Emerging Markets Eye Post-Tariff Success Beyond China and the U.S.

Caught in the crossfire of intensifying trade disputes, emerging markets find themselves navigating between powerhouses China and the United States. However, they are choosing an alternative path: self-empowerment.

"Nations in Southeast Asia, such as Malaysia, are engaging with the United States to ensure a softer economic impact," former Malaysian Deputy Minister of International Trade and Industry Ong Kian Ming stated to CNBC. "Simultaneously, we’re pursuing alliances with other countries—not as a counter to the U.S., but to advance our interests."

Challenges for Southeast Asian Economies

Southeast Asia faces significant vulnerabilities amidst escalating trade tensions on the global stage. According to Goldman Sachs, their economic growth forecasts for Asian emerging markets have been reduced, particularly noting the susceptibility of smaller economies that are heavily reliant on exports.

For instance, Goldman revised Vietnam's GDP growth prediction for 2025 to 5.3%, which is notably below the consensus estimate of 6.5%. Predictions for Malaysia and Thailand in the coming year have also been lowered to 3.8% and 1.5%, down from 4.7% and 2.7%, respectively.

Tariff Dilemmas and Strategic Partnerships

Southeast Asian countries were anticipated targets of tariffs as proclaimed by former U.S. President Donald Trump, which pose considerable strategic dilemmas. The region depends on both the U.S. and China for its growth ambitions, remarked Lavanya Venkateswaran, OCBC Bank's senior ASEAN economist.

Amid this, China's President Xi Jinping has been promoting China as a stabilizing force in the region, urging the Global South to preserve the shared interests of developing countries.

Rise in South-South Trade

The shift in trade dynamics seems to be taking shape. Rebeca Grynspan, Secretary-General of the United Nations Conference on Trade and Development (UNCTAD), noted on CNBC's Squawk Box that intra-regional trade among Southern economies is accelerating.

"During this century, trade among Southern economies has been outpacing trade between Northern economies," she commented. "I anticipate a fresh surge in South-South trade triggered by new U.S. trade policies."

Echoing this, Malaysian Prime Minister Anwar Ibrahim, chairing ASEAN, emphasized intensifying trade and regional economic coherence during the ASEAN Investment Summit in April.

Seeking Strategies in a Complex Landscape

While straightforward solutions are scarce, emerging economies are likely to explore various tactics to mitigate the repercussions of U.S. tariffs, explained Lavanya Venkateswaran of OCBC.

"In the short term, governments will need to leverage fiscal and monetary measures to assist sectors hardest hit. Over the medium haul, diversifying trade and investment partnerships becomes essential," she added.

Maintaining the "China+1" strategy remains beneficial for these nations, she elaborated. This strategy significantly benefited export-reliant Southeast Asian economies during Trump's initial tenure as firms relocated production from China.

Taking Cambodia as a case study, World Bank data shows the nation’s export of goods and services constituted 55.5% of GDP in 2018. This proportion surged to 66.9% by 2023, following Trump's initial tariffs on China.

Miguel Chanco, leading economist for emerging Asia at Pantheon Macroeconomics, concurs that these markets will continue to best China as preferred destinations for export manufacturing in the long term.

"Importantly, these tariffs haven't diminished the labor cost competitiveness in non-China emerging markets across Asia, retaining these countries’ appeal to multinationals," he conveyed in an email to CNBC. "Nonetheless, any adjustment in supply chains will not happen immediately."