China's exports to Southeast Asia increase due to US tariffs

A recent Citigroup report shows that Chinese exports to several Southeast Asian nations have hit record levels as firms shift shipments to avoid rising US tariffs. This raises concerns about the impact on local industries in countries like Vietnam, Thailand, and Indonesia.

China’s push into Southeast Asian markets comes after a steep drop in its direct exports to the United States. Johanna Chua, head of emerging-markets economic research at Citigroup, noted in the Tuesday report that higher US duties have prompted exporters to reroute goods through nearby countries. 

As a result, shipments to Indonesia, Malaysia, Thailand, and Vietnam all reached their highest monthly totals on record.

In Indonesia, the surge has been especially apparent in textiles, where imports from China climbed to a new peak. Local garment makers, already reeling from weak demand, have laid off thousands of workers this year. Cheaper Chinese fabrics and clothing now flood markets, putting additional strain on an industry that has struggled to compete on price.

Since early 2023, overall Chinese export prices have been on a downward trend, and textile prices have fallen even faster. Meanwhile, exports to the US plunged by just over a third in May, the sharpest drop since February 2020, after Washington slapped on steeper levies amid an ongoing trade dispute.

China may have dodged US tariffs by exporting via middle countries

Citigroup’s report also highlights a “significant increase in correlation” between the rise in Southeast Asian imports from China and those countries’ own exports to the US. That pattern suggests some of the goods may simply be transshipped, sent to a third country before onward shipment to America, to dodge higher tariffs.

US officials have focused on this practice in talks with Vietnam and Thailand, both of which have agreed to tighten rules around certificates of origin. As the White House presses for stricter enforcement, Citigroup argues that China may respond by shifting more downstream production out of China altogether, while controlling the supply of key intermediate goods.

Despite the plunge in US-bound exports, China’s overall shipments rose 4.8% in May compared with the same month last year. That figure fell just short of market forecasts, which had predicted around a 5% gain.

At the same time, imports into China tumbled 3.4%, far worse than the 0.9% drop economists had expected. Weak domestic demand continues to weigh on inbound flows.

Chinese exports to Southeast Asia have increased

Chinese exporters have partly offset losses in the US market by boosting sales elsewhere. Shipments to Southeast Asian countries jumped nearly 15% year-on-year, while those to the European Union rose 12% and exports to Africa surged over 33%.

Overall, China’s trade surplus climbed 25% from a year earlier to $103.2 billion in May.

The pace of export growth did ease from April, when a sharp rebound in shipments to Southeast Asia helped mask a 21% slump in US exports. In April, the broader export tally jumped 8.1%, driven largely by regional demand.

Digging into commodities, customs data show China’s rare earth exports fell 5.7% year-on-year to 5,865.6 tons in May. Those minerals are critical for high-tech applications, and Beijing has tightened controls on their shipment to strengthen its position in trade talks with Washington.

By product, auto exports led the gains, with car shipments up 22% and ship exports rising about 5% year-on-year. In contrast, smartphones and home appliances each saw around a 10% and 6% drop, respectively.

China’s Ministry of Commerce said on Saturday that it will continue to process applications for rare earth exports, citing growing demand in areas like robotics and new-energy vehicles. 

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