UBS Economics-APAC Economic Perspectives _ASEAN The long-term implication...-117731463

ab11 September 2025Global ResearchPowered byUBS Evidence LabYESAPAC Economic PerspectivesASEAN: The long-term implications of tariffsFour potential long-term implications of tariffs In this note, we examine four long-term implications of higher tariffs. First, tariffs' potential impact on cost competitiveness and equilibrium import market shares. Our perspective is that an overall tariff rate of roughly 20% is unlikely to significantly alter ASEAN's relative competitiveness compared to other regions. Second, we examine the growth implications of a reversal in the trend of rising import share gains in the US. Third, we evaluate the changing dynamics of FDI into ASEAN, noting that China+1 strategy also represents 'horizontal' FDI geared towards market access, not merely 'vertical' FDI focused on cost efficiency. It's possible that countries that are more dependent on US-based FDI (e.g. Singapore) could be more at risk from investment reshoring. Fourth, we address the risks related to transshipment tariffs. Growth gains from rising market shares could stall if import shares stop rising Relative tariffs matter more for lower cost, labour-intensive manufacturing, especially textiles and footwear, due to higher elasticities. If large tech companies that invest in the US are exempt from tariffs, then the indirect spillover effects for Malaysia, Singapore and Vietnam may be avoided (see here). We remain cautious about labour-intensive manufacturing industries in Indonesia, Vietnam, the Philippines and Thailand. Assuming ASEAN's relative tariff rate stabilizes around 20%, we think ASEAN is unlikely to lose much market share in the US. But stable shares could still mean foregone growth. Post-2017, ASEAN's import share in the US rose structurally; we estimate this contributed 0.1-0.6ppt to annual GDP growth over 2017-23. If tariffs halt such gains, growth could slow by a similar margin compared to the 2017-23 period. Can ASEAN capitalize on horizontal FDI to drive growth?Besides arbitraging cost differentials (vertical, or efficiency-seeking FDI), firms also consider market access a key reason for investing in ASEAN (horizontal FDI). UBS Evidence Lab's latest China CFO survey conducted in June 2025 revealed an intriguing insight: 85% of Chinese companies would still invest in ASEAN as a China+1 destination even if tariffs on ASEAN were raised by 11-30%. Moreover, a host of supporting factors, such as infrastructure, technology, regulatory environment and labour skills, matter for FDI decisions. These intangibles can offer significant advantages, offsetting cost disadvantages. However, as identified during our recent macro tour, a key challenge for ASEAN lies in determining whether 'horizontal' FDI targeting market access can effectively stimulate growth through knowledge transfer and supply chain integration, particularly if such investments risk displacing local producers.Transshipment concerns could end up making production cost