Workers on a production line at an electric-vehicle factory in Chongqing, China, on May 20. For months, trade officials throughout Asia have been waiting for the Trump Administration to address a question that cuts to the heart of their disruptive plans: How do you decide the origin of goods in a world where virtually everything contains parts that come from different countries? Photo / Gilles Sabrie, The New York Times
Workers on a production line at an electric-vehicle factory in Chongqing, China, on May 20. For months, trade officials throughout Asia have been waiting for the Trump Administration to address a question that cuts to the heart of their disruptive plans: How do you decide the origin of goods in a world where virtually everything contains parts that come from different countries? Photo / Gilles Sabrie, The New York Times
For months, companies and officials throughout Asia have been waiting for United States President Donald Trump to address a question that cuts to the heart of his disruptive plans for global trade.
How do you decide the origin of goods in a world where virtually all the things we buy,from computers and phones to sofas and cars, contain parts that come from different countries?
The answer is central to Trump’s aim to reduce China’s dominant role as the starting point for many of the world’s manufactured goods.
“It’s a sleeper issue,” said Wendy Cutler, a senior vice-president at the Asia Society Policy Institute, a think-tank.
“People are trying to convince themselves that it is just technical, but if you take a step back, it’s all going to rest on this.”
No other region is more exposed to Trump’s crackdown than Southeast Asia.
Billions of dollars a year in raw materials, machinery and finished goods flow from China through Vietnam, Thailand, Malaysia and other countries across the region.
Ahead of Trump’s visit to Asia this week, his trade officials met with negotiators for other countries to try to reach agreements.
Whether any prospective deals will contain details that address how Trump wants to define the nationality of goods is still up in the air.
The determination that the Trump Administration makes on the so-called rule of origin could blow up laboriously negotiated agreements.
That is because if a product is shipped from one country but does not meet the origin criteria, it will be hit with a hefty special tariff, which Trump has warned will be 40%.
This northern summer, Trump, pulling back on his opening salvo of sky-high tariffs in Asia, announced frameworks for most Southeast Asia countries with across-the-board tariffs that settled at around 20%.
Trump’s trade legacy in his first term was to force companies to set up factories outside China.
Now, he is trying to cut China out of supply chains.
China has moved goods through Southeast Asia to circumvent American tariffs and has been the source of a swell of exports to the region, much of those in machinery and raw materials that regional factories depend on.
Many of the components in the things that are made around the world come from China, from the screws and glue that hold metal and wood together to the minerals in smartphone batteries.
Yet even in Malaysia, where signing a deal with Trump would be seen as a positive development, there is some hesitancy about the unilateral way that the US is going about setting new rules for global trade.
Workers pack dental treats for dogs at Siam Inter Pacific in Bangkok, Thailand, on June 11. Photo / Rebecca Conway, The New York Times
Malaysia’s biggest trading partner is China, but one of its biggest industries, semiconductors, depends heavily on the American market, and its exports are at risk with the possibility of separate sector tariffs.
“All we can do is express our concerns — hopefully, they are listening to the confusion,” said Siobhan Das, chief executive of AmCham Malaysia, which represents American companies in Malaysia.
“With this trade agreement, what we’re hoping for is that there is clarity and a guideline for how supply chains need to move.”
Trump Administration officials have been vocal about setting one rule-of-origin target for the region.
They have focused on 30%: Any product containing more than that level of foreign parts or content sent to the US would face the special transshipment tariff.
While discussions are fluid, one thing is clear: For much of Southeast Asia, such a low figure would be difficult to meet.
Even if the Administration clarifies a final number, for many companies and governments there are many more questions.
What counts as foreign content? Does it include foreign investment in a factory? A foreign-branded machine? Foreign workers?
In recent years, many factories from China have moved some of their operations to countries like Vietnam but have created local supply chains and employ local workers.
And whose role will it be to police this new content rule?
“You’re talking about creating an entire new policing agency for exports to the US,” said Steve Okun, chief executive of APAC Advisers, a geopolitical consulting firm.
Governments in Southeast Asia are facing a dilemma.
Getting clarity on the rule-of-origin number is crucial before signing broader trade agreements.
Many of the products they export may not be able to meet the new definition for a local product.
If they don’t sign something more concrete than the initial trade agreements with the US soon, they face the threat of the original steep tariffs that Trump threatened in the northern spring.
“It’s deeply unsettling from an economic point of view, because if tariffs were to snap back to those original levels, that would be devastating,” said Daniel Kritenbrink, a longtime American diplomatic official in Asia and former ambassador to Vietnam now at the Asia Group, a think-tank.
“From a broader strategic point of view, these are countries that look to the US as a balance or guarantor for strategic stability in the region.”
The countries will also have to negotiate with Trump over various sector tariffs under a legal provision in the US known as Section 232, covering products ranging from semiconductors to machinery, furniture, and pharmaceuticals.
All of this will come as Trump is expected to meet China’s President Xi Jinping in South Korea at the end of the week to talk about a host of economic and political issues dividing the world’s superpowers.
“If you’re heavily dependent on China, then you are between a rock and a hard place,” said Deborah Elms, head of trade policy at the Hinrich Foundation, an organisation that focuses on trade.
“No matter how much leverage you have, you’re still a lot smaller than the US or China,” she said.
