Some holes in the tariff web for ASEAN

With the increased dependency on exports to the U.S.—both direct and indirect (e.g., transshipment)—fueling growth,  ASEAN economies have been caught in the tariff crossfire.

Since the escalation of the U.S.-China trade tensions in 2017, ASEAN exports to the U.S. as a share of overall exports have nearly doubled, rising from 12.1% to 22.1% as of 2Q25. This reflects shifts in manufacturing supply chains and investment out of China into ASEAN economies as part of the “China Plus One” strategy, which accelerated during COVID, with the bloc benefiting from foreign direct investment (FDI) inflows in recent years. This has led to a stronger intra-regional trade network, cost advantages for producers, and has benefited ASEAN economies.

While the effective tariff rates on Asian giants, such as China and India, are significant—at 40% and 34.4%, respectively—the rates on ASEAN economies are comparatively lower, ranging from 22.3% for Indonesia to 4.5% for Singapore. The announcement of trade deals last month has also improved investor sentiment in ASEAN, which has manifested in year-to-date price returns of the MSCI ASEAN index of 11.2% in U.S. dollar terms, compared to 6.9% in 2024. However, it is also important to note the dispersion in year-to-date U.S. dollar price returns on an economy level: Indonesia (-9.9%), Malaysia (2.2%), Thailand (-0.9%), Singapore (26.6%), Philippines (-3.6%), and Vietnam (47.2%).

Notably, the ongoing Section 232 investigations and product exemptions have provided some relief for ASEAN economies, as a large proportion of exports to the U.S. are currently not subject to the sectoral tariff rates, compared to Asian peers such as Korea and Japan (Exhibit 1). As it stands, additional tariffs have not been levied on semiconductors. Last week, it was announced that brand-name or patented pharmaceutical products will be subject to a 100% tariff starting next month, with some exemptions. 

The high proportion of automobile exports to the U.S. as a share of total exports leaves Korea and Japan most susceptible to the impact of tariffs. Within the ASEAN bloc, the impact of sectoral tariffs, if implemented, would be most material in Singapore and Malaysia due to the high proportion of goods exports to the U.S. in pharmaceuticals and semiconductors, respectively, implying that some caution around the external outlook is warranted.

Pre-emptive monetary and liquidity measures in focus

With the expectations of easing U.S. gross domestic product (GDP) growth momentum—which has, in turn, led to further rate cut expectations by the Federal Reserve—the U.S. dollar is likely to depreciate in the coming quarters, albeit at a more modest pace relative to 1H25. Financial stability concerns, which typically manifest in currency weakness, have been a key reason why Asian central banks have not eased policy rates despite slowing domestic demand. While external demand in ASEAN remained robust in 1H25, reflecting front-loaded activity ahead of tariff imposition, the weaker U.S. dollar has created space for rate cuts in Asia. ASEAN central banks, in particular, have actively responded to the potential slowdown by easing policy rates as a pre-emptive measure, especially in Indonesia (-125 bps) and the Philippines & Thailand (-75 bps) this year alone (Exhibit 2).

In September, Bank Indonesia surprised markets by reducing the policy rate, with the central bank reinforcing its commitment to growth to meet the “economy’s capacity” through interest rate cuts, in addition to liquidity injection operations to boost credit growth via a reduction in the deposit facility rate (FASBI). Weaker economic activity and tighter lending standards were the catalysts for August’s policy rate cut by the Bank of Thailand. Interestingly, relative currency outperformance this year has been cited as a potential hurdle to underlying economic momentum, with the THB/USD and the NEER up 6.2% and 1.5% year-to-date, respectively. This raises the likelihood of further monetary policy rate cuts this year.

Capital and structural reforms add tailwinds

Beyond monetary policy measures, ASEAN policymakers have steadily unveiled a series of reforms that could elevate investor appetite. The Monetary Authority of Singapore (MAS) launched the Equity Market Development Programme (EQDP) in February 2025 in an effort to strengthen and deepen the equity market beyond large-cap stocks. Policymakers in Vietnam have rolled out bureaucratic reforms to overcome governance challenges by streamlining ministries and agencies. This follows sweeping real estate reforms in 2023, which addressed foreign investors’ concerns regarding land procedures, from registration to approval.

Investment implications

Investors should manage concentration risk in portfolios, particularly regarding mega-cap stock exposure, which reinforces the case for diversification across other markets. Beyond the factors above, comparably more favorable valuations relative to other Asian peers, as well as cyclical and structural support, strengthen the case for investors seeking to rebalance and diversify portfolios.

However, investors should take an active approach to investing in ASEAN equities, given the cautious near-term outlook on the external side stemming from potential changes in U.S. trade policies and the wide dispersion in stock fundamentals across the region.

The positive structural forces that continue to drive ASEAN’s growth are still evident, including favorable demographics, a growing middle class, and increasing consumption. There is an accelerated change in consumption behavior, aided by increasing financial and digital penetration. Both traditional sectors and emerging industries offer investment opportunities for stock pickers. For example, the dynamic artificial intelligence (AI) innovation landscape in ASEAN offers downstream investment opportunities, such as data centers in Malaysia. The strategic emphasis placed on AI—such as the National Artificial Intelligence Strategy in Singapore—continues to reinvigorate investor interest by attracting AI practitioners to the market. Moreover, the timely monetary policy response (with more in the pipeline) and a weaker U.S. dollar environment could also support local currency bonds in ASEAN.

09ns250110162026