Blog

[JAKARTA / HO CHI MINH CITY] South-east Asia’s role as the factory floor for global sportswear and apparel giants is being tested by the high-stakes tariffs stand-off with Washington – and the next 90 days of haggling could make or break the region’s edge as a manufacturing hub and long-term investment magnet.

Textiles, garments and footwear are not just big business for Vietnam, Indonesia and Cambodia – they are the lifeblood of their export economies, driving jobs and growth.

Vietnam remained South-east Asia’s top textile and footwear exporter to the US in 2024, racking up US$24.5 billion in shipments; Indonesia followed with US$7.1 billion, and Cambodia logged US$745.8 million, according to official data and industry sources.

These sectors have turned the three countries into key manufacturing hubs for global giants such as Nike, adidas and Lululemon, with the US serving as both their biggest customer and most critical market.

“It’s only a temporary reprieve – we’re still waiting to see how the negotiations play out,” Jemmy Kartiwa Sastraatmaja, chairman of the Indonesian Textile Association, told The Business Times. He added, however, that the pause is “very helpful as it gives us room to breathe and more time to keep negotiating for a win-win outcome”.

That, however, may be wishful thinking, given Washington’s hardline stance.

Having previously weathered the first wave of the US-China trade war by capitalising on the manufacturing exodus from China, the region is once again in the crosshairs of sweeping US tariff hikes.

Vietnam and Cambodia were bracing for steep tariff hikes of 46 per cent and 49 per cent, respectively, while Indonesia faced a 32 per cent increase set for Apr 9 – until US President Donald Trump unexpectedly pulled the plug and granted the 90-day reprieve. On Wednesday (Apr 9), he announced a lower 10 per cent tariff for most countries, but raised duties on China to 125 per cent.

Frederic Neumann, chief Asia economist at HSBC, said: “A 10 per cent blanket tariff appears largely manageable for South-east Asian economies – for the time being.”

Negotiation game

Instead of resorting to tit-for-tat measures, Asean countries are focusing on dialogue with the US over trade tariffs, and have pledged not to impose retaliatory actions in their efforts to secure tariff relief from Trump.

Analysts say the outcome of negotiations could be pivotal in determining the region’s ability to maintain its appeal as a long-term magnet for foreign investment.

Allianz economists said in their latest research: “South-east Asia will remain attractive in the long run if countries manage to strike deals with the US and depreciate their currencies to compensate for part of the tariff increases.”

In a show of goodwill, some governments are even exploring the possibility of lowering import duties on US goods – ranging from agricultural products to industrial inputs – not only to reduce their trade imbalances, but also to strengthen their bargaining position in increasingly delicate negotiations.

Indonesia is exploring a plan to boost imports of US cotton – a key raw material for the garments it manufactures – to help narrow its US$17 billion trade surplus with Washington.

South-east Asia’s largest economy imports roughly 500,000 tonnes of cotton annually, but only 17 per cent comes from the US. Jemmy of the Indonesian Textile Association said the industry is aiming to spin that number up to 50 per cent.

Indonesia’s footwear and apparel sector hit its stride last year, chalking up US$11.2 billion in exports – a 9.8 per cent increase from the year before. The US remained its biggest runway, absorbing 60 per cent of its total shipments, according to the Indonesia Statistics Bureau.

Cambodia, which had faced the steepest proposed tariff hike among Asean nations, has offered an average 10 per cent cut on US imports – including those on meat, dairy products and motorcycles – as a strategic bargaining chip to secure lower duties on its own exports, reported Khmer Times.

The US remains Cambodia’s largest export destination, accounting for 37.9 per cent of the kingdom’s total outbound trade, which is largely driven by garments, footwear and travel goods, going by United Nations Comtrade data.

Meanwhile, Vietnam has offered to bring the import tariff rate to 0 per cent for US goods and seek the same approach from the other side, as both countries agreed to start talks for a bilateral trade agreement.

Vietnam has already made a series of trade concessions, including tariff reductions on selected US goods, including liquefied natural gas, vehicles and ethanol, in hopes of securing more favourable terms for its own exports.

Shock needle

The latest round of US tariffs came as a surprise to Indonesia.

In a Zoom call earlier this week, the American sportswear giant Nike reached out directly to the Indonesian government to safeguard its supply chain, said Coordinating Minister for Economic Affairs Airlangga Hartarto.

Nike now uses at least nine factories in Indonesia to produce apparel and footwear for its global supply chain. Most of these facilities are run by manufacturers from China, Taiwan and South Korea, collectively employing hundreds of thousands of Indonesian workers.

Already, the tariffs are threatening to further destabilise the country’s struggling textile industry, which is grappling with a protracted downturn marked by factory closures, declining orders and waves of layoffs.

Yoseph Billie Dosiwoda, executive director of the Indonesian Footwear Association, said that with domestic demand running out of steam, exports have become the industry’s saving grace – especially now, as a stronger US dollar brings an unexpected revenue windfall.

But the sudden hike in tariffs has thrown a spanner into the works, forcing many players to sit on their hands and wait before stepping back into the negotiating ring with buyers.

Fakhrul Fulvian, chief economist at Trimegah Sekuritas, said the tariff delay presents an opportunity for Indonesia – previously hit with a smaller hike than Vietnam and Cambodia – to regroup and strengthen its trade strategy with the US.

He added that accelerating business deregulation and easing export procedures will be key to boosting the country’s textile and footwear competitiveness.

“The trade war is opening the door for reshoring opportunities from countries likely to be hit harder than Indonesia – such as Vietnam, Bangladesh, China and Thailand,” he said.

Vietnam – deepest cut

Among Asean countries, analysts say Vietnam stands to lose the most from the tariff hike. Its heavy reliance on the US market leaves it exposed to outsized risks if trade tensions deepen and no agreement is reached with Washington.

Textiles and footwear account for about a fifth of Vietnam’s total exports to the US, which in turn purchases more than a third of the sector’s global shipments. The South-east Asian country now produces half of Nike’s global footwear and 39 per cent of adidas shoes.

The prospect of steep reciprocal tariffs now threatens to erode its competitive advantage – particularly as regional peers face less severe levies.

“We expect shipments of clothes and shoes (from Vietnam) to bear the brunt of a significant decline in US demand,” BMI analysts stated in a note on Apr 7.

According to the Vietnam Textile and Apparel Association (Vitas), Vietnam has steadily climbed the ranks to become the second-largest supplier of textiles to the US in recent years, second only to China.

“Vietnamese enterprises are deeply concerned and anxious about the unexpectedly high and excessive tariffs,” Truong Van Can, vice-chairman of Vitas, said at an emergency meeting with the government on Apr 4. “The textile industry already operates on razor-thin margins and must constantly fend off fierce competition from other exporting countries.”

No short cuts

With the threat of steep tariffs hanging over their key export markets, regional manufacturers are racing to diversify their customer base – seeking new markets not just as a stopgap, but as a long-term strategy to safeguard profit margins and reduce overreliance on the US.

“However, acquiring a new client in a different market is no easy feat… it’s not something that can be done in just a day or two,” said Tran Anh Tuan, senior executive assistant to the chairman of New World Fashion Group, a Vietnam-based manufacturing vendor for global fashion brands.

He noted that it would especially take time for suppliers to comply with a different set of requirements and standards in other markets.

The challenge for Vietnam is also compounded by structural limitations. More than 70 per cent of Vietnam’s textile manufacturing inputs are still imported – mostly from China – leaving the sector vulnerable to origin-based restrictions from tariff preferences under some trade deals.