Commentary: Will Southeast Asian exporters 'eat’ the Trump tariffs?

SINGAPORE: US President Donald Trump’s "Liberation Day" tariffs have hit Southeast Asia particularly hard. Although these tariffs have come down somewhat, they are still significant.

The question facing exporters is whether to “eat” the tariffs by reducing profit margins, or to “pass through” the tariffs to importers in higher prices and risk loss of market share. It is likely that Southeast Asian exporters will eventually opt for the latter, like their competitors, thus resulting in more negative effects on the US than any other economy.

Trump thinks – quite erroneously – that the burden of tariffs falls on foreign sellers, not domestic buyers, thereby limiting their negative impacts. This will depend on how Southeast Asian exporters, and their competitors, respond.

There is an extensive body of literature that studies the determinants and measurement of the “pass-through” of policy changes, mainly exchange rates but also tariffs, to prices of internationally traded goods. Such studies can shed light on the issue. The literature suggests that pass-through may be incomplete depending on the degree of competition facing sellers and buyers, and that it can vary in the short and long run. That is, the degree of pass-through is product- and time-dependent.

The tariff can be absorbed by the exporter, as Trump believes, or by the importer, who has to pay the tariff. When the importer resells to a retailer, then there is another level at which the tariff can be absorbed. In a post on Truth Social on May 17, Trump said, “Between Walmart and China, they should, as is said, ‘EAT THE TARIFFS’, and not charge valued customers ANYTHING”.

ABSORB OR PASS IT DOWN?

If exporters absorb the tariff, then it would result in a welfare-improving terms of trade (TOT) gain to the importing country, as a derivative of the optimal tariff argument. That is, the US will be able to buy more imports with its exports because the former have become cheaper in terms of the latter.

If it is not fully absorbed, then its net effect will depend on the extent to which the TOT gain offsets the inefficiencies associated with the distortions due to the tariff. If the absorption takes place at the importer or retailer level, it could serve more as a corporate than a sales tax on consumers, reducing the regressive nature of the tariff and its impact on income inequality (lower-income earners will pay a higher proportionate share of their incomes on goods levied with higher tariffs).

There is some evidence that partial absorption of tariffs occurred previously. During his first term, Trump imposed tariffs on China in 2017. Chinese exporters were reported to have absorbed between 10 to 50 per cent of the tariff on selected products like steel. Most of the evidence for most products points to no change in price by exporters in response to the tariffs, however.  Nevertheless, the Trump administration has frequently referred to the partial absorption by China in justifying the original "reciprocal tariffs" and subsequent changes.

More importantly, however, there is less incentive now for exporters to absorb the tariff because the impact on relative competitiveness is muted. This time round, all countries are being subjected to the Trump tariffs. This is unlike Trump’s first term, when his administration targeted China only.

While there are variations in the tariff rates across countries, the differences must be substantial enough to threaten market shares before exporters absorb them to retain competitiveness. If the differences are not substantial and competitors are passing through their tariffs, then Southeast Asian exporters may do the same.

MORE PRICE HIKES AHEAD

There are already signs of prices increasing because of the tariffs. For instance, the US producer price index rose by 0.9 per cent in July 2025, the highest jump in more than three years. With the tariff pause ending in August 2025 (except for China) and inventories stockpiled prior to the tariffs running out, more price increases are likely. Other indirect effects will add to inflationary pressures over time, as prices of domestically produced substitutes rise in unison with the imports they compete with.  

That said, these are the only first-round price effects of the tariffs. In the second round, rising imported input costs will feed through manufacturing supply chains, reinforcing the inflationary impact of tariffs and eroding the competitiveness of US exports that use them.

With inflation comes a rise in the cost of living, which will lead to demands for higher nominal wages to retain their real value. This will precipitate a wage-price spiral. If this leads to a rise in inflationary expectations at the macro level, it could fuel a vicious cycle that threatens runaway inflation. Monetary tightening that dampens economic growth may be required to contain inflation.

Over time, the likely response from trade partners is to reduce their reliance on the US market. There are signs that Southeast Asia is already diversifying. There will be adjustment costs given the importance of the US market to Southeast Asia, but these costs will diminish over time. As competition to supply the US market diminishes, the incentive to “eat” the tariff will also decrease. The eventual outcome will be higher prices and fewer choices for US consumers.

One reason why Trump loves tariffs is the belief that exporters will “eat” them by lowering prices to maintain competitiveness in the world’s largest consumer market.

Quite to the contrary, the international evidence suggests that tariffs are usually fully passed through in the long run. Evidence is emerging that this is starting to happen with the recent Trump tariffs. This trend is likely to continue, leaving the US with rising inflation, inequality, and slowing growth, raising the risk of stagflation.

It would appear that Southeast Asian exporters will not need to cut margins if most countries are passing through the tariffs. Southeast Asia’s manufacturing supply chains remain China-centred and are so complex that shifting production to the US because of these tariffs is unlikely to be easy or worthwhile. While they might retain their profitability, export volumes may fall if US growth slows. While there may be winners and losers in Southeast Asia, the US and the world will be worse off because of these tariffs.

Jayant Menon is a Visiting Senior Fellow in the Regional Economic Studies Programme at the ISEAS – Yusof Ishak Institute. This commentary first appeared on the Institute's blog, Fulcrum.