after securing unprecedented zero-tariff access.

Damond said enforcement options are limited. Section 301 wouldn't apply as there isn't a national security nexus, he said, and Section 232 is sector-specific. “This is one area where IEEPA [the International Emergency Economic Powers Act] may matter,” he said, noting that future retaliation likely would require a national security justification. Otherwise, he said, it would be difficult to raise reciprocal tariffs simply because a partner is not “mirroring our trade policy toward China or Russia.”

He also said the administration appears to have accepted that the negotiations may not finish this year. While officials initially pushed for year-end completion, the talks have slowed as the administration insists on precise economic-security provisions. “They’re going deep into some of these issues,” he said, adding that Washington seems unwilling to rely on vague language in order to close the deals quickly. Linscott agreed, saying the agenda is “unprecedented” and makes additional agreements before year-end unlikely.

Dan Mullaney, former assistant USTR for Europe and now a senior fellow at the Atlantic Council, said the administration’s overall tariff policy also seems to be shifting. After initial broad tariff threats, he said, the U.S. is now "winnowing away" some tariffs, issuing exemptions and avoiding new announcements. “We anticipated that as the costs of the tariffs became apparent and some of these deals came into place,” he said, adding that the slowdown is welcome news for trading partners.

Cutler said the U.S. is also calibrating its actions ahead of the president’s April trip to China. Any new Section 232 tariffs that significantly affect China, such as on semiconductors or electronics, would be provocative, she said. Early expectations for a quick decision were unrealistic, she argued, given the complexities of applying tariffs to components and downstream products. With the administration’s affordability goals in mind, Cutler said that “all of these derivative products now as well, I have to conclude, are being questioned by some in the administration.”

She said the administration is cautious not only because of the economic implications but also because the U.S.-China trade “truce is so fragile” that any tariff action affecting China -- even if not aimed directly at it -- could reignite tensions.