Ahead of Trump-Xi meet, report flags sleeper issue fueling US-China trade tensions

With uncertainties in global trade due to sweeping tariffs imposed under Donald Trump's administration, companies and officials across Asia have been waiting for the US President to address the question of how the origin of goods is decided, according to a report by the New York Times (NYT).

This question becomes significantly important as all goods we consume, from computers and phones to sofas and cars, contain parts that come from different countries. The answer is key to Trump’s goal of diminishing China’s leading position as the source of many of the world’s manufactured products.

“It’s a sleeper issue,” Wendy Cutler, a senior vice president at the Asia Society Policy Institute, told NYT. “People are trying to convince themselves that it is just technical, but if you take a step back, it’s all going to rest on this," Cutler said.

These doubts come as Trump is likely to meet Chinese President Xi Jinping in South Korea at the end of the week to discuss the trade tensions between the world's largest economies.

Southeast Asia has been the most vulnerable region to Trump's tariffs. Billions of dollars annually in raw materials, machinery, and finished goods are transported from China through countries such as Vietnam, Thailand, and Malaysia.

Vagueness over nationality of goods

Even though Trump signed trade deals with South Asian partners, it is still unclear whether these agreements will contain details on how the nationalities of goods are considered.

The Trump administration's decision on the rule of origin could jeopardise carefully negotiated agreements. Products shipped from one country that fail to meet origin requirements will face a significant tariff, which the US President has warned could be as high as 40%.

Meanwhile, Trump pulled back his initial aggressive tariffs in Asia and announced frameworks for most Southeast Asian countries, with tariffs settling at 19% or 20%.

How did Trump's attack against China change in the second term?

During his first term, Trump focused on relocating factories outside China, while now he is trying to cut Beijing out of supply chains. China has diverted goods via Southeast Asia to bypass American tariffs and has been the origin of a surge in exports to the region, largely in machinery and raw materials that local factories rely on.

Many components in products worldwide originate from China, including screws, glue used to join metal and wood, and minerals found in smartphone batteries.

Malaysia's dilemma

Even in Malaysia, where a deal with Trump might be viewed positively, there is some reluctance regarding the US's unilateral approach to establishing new global trade rules.

Notably, China is Malaysia's biggest trading partner, but its semiconductor industry depends heavily on the American market, and its exports are at risk due to the possibility of sector-wise tariffs.

“All we can do is express our concerns — hopefully, they are listening to the confusion,” Siobhan Das, chief executive of AmCham Malaysia, which represents American companies in Malaysia told NYT. “With this trade agreement, what we’re hoping for is that there is clarity and a guideline for how supply chains need to move," Das added.

Rule of origin issue

Trump administration officials have strongly advocated for a single rule-of-origin target for the region, emphasising 30%. This means any product with more than 30% foreign parts or content sent to the US would incur the transhipment tariff. Although negotiations are ongoing, it's evident that achieving this low threshold would be challenging for many Southeast Asian countries.

However, the question remains on what counts as foreign content? Does it include foreign investment in a factory, a foreign-branded machine, or foreign workers?

Southeast Asian countries are looking for clarity over the rule-of-origin number before signing broader trade agreements. However, unless they sign a more concrete agreement with the US soon, they risk facing the original steep tariffs that Trump threatened earlier, the report said.

“It’s deeply unsettling from an economic point of view, because if tariffs were to snap back to those original levels, that would be devastating,” Daniel Kritenbrink, a longtime American diplomatic official in Asia and former ambassador to Vietnam, told NYT. “From a broader strategic point of view, these are countries that look to the US as a balance or guarantor for strategic stability in the region," he added.