Where do Asian economies stand between the US and China? A value-added analysis

After the Trump administration started a global tariff war to address the perceived US trade imbalance, China's old quick fix of rerouting trade through other locations may no longer work. Asian economies with pervasive rerouting and a large reliance on intermediate goods from China can be particularly at risk, but the issue goes beyond gross exports. We use value-added measures to assess how much output is ultimately consumed in the US or in China, as well as the reliance on China's inputs by market and sector. Thus, we can determine which economies are more vulnerable when negotiating reciprocal tariffs with the US and which sectors may be more problematic.Why is the value-added approach relevant?Compared to gross trade, value-added data has a few advantages when reflecting the contribution of domestic production. First, it avoids double counting where goods are often re-exported and re-imported for manufacturing. Second, it traces the real contribution in supply chains for different countries. Third, it can show indirect exposure from a country on another. As a result, value-added data is better than gross trade in the economic connection with growth, income and the labor market.Exposure to US and Chinese DemandMany Asian economies have become increasingly reliant on both US and Chinese final demand. This dual dependence creates a precarious situation as trade tensions escalate. Based on the focus of US tariff actions so far, we narrow the lens to manufacturing-related value-added exports to the US to compare which economies are most vulnerable to tariff escalation.Vietnam, Cambodia and Taiwan can be the most hitRegarding reciprocal tariffs, Vietnam and Cambodia have seen a notable increase in value-added exports of manufactured goods to the US. This reflects US efforts to diversify away from China, with firms rerouting supply chains or producing more in Southeast Asia. As the center of global production in ICT and semiconductors, Taiwan presents a more complex picture with a reducing dependence on China and faster growth of value added towards US demand, but its net dependence (defined as value-added exposure to China minus that to the US) remains tilted toward China. One caveat is that the data are as of 2022, which misses the fast shift towards the US as Taiwan’s largest export market since then.On restrictions on Chinese content, the US is increasingly targeting goods with Chinese-origin components, regardless of where final assembly takes place. Once again, Vietnam, Cambodia, and Taiwan stand out as economies with some of the highest manufacturing value-added exports to the US and with a very large foreign value-added in their production served by China.One potential path to resilience lies in increasing local or non-China foreign value-added content in exports, but it is not easy. India’s experience is illustrative. Despite strong growth in manufacturing output, its share of domestic value-added in its exports to the US has come down and has been replaced by China’s value-added, although it remains low compared to other Asian countries.Beyond broad-based tariffs, the US is turning to sector-specific tariffs framed around industrial policy and national security. To assess potential sector targeting, we apply three criteria: Countries with sectors that are heavily dependent on US final demand (over 15% of their sector’s external value-added exports), but also with Chinese value-added in US final demand exceeding 4% and increasing more than 10 percentage points since 2017. Electronics stands out as the most exposed sector, especially for Taiwan and Vietnam. Both economies have captured significant US demand, but a substantial portion of their value chain still relies on Chinese componentsVietnam and Cambodia also show the widest cross-sector vulnerability, including a range of goods in textiles, leather goods, metals, machinery and electrical equipment. Cambodia has even more sectors heavily dependent on Chinese intermediates.Conclusion: Asia’s dilemmaAsia’s dilemma when it comes to Trump’s trade war is all about dependence on US final demand while relying heavily on China’s value added in domestic production. Focusing on three tariff fronts (reciprocal tariffs, restrictions on China-origin content, and sector-specific barriers), Vietnam, Cambodia, and Taiwan stand out as the most exposed. Their dependence on US markets, use of Chinese inputs, and concentration in sectors like electronics leave them vulnerable in the ongoing negotiations with the Trump administration.However, given that the US will always need manufactured goods, some Asian countries can benefit from this. Overall, the key potential winner will be India since its dependence on Chinese imports is more moderate and could eventually scale up its manufacturing sector. Developed Asia (South Korea, Japan, and, to a lesser extent, Taiwan) should continue to meet US demand in electronics, shipbuilding, and high-tech sectors and, therefore, end up with a better deal in the tariff negotiations.