The Trump administration unveiled its much-anticipated tariffs on most of the world last week – and they make about as much sense as you would expect. Countries will see tariffs on exports to the United States ranging from 10 to almost 50 percent. Southeast Asia has been particularly hard hit. Vietnam is looking at a 46 percent tariff, Thailand 36 percent, and Indonesia 32 percent. Cambodia and Laos will see tariffs of nearly 50 percent.
It appears that the Trump administration arrived at these figures by taking the existing trade deficit the United States has with each country and dividing it by how much the United States imports from that country. They then took that ratio and halved it to derive the tariff amount. Apparently, they only included trade in goods and not services. If you find this hard to follow, as I did, it is because it doesn’t make sense. But whether it makes sense or not it is, for the moment, happening. So why is it happening and what does it mean?
First, let’s at least try to understand the rationale here, such as it is. The idea is that the U.S. is absorbing a lot of output from the rest of the world, and that is why it runs trade deficits with many countries. Americans are buying things made in other countries, and as a result are producing less at home. By making it prohibitively expensive for the U.S. to import foreign products, domestic production will increase. There are many things wrong with this, but it is the logic Donald Trump is using to justify these actions.
It is wrong because global trade and value chains are more complicated than that. Let’s look at Cambodia, a small country that is facing a 49 percent tariff on exports to the United States. Trump’s team is arguing that Chinese products are often produced in or re-exported from Cambodia (and Vietnam and Laos) to evade U.S. trade sanctions on China. Even if that is true, Cambodia only did $9.7 billion worth of exports to the U.S. in 2023, which is inconsequential given the overall size of America’s economy and trade activity. It is very consequential to Cambodia, however, where the GDP in 2023 was just $42 billion.
But let’s say, as a thought experiment, that Trump’s theory is correct and by applying a 49 percent tariff on Cambodia, all these goods would be produced domestically in the U.S. from now on. What did Cambodia export to the United States in 2023? Almost half ($4.2 billion) was textiles, like sweatshirts. Another $1.3 billion was for trunks and cases. These are the kind of labor-intensive, low value-added products the United States either does not want to or cannot easily produce, especially at a cost that is comparable to Cambodian manufactures.
Another thing Trump’s model of global trade misses is that not all trade is in finished goods. A lot of it is intermediate goods, which are used to make finished goods. Even if a high-value product like a car is assembled in the United States, many of the components that go into making it will be imported from around the world.
For instance, Cambodia exported $2 billion in semiconductor devices to the U.S. in 2023. These were probably used to make other electronic products and systems. Now, U.S. companies that were getting these parts from Cambodia (or Vietnam, or Thailand, or Malaysia) will have to source them from somewhere else, either another country with a lower tariff rate or domestically, if they are even produced in America, which they may not be.
Building new production capacity will require large investments of both time and money. Either way, it will disrupt existing production networks and increase costs, while accomplishing little. I’ve focused on Cambodia here, but we could break down the trade ties between the U.S. and almost any other Southeast Asian country and come to similar conclusions.
There’s a good chance a lot of this will be walked back, especially as financial markets are not happy about the tariffs. The U.S. will probably try to secure some concessions from each country, then lower the tariff and champion it as evidence of Trump’s deal-making prowess. We are already seeing this begin to unfold. In reality, this is the opposite of good policy because it will create uncertainty and confusion while simultaneously not achieving any of the stated goals, such as more domestic manufacturing or a lower U.S. trade deficit.
In the process, it has already done immense and likely irreversible damage to America’s image and relations abroad. A lot of countries in Southeast Asia have built their economies around exports, and the U.S. has long been a reliable market for these goods. The Thai economy is already struggling with an economic slowdown, and being punished with punitive tariffs for running a $45 billion bilateral trade surplus with the United States last year is going to make things worse. Even if the tariffs are ultimately lowered or reversed, the damage is done.
The U.S. has sent the world an unmistakable message that it can no longer be trusted with policy dictated by the incoherent whims of an erratic leader. Many countries were already starting to look elsewhere for more reliable partners, and these actions are going to lock that process even further into place. Rather than uncorking a boom in domestic manufacturing, the United States will, in all likelihood, end up more isolated, with less influence in fast-growing and geo-strategically important regions like Southeast Asia and with its large global trade deficit still intact.