How Will the US Election Affect Southeast Asia’s Economies?

We are now hours away from the United States electing its 47th president. All eyes are glued on whether former president and Republican candidate Donald Trump will make a return to the White House. Standing in his way is current Democratic Vice President Kamala Harris. While there are three more candidates for the country’s top posts, they either belong to smaller parties or are independents and therefore unlikely to figure prominently in the poll.

There have been many polls, surveys, and commentaries on who will emerge victorious in this battle. After all, the next commander-in-chief of the U.S. has the power to impact the trajectory of the global economy, including here in Southeast Asia. With the world’s economy plagued by uncertainty, volatility, high interest rates, and wars on two fronts, there is much at stake.

With Trump and Harris locked in a close battle, what does the outcome of the U.S. election mean for Southeast Asia?

Between the two, Trump is probably the more known entity. Already in his first term, which began eight years ago, he sought to disassemble the multilateral trading regime created by globalization. We are still seeing the effects and implications of his policies in this regard. This is especially true for his aggressive and combative stance against China and its alleged trade practices. If the U.S. and China are currently on a trajectory of decoupling from each other’s economies then Trump certainly set those wheels in motion in his four years in the Oval office. Should he be elected into office this week, Trump will likely use his term to grease those wheels on “America First” policies.

Trump’s Tariff Plans

Already, Trump has threatened to impose a series of high tariffs, or import taxes, on 60 percent on all goods from China and 20 percent on goods the U.S. imports from elsewhere. In September, he also threatened to hit Mexican-produced goods with 100 percent tariffs.

First, Southeast Asian countries, most of which are export-oriented economies, face the risk of lower exports to the U.S. due to Trump’s 20 percent tariff threat. This is significant. This year, the U.S. overtook China as Southeast Asia’s largest export market, and as much as 15 percent of the region’s exports go to the U.S. Any substantive reduction in these exports, due to the tariffs, could hit the region’s economies hard. Of course, there is every possibility that Trump, if he is elected, may choose not to follow-up on his tariff plans. However, his preoccupation with trade deficits and correcting those imbalances are key to his promise to create more American jobs. With the region maintaining a nearly $200 billion trade surplus with the U.S., it will be a surprise if Trump doesn’t take steps to reduce this deficit, especially with Vietnam and Thailand, which run $105 billion and $41 billion trade surpluses with the U.S., respectively. Malaysia and Indonesia also run large bilateral surpluses.

Moreover, Trump is likely to complement his high tariff structure with a further dismantling of multilateral trade agreements. Trump prefers bilateral deals over multilateral ones as they are more effective in dealing with trade deficits with individual countries. He has already threatened to withdraw from the Biden administration’s Indo-Pacific Economic Framework (IPEF) as early as possible in his second term and thus Southeast Asian economies will not get any reprieve from the prospects of high tariffs from the U.S.

His tariff plans could also prove to be a double-whammy for Southeast Asia. On the one hand, some regional economies stand to benefit from his strategic decoupling from China as they become a recipient of FDI from companies looking to diversify their manufacturing bases. At the same time, this increased scrutiny means that Southeast Asian economies that have large Chinese investments, particularly in strategic sectors like manufacturing, digital infrastructure, and high tech, could be adversely impacted. Trump’s aggressive stance toward China could see him focusing on Chinese companies’ investments globally and not just within China. This could mean that Southeast Asian companies or industries with large Chinese investments could come under similar treatment as those from mainland China and face import restrictions. Washington may even restrict the export of U.S. technologies to these sensitive sectors and economies.

Such moves could cripple or slow down the growth sectors in Southeast Asian economies and affect the overall development of those regional economies looking to transition to more high value-added sectors, with Indonesia, Malaysia, Thailand, and Vietnam, to be among the most affected by these policies. For instance, Thailand has been transitioning its automobile manufacturing market to produce more electric vehicles (EVs) with the help of large investments and technology transfer from Chinese EV manufacturers. With Trump making it clear that he sees the American EV market as a strategic sector and one that must be protected, Thailand’s move could be hampered due to the large Chinese investment in this industry.

Inflationary Pressures

Trump’s high-tariff environment will increase business costs. As the price of U.S. imports, including from Southeast Asia, rise, this increase will be passed on in part to manufacturers here, which will in turn be passed on to consumers elsewhere. Part of this will be borne by importers in the U.S. and thus consumers there.

Trump’s strict immigration policies are likely to exacerbate high costs. He has threatened to restrict and reverse the dependence on immigrant and foreign labor in the U.S., which could create a tight labor market. This will increase wages, business costs and, inevitably, prices.

If Trump’s policies have the undesired effect of keeping prices high, that may halt the slashing of interest rates in the U.S. In September, the Federal Reserve in the U.S. aggressively cut rates by a half percentage point and suggested that it could do more in the coming year, as it saw inflation moderating. This first rate cut in four years was much reason to cheer, as it promised to give a boost to investments and consumption globally, including in this region.

However, the Fed may revise its decision and maintain interest rates at this level at a longer period, if not increase them, if Trump’s policies again push costs up.

Would Harris Be Any Different?

There is a general view that a Kamala Harris presidency would be much better for the global economy than Trump’s. I believe such a binary view lacks nuance.

Today, the issue of creating and protecting American jobs enjoys bipartisan support in the U.S., as a response to the notion that China is taking away American jobs.

While Trump will deal with this in a more direct, confrontational way through tariffs and restrictions, Harris is likely to use human rights, labor standards, and environmental regulations to deal with China. This may be gentler, and the lesser of two evils, as far as Southeast Asia is concerned, even if the region still comes under U.S. scrutiny under a Harris administration.

Although Harris has in the past opposed trade agreements such as the United States-Mexico-Canada Agreement and the Trans-Pacific Partnership, she is likely to continue President Joe Biden’s approach to expanding trade with the region. What this means for trade agreements like IPEF is that while Harris would commit to keeping the trade pillar alive and growing, she could demand stronger enforcement of environmental and labor standards, which could make the negotiations for the agreement more difficult and complicated, especially with those Southeast Asian countries that fall short of these standards.

Overall, Harris’s approach to trade will still be net positive. Even though there is little sign that she will push for any comprehensive trade agreements, she is less focused on correcting trade imbalances than Trump and, therefore there is every likelihood she could pursue targeted sectoral or bilateral trade deals in line with U.S.’s strategic priorities including in green technologies and the digital economy – particularly AI and cybersecurity – which could facilitate the relocation of more manufacturing out of China into Southeast Asia.

On the other hand, Harris played a key role in the current Biden administration’s reshoring of U.S. industries through the CHIPS Act and Inflation Reduction Act (IRA). Her continued focus on this approach could see a reversal or reduction of U.S. FDI into Southeast Asia, if companies allocate those investments domestically instead and shorten supply chains.

Whether Trump or Harris prevails on Tuesday, we are likely to see an increasing move to more “America First” policies that suit Washington’s strategic needs. While these may create some opportunities for Southeast Asian economies, the region may have to brace itself for a more complicated and transactional economic relationship with the U.S. over the next four years – and likely beyond.