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On March 11, 2020, the World Health Organization (WHO) officially declared Covid-19 as a global pandemic. As a result, economic activities around the world have been disrupted. The World Bank estimated the global GDP to contract by 5.2% due to the pandemic.
Sectors heavily affected include travel and tourism, retail and service-based industries, as well as business operations surrounding supply chains and logistics.
Since the pandemic came right after the US-China trade war (which started around mid of 2018 and continues to date), the impact felt by these industries has been immense for business owners and manufacturers in both countries.
This makes the Asia Pacific region extremely vulnerable to the uncertainties of the trade war. It is likely that as tensions increase and tariffs rise, that some ASEAN member countries will be heavily affected, while others benefit.
While more and more Southeast Asian manufacturers and e-retailers are considering options to sell with large online shopping brands in the USA, it has not necessarily been a cakewalk.
US-China trade war- quick synopsis
The trade war started in 2018 when President Donald Trump set multiple tariffs on China. The U.S. trade representative’s office imposed levies on over 1,300+ Chinese goods. In response, the Chinese Customs Tariff Commission of the State Council announced 25% additional tariffs on 106 items of US products.
Four years and one president change later, the tariffs still remain.
As tensions between the two trade superpowers grew, Southeast Asia’s rise as the new factory of the world seemed inevitable.
While foreign direct investments into ASEAN members have long been underway, the trade war only looks to accelerate the liftoff of the Southeast Asian economy with countries such as Vietnam and Thailand looking to profit the most.
Southeast Asian economy during COVID-19
Following China in heavy restrictions and advanced measures in order to combat the spread of Covid-19, were Japan and Korea. Having the three largest sources of tourism to the Asia Pacific region shut down their borders was crucial in analyzing the pandemic’s effect on economic contraction in the ASEAN region.
Enter 2021, Covid-19 shows little signs of improvement. As new strains and clusters of outbreaks take shape, local businesses are struggling to survive with travel restrictions, disruptions in business operations, and enforced lock downs.
Amongst the ASEAN major economies, Thailand became the fourth of six regional economies, following Malaysia, the Philippines, and Indonesia, to lodge an annual GDP contraction in the first quarter of 2021.
On the other hand, Singapore and Vietnam delivered positive economic growths in the first quarter of 2021. This can be attributed to their strong manufacturing output and expansions into the wholesale and retail trade sectors.
With increased spending and a weakened economy, the IMF estimated public debt to increase resulting in a GDP reduction of up to 15% in Southeast Asia.
Furthermore, the region’s slow vaccination schemes and the emergence of mutant virus strains add unpredictability to economic recovery. Margerest Yang from the Daily FX in Singapore writes that the economic gap could continue as economies struggle with outbreaks, inflation, and unemployment.
The current scenarios in Southeast Asia have forced regional business owners to look for eCommerce opportunities in global markets like the USA. Local goods manufacturers like furniture owners have now been considering entering the US market.
However, the legislation, taxes, need for intermediaries, difficulty connecting with online retailers in the USA, etc make it very hard for manufacturers to get their first break in the country.
US Tariffs on Chinese goods
Let’s understand more on the tariff structures imposed by the USA on Chinese products and how it impacts other countries in Southeast Asia.
How did the trade war impact the SEA countries?
Back in 2018, after withdrawing from the Trans-Pacific Partnership (TPP), US President Donald Trump signed an executive memorandum to place tariffs on Chinese products. Its purpose being to force US companies to move manufacturing operations back to the states thus reducing the trade deficit against China.
In retaliation, the Chinese government placed tariffs on US food-related products. Between 2018 and 2019, both countries announced plans to impose tariffs worth 200 billion US dollars per side.
This trade war had and continues to have heavy implications on the global economy, as well as the Asia Pacific region greatly. China is known as the world’s factory and plays a significant role in the global supply chain. More than 60% of world trade passes through this country, especially intermediate products.
Furthermore, ASEAN is heavily dependent on its top two trading partners, China and the USA. According to data released by ASEAN in 2019, the import and export value to China was 305.4 billion USD, and 202.5 billion USD, and imports and exports to the USA were 111 billion USD, and 183.6 billion USD, respectively. These sums equal 27.1% of total exports, and 29.9% of total imports, being made with only two countries.
The higher tariffs will result in lower demand for Chinese products in the US. ASEAN countries, many of whom are big suppliers of raw materials to China, will be greatly affected as supply decreases.
Sequentially, this will also decrease the global financial sentiment surrounding trade and investment. Many industries that involve the sale and management of end products, such as eCommerce retailers and platforms, will also be negatively affected by the higher-priced goods.
Challenges faced by eCommerce retailers when selling in the US
In 2020, internet retail sales worldwide were worth 4.28 trillion USD, with eCommerce retail revenues expected to grow up to 5.4 trillion USD by 2022. These numbers show that the online consumer trend is growing exponentially.
In addition, the US is known to have the largest consumer market in the world, as well as the second-largest e-commerce market after China. They also have one of the highest levels of disposable income and consumer expenditure across OECD countries.
Therefore, it is a given that setting up a shop in the US as an eCommerce retailer can be extremely attractive. However, many might not know the challenges faced when trying to do so. Legal and business-related operations in the US can be stringent, and very different from other parts of the world.
Here are some of the challenges faced by eCommerce retailers when selling in the US.
Legislation
Legislation work to ensure that both consumers and sellers are protected and legally accounted for in a transaction. This allows the sale, processing, and post-sale operations to operate.
However, each country has different laws and regulations in place, with developed economies such as the US having legislation surrounding the environment, human rights, and quality control.
This can pose a problem for ASEAN members who are looking to break into the US market.
In Southeast Asia, manufacturers have long been able to produce quantities at low costs as a result of cheap labor. This often comes intertwined with the exploitation of the labor market, especially in underdeveloped countries.
It is also common nowadays for eCommerce retailers to sell a wide range of products from various manufacturers, many of which do not pass through the retailer themselves. This can make it extremely difficult to ensure that products are able to adhere to the strict US importation rules.
Furthermore, adhering to strict laws can drive up costs that reduce, or make obsolete, profit margins from selling in the US market.
Customs
The US customs department’s role is to ensure that all goods entering the country via sea, air, or land, is in line with their restrictions and rules. They are allowed to refuse, seize, or send back any items that do not fit their regulations.
In addition, tariffs, which is a type of custom duty, can add high costs to products. In light of the ongoing trade war between China and the US, it can be said that the latter can and will exercise power over international trade.
Moreover, rules surrounding labeling, banned products, packaging, and more can also change. This can pose a challenge to eCommerce retailers looking to sell in the US because of the instability and uncertainty surrounding custom-duty laws and regulations.
Tax
Every country has different tax expectations. Staying in line with tax rules in the US will not only be useful for avoiding costs in legal confrontations with the law but also help in meeting consumer expectations. For example, consumers in the US may expect listed prices to be minus tax, while many other countries do not.
Seeking legal consultation can go a long way. Knowing how to obtain a proper tax ID, or understanding where and how exemptions can be made will increase operational fluidity down the line.
Understanding tax structures within the USA could come easy to local sellers in other countries, especially Small and Medium Business Owners (SMBs). This makes it extremely difficult for these manufacturers and e-retailers to get their first break in the country.
FDA approval
If you are planning to sell any biological product, food, or drug, into the US, then abiding by the Food and Drug Administration’s (FDA) rules is a must.
Registering products and getting them approved by the FDA are also two different things. Some products are required to fall into either or both of the categories to be able to be sold in the US.
E-commerce implications for Southeast Asian manufacturers due to trade war
The tensions between the US and China have affected ASEAN countries that depend on free trade and open markets. This is due to the fact that lower consumer demand as a result of increased tariffs greatly influences the supply of raw materials, most of which come from ASEAN member countries.
Here are some of the eCommerce implications in Southeast Asia as a result of changes in global trade.
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Price rise of end products
As tariffs increase for intermediate products in both the US and China, consumers and retailers are vulnerable to price increases in end products prices.
Industries affected by the proposed tariffs include electronic and cotton products. This is due to the heavy reliance on China for the supply and assembly of US-branded electronic products. Retailers around the world that carry these products will most likely bear the higher costs.
Furthermore, while ASEAN countries look to be the eventual winners of the trade war with Foreign Direct Investment moving from China to Southeast Asia, multinational countries are still concerned with their poor infrastructure and logistic networks.
This sudden increase of demand on local manufacturers will result in higher costs to ASEAN members in the early years. Increased expenditure on infrastructure and manufacturing capabilities, as well as production capacity and labor training programs.
In addition, of the ASEAN members, the trade war has heavily benefited some while affecting others. Singapore, whose manufacturing sector heavily relies on the demand from China, has suffered heavy economic losses, especially in the semiconductor industry.
It will take time for Southeast Asia to become China’s manufacturing successor and produce similar numbers. Meanwhile, consumers can expect to be the biggest losers as a result of the trade war.
The furniture industry brought in US$ 1,417 billion in 2019, with an expected annual growth of 3.9%. China, as the largest furniture manufacturer in the world, accounts for more than a third of this with the US being the biggest importer of furniture worldwide.
Therefore, it is almost certain that the furniture industry will be greatly affected as a result of the ongoing trade war. However, products that do not have their supply chains linked to the US or China will likely be unaffected by the imposed tariffs.
This presents an opportunity for Southeast Asian countries who were already China’s biggest exporter of raw materials used in furniture with the leading exporters of hardwood, steel, and textiles into China being Thailand, Japan, and Vietnam, respectively.
The ability to source and manufacture furniture locally will significantly reduce costs which can help offset the high-cost barriers of selling in the US.
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Changes in supply chain systems
Prior to the US-China trade war, multinational corporations were already moving their manufacturing bases to Southeast Asia due to rising costs in labor and raw materials in China.
However, the emergence of the Covid-19 pandemic coupled with trade politics had further highlighted the problem with today’s globalized supply chain model.
As the world recognizes, and moves towards a more regionalized supply chain model, dependency on single supply chain sources and poor adaptability to trade shocks will cease to exist. Pandemics, political instability, and social unrest will no longer affect the worldwide economy.
As a result, Southeast Asian manufacturers looking to sell in global eCommerce markets like the US and Europe will face challenges such as price competition, opposing laws and regulations, and differences in political and financial agendas.
However, businesses and eCommerce retailers looking to sell locally in the region might find strong margins in lower costs as well as growing consumer expenditure in Southeast Asia.
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Impact on small business owners in Asian markets
The growing tensions between the US and China have forced many companies to rethink their global supply chains. The decoupling of the two countries presents an opportunity to many ASEAN countries.
Strong manufacturing countries like Vietnam stand to benefit the most from the trade war with cheap, but extended infrastructure and manufacturing capabilities already in place.
Furthermore, small manufacturing business owners in Southeast Asia, also profit greatly from the trade war as MNCs moving into the region are looking to build new partnerships. Bain & Co predicts that as companies move into ASEAN countries, small and medium businesses will adopt more technology into their operations resulting in potentially unlocking a trillion USD opportunity.
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Increased difficulty breaking into the US online markets
If tariffs continue to remain high, imported products from Asia may become too expensive for American households, especially if manufacturers opt to take the entire e-selling process into their own hands.
This could result in two independent eCommerce marketplaces which will make it much more difficult for Southeast Asian manufacturers to break into the US online markets, and vice versa.
Additionally, tough tariff structures, stringent laws, difficulty contacting online retailers in the USA, plus other logistics, warehousing, and shipment issues make it difficult for these local manufacturers to get their first big break in US markets.
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Shipment and logistic difficulties
As eCommerce activities pick up in Southeast Asia, complications surrounding shipment, warehousing, inventory management, and logistic difficulties will increase.
The US also has specific laws for warehousing and shipments. This may mean additional problems to resolve in order to get your end products delivered to the customers (even if you manage to find a space on an online retailer’s website).
It also includes different customs and clearance rules and regulations, and trade and transport infrastructure. The difference in quality control expectations could breed a multitude of problems.
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Challenges tying up with popular online retail brands
With the increase of small manufacturing businesses in the ASEAN region comes higher competition for quality control. Because consumers’ expectations for prices are to remain low, manufacturers will be forced to reduce profit margins in order to retain customer bases.
As a result, popular online retail brands like Amazon, Wayfair, Walmart, Overstock, etc have multiple options in their chosen manufacturers. This provides a large challenge to smaller and medium-sized businesses that can’t afford to stay competitive by cutting margins.
Also, read our article on “Global Furniture Industry Trends in 2021 and COVID Impact.”
Conclusion
As foreign companies move into Southeast Asia, competitiveness will grow amongst smaller manufacturing companies looking to make a profit from the trade war. There is no doubt that ASEAN countries will enter an age of unprecedented economic growth.
The US still has one of the largest online marketplaces in the world coupled with high spending power. This makes selling there financially attractive.
However, supply chain changes due to the ongoing trade war and the pandemic will bring more challenges and barriers when entering the US market.
Therefore, it is advisable to partner with end-to-end fulfillment and operations companies like MultiB2B to smoothen overseas transactions and ensure that laws and regulations are followed.
