Southeast Asia, explained.
Checking inside a shipping container at the port in Da Nang, Vietnam (Laura Gil/UNODC)
Washington looks set to force Southeast Asian nations to choose between the US consumer market and Chinese supply chains.
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ASEAN’s rules- of-origin problemASEAN’s rules- of-origin problem
In July last year, the Trump administration gave itself the power to enact 40% tariffs on the “transshipment” of goods.
These tariffs caused a frisson of anxiety throughout the Association of Southeast Asian Nations members, where it was widely understood that the principal target was the putative practice of Chinese companies using Southeast Asian countries as a conduit for tariff evasion.
Transshipment is notoriously difficult to measure, but is typically defined as shipping goods to their final destination via a third country without “substantial transformation”. A classic example would be a Chinese company unboxing solar panels in Malaysia or Vietnam for some light polishing, before final export to the United States.
Vietnam, which is tightly interwoven with southern Chinese supply chains, is sometimes regarded as a major culprit. Trade advisor Peter Navarro has claimed that a third of Vietnamese exports to the US are in fact Chinese goods.
Perversely, overly restrictive rules of origin may even negate the tariff-driven cost advantage that ASEAN countries enjoy over China.
Although some transshipment does occur, its prevalence is likely grossly exaggerated. One influential Harvard study found that just 9% of the growth in Vietnamese exports to the US between 2018–21 was due to transshipment.
Reliance on Chinese supply chains is growing but probably overestimated. A Lowy analysis using data from 2022 put China’s total share of value-added in ASEAN’s US-bound global value chain exports at 18%.
The veracity of Navarro’s claims is, in one sense, immaterial in a White House where sentiment routinely wins out over technocratic analysis. In any case, the US does not appear to have enforced transshipment tariffs with much vigour.
According to veteran US trade negotiator Wendy Cutler, working out how to define and enforce transshipment proved too complicated given the extraordinarily ambitious timeline that Washington set for concluding trade agreements with ASEAN countries. Instead, the US included a placeholder in agreements for future discussions on rules of origin, such as in Article 4.1 of the US-Indonesia agreement. These negotiations, which Cutler anticipates will begin in earnest shortly (likely after the US finds an enduring legal basis to reconstitute its “reciprocal tariffs”), will define the maximum permissible level of Chinese content in goods qualifying for reduced US tariff rates.
Much is at stake in these otherwise highly arcane and technical discussions.
The Special Economic Zone in Khan Posenchey, Phnom Penh, Cambodia (Chhor Sokunthea/World Bank)
The Biden administration was widely criticised for the dearth of any substantive trade agenda with ASEAN. With the benefit of hindsight, tectonic economic forces proved more influential than any trade agreement. By 2024, and for the first time since 2007, the US overtook China as ASEAN’s largest export market.
This was a natural result of the confluence of China’s tepid consumption, chronic overcapacity and reinvigorated mercantilism after the 2021 property collapse. Irrepressible US demand and tariff-induced supply chain reorientation out of China have likewise played major roles.
US-bound exports from Malaysia, Thailand and Vietnam proved impervious to tariffs, recording healthy growth in 2025. ASEAN’s overall shipments to the US registered 29% growth.
The contrast in ASEAN’s exports to China is stark. Across 2025, the Philippines, Malaysia and Vietnam all registered a decline in shipments to China. Thailand recorded modest growth after three years of contraction, while Indonesia registered a 15% increase – albeit after two consecutive years of decline.
Meanwhile, China’s trade surplus with ASEAN has reached new heights, with the bloc now absorbing 18% of Chinese exports.
These figures point to a geopolitically fraught reality. Chinese shipments of raw materials as well as intermediate and capital goods are undoubtedly helping to facilitate ASEAN’s US export boom, as have Chinese investors using predominantly home market suppliers.
ASEAN nations will be wary of uprooting established supply chains benefiting from high-quality, low-cost Chinese goods. Perversely, overly restrictive rules of origin may even negate the tariff-driven cost advantage that ASEAN countries enjoy over China.
Politically, Beijing can be expected to pull out all the stops to induce ASEAN nations to resist US rules of origin efforts. ASEAN would have much greater leverage to defend its own interests – though the chances of a joint approach materialising are vanishingly small.
Still, a surgical and very gradual tightening of rules of origin could still be to ASEAN’s benefit. ASEAN governments, particularly in Vietnam, Malaysia and Indonesia, are exercised by the problem of how to capture more value from exports.
Though there is enormous variance, Chinese companies in ASEAN are generally not favourably regarded for their willingness to source locally. With the right design, rules of origin could give host governments more leverage to demand much greater technology transfer and use of local content. They could also give a reprieve to ASEAN manufacturers of intermediate goods such as steel and plastics who are being displaced by Chinese competition.
Evidently, much will also depend on US officials showing much more pragmatism and being more responsive to the concerns of regional partners than they have to date.
President Xi Jinping may also have something to say about the issue when he sits down with President Donald Trump in May.
About the author
Henry Storey
Henry Storey is Manager - Projects, Research and Analysis at Dragoman with a focus primarily on Asia and the South Pacific.
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