SEOUL, South Korea — Having awoken Thursday to news of a long-awaited and long-feared new U.S. tariff regime, key American allies in East Asia were stunned.
Responding to persistent U.S. trade imbalances — last year, America’s trade deficit was $1.2 trillion — President Trump put the blame squarely on trade partners Wednesday and outlined an array of new tariffs on imports.
As capitals around the world mulled responses, there were fears that the global economy could be hammered, or even plunge into a trade war.
All countries’ exports to the U.S. were hit with 10% tariffs under the Trump directive, but the president singled out several of the Indo-Pacific region’s export-focused manufacturing economies for higher rates and inclusion on a list of 60 countries he called the “worst offenders.”
Infrastructure and manufacturing powerhouse China, the world’s No. 2 economy behind the U.S and a major strategic competitor, was slapped with a 34% tariff rate. Cambodia’s rate is 49%; Vietnam, 46%; Myanmar, 44%; Thailand, 36%; Indonesia, 32%; and Malaysia, 24%.
U.S. strategic partners and treaty allies in the region got off more lightly — albeit, not by much.
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Taiwan, the leading global manufacturer of cutting-edge semiconductors and a holdout against Chinese political and military coercion, was hit with a rate of 32%.
India, the world’s largest democracy, a rising industrial player and a bulwark against China in the Himalayas, suffered 26%.
South Korea and Japan — U.S. allies and hosts to major concentrations of American troops — suffered rates of 26% and 24%, respectively.
Another U.S. treaty ally battling Chinese hybrid tactics in the South China Sea, the Philippines — one of the region’s least industrialized economies — got a low rate of 17%.
Angst was not long in coming from leading U.S. allies.
In Japan, Prime Minister Shigeru Ishiba said tariffs will have “a big negative impact on bilateral economic ties, the global economy and the multilateral trade system” adding he “would not hesitate” to approach Mr. Trump in person.
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Using language that is outspoken by Japanese standards, Mr. Ishiba said tariffs were, “extremely unfortunate” and “against our wish” that had been conveyed to U.S. counterparts.
Japanese media reported that Tokyo officials have not ruled out retaliation.
Calling tariffs “very grave,” acting South Korean President Han Duck-soo chaired an emergency meeting in Seoul with his finance and industry ministers, demanding the government use “all its capabilities” to “overcome this trade crisis.”
Officials were told to prepare support measures for hard-hit sectors, to work with industry to analyze impact, and actively initiate negotiations with Washington.
Washington’s stern stance on trade with the region is rooted in what some call the “Asian model” of capitalism — very different from the free-wheeling, market-led U.S. version.
Capitalism, Asian style
Over the second half of the 20th century, Japan pioneered a top-down, state-led approach, in which an elite Tokyo bureaucracy planned and managed the economy, and companies followed suit. Leveraging the sweat equity of a disciplined and highly educated population, the model proved incredibly successful.
It was subsequently adopted by South Korea, Taiwan, and most recently China. Problematically for the West, Communist China adopted the Asian model of capitalism in its economy — but never transitioned to democracy, instead maintaining a one-party political system.
Regardless, formerly poverty-struck East Asia, producing “everything from chips to ships,” firmly embedded itself as the third pillar of the global economy after North American and Western Europe.
However, practices such as state subsidies, copycat approaches to intellectual property and an “export, don’t import” mentality generated intense trade friction with Washington in the 1980s and 1990s.
U.S. frictions with regional democracies were managed by supra-national bodies like the World Trade Organization, as well as by bilateral and multilateral trade deals.
But many accuse China of ignoring the rules-based order.
Under Mr. Trump, Washington has returned to an aggressive trade policy. That aims not only at balancing trade flows, but also luring — or spooking — overseas investment into the U.S., creating jobs and reinvigorating American manufacturing.
Non-tariff barriers to business
Multiple commentators have said the math that went into the White House’s “reciprocal” tariffs makes little sense. Those analyses may overlook the “non-tariff barriers” clause Washington included in its accounting.
Non-tariff barriers to U.S. exports include discriminatory regulatory hurdles and taxation; onerous and time-consuming bureaucratic requirements; support of and subsidies for domestic companies; failures to protect intellectual property; and even nationalistic consumer choices.
Washington said that currency manipulation — a practice that makes exports cheaper and so more competitive — was also factored in.
James Kim, CEO of the American Chamber of Commerce in Korea, admitted he was “a little surprised” at the tariffs that South Korea suffered.
Korean firms have followed Mr. Trump’s wishes by injecting billions of dollars of investment into the U.S. in sectors including semiconductors, autos and tires — even food services — he said.
However, Mr. Kim stated that hurdles and risks do exist for U.S. businesses in Korea.
These include labor inflexibility — it is difficult to hire and fire — and CEO risks. In Korea, executives can be held legally liable for a wider range of matters than they are in the U.S. Other issues include barriers raised to digital services and higher taxation corporate and personal tax rates for expatriate businesspersons and branch offices.
AMCHAM Korea will next week publish its annual report on the Korean business environment. “That will walk everyone through the non-tariff barriers,” Mr. Kim said. “This can be very helpful as they continue to negotiate.”
That suggests an anticipation that talks will follow the initial tariff declarations.
“The big question on the tariffs is will they be permanent for the rest of our lives?” Mr. Kim asked. “I don’t believe it.”
Expecting South Korea to be a “strong actor,” in talks, he expressed optimism that a middle ground can be reached.