Beyond factory relocation: Building local supply chains in Asean is key

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Beyond factory relocation: Building local supply chains in Asean is key

Published: 23 Jul. 2025, 00:05

Audio report: written by reporters, read by AI

Ko Young-kyung

The author is a research professor at Yonsei University Graduate School of International Studies.

“Should we relocate the factory?”

This is the question many Korean businesses operating in Southeast Asia are grappling with as they face sweeping tariff hikes imposed by U.S. President Donald Trump. The situation is far from simple. Tariff rates across Asean vary widely. Vietnam and Indonesia reached agreements to lower their rates to 20 percent and 19 percent, respectively, from 46 percent and 32 percent. Cambodia and Laos, however, still face steep tariffs of 36 percent and 40 percent, respectively. Thailand and Malaysia, which are currently negotiating rates of 36 percent and 25 percent, are under pressure to finalize deals by Aug. 1.

Yet, basing relocation decisions solely on tariff differentials may be shortsighted. Trump’s tariff policy does not target Asean alone. Major economies including Korea (25 percent), Japan (25 percent), the European Union (30 percent), Mexico (30 percent), Canada (35 percent), Brazil (50 percent) and China (55 percent) are also affected. With a flat 10 percent base tariff proposed on all traded goods, the scope is global.

Vietnam's Foreign Ministry spokeperson Pham Thu Hang answers reporters' questions during a press conference in Hanoi on July 3, 2025. Vietnam's trade deal with the United States averts the most punishing of Donald Trump's ″reciprocal″ levies but analysts warned it could provoke a fresh standoff between Washington and Beijing. [AFP/YONHAP]

In this context, the 20 percent range applied to Vietnam and Indonesia cannot be considered low. These rates came at a high price — $2.9 billion in agricultural imports from the United States, the purchase of 50 Boeing aircraft and $15 billion in energy imports. Yet paradoxically, these negotiated tariffs now serve as a competitive advantage.

What matters more than the rate itself is certainty. In April, when Vietnam’s tariff negotiations were underway, the VN-Index dropped to 1,094.3. Following a confirmed deal and renewed foreign investment, it rose to 1,507 on June 21, marking a 37.7 percent increase. Foreign investors purchased nearly $200 million in Vietnamese equities in a month. The market clearly values resolution over rate.

Trump’s diplomacy is less about allies and more about transactions. Vietnam and Indonesia’s success in securing deals shows the effectiveness of strategic give-and-take. Thailand, which leaned on historical ties with the United States, has yet to reach an agreement despite offering to reduce its trade surplus.

Meanwhile, the United States is pursuing bilateral rather than bloc-level deals, weakening Asean’s collective leverage. Its handling of individual tariff negotiations — such as announcing a higher rate for Vietnam than what was reportedly agreed, or assigning a far-right ambassador to Malaysia — reflects an approach driven more by domestic political calculus than diplomatic consistency.

Korean firms now face the challenge of navigating Trump’s unpredictable trade policies, while rethinking global supply chains. This means considering tariffs, rules of origin and sourcing networks in tandem. The 40 percent tariff on transshipped Chinese goods alone poses a direct threat to Korean exporters.

Still, rushing to relocate factories is not the answer. First, no country is immune to U.S. tariffs. Korea, Mexico and Canada are all affected. Second, relocation entails enormous hidden costs — from building new facilities and hiring skilled labor to dismantling and rebuilding supplier networks. Delays in achieving product quality stability could prove more costly than tariffs themselves.

A more sustainable solution is to reduce reliance on Chinese inputs by building stronger partnerships with local suppliers or replacing Chinese firms with Korean ones. If over 50 percent of parts are locally sourced, companies can meet rules-of-origin thresholds while minimizing tariff exposure. Developing a “China-free” supply chain in Asean could be more viable than relocating entire operations.

However, this cannot be done by companies alone. The Korean government must step in. As the United States implements systems to trace Chinese components, support for Asean nations like Vietnam and Indonesia in meeting these demands would ultimately benefit Korean firms.

Indonesia's President Prabowo Subianto attends a plenary session of the BRICS summit in Rio de Janeiro, Brazil, on July 7, 2025. BRICS leaders at a summit on Sunday took aim at US President Donald Trump's ″indiscriminate″ import tariffs and recent Israeli-US strikes on Iran.[AFP/YONHAP]

Cooperation should also extend to technical and sanitary regulations. If Asean countries align with Korean standards, as Vietnam already has in several sectors, the regulatory environment will become more favorable for Korean businesses, especially in emerging industries.

The current tariff war is not merely a threat — it is also an opportunity. As Southeast Asia’s manufacturing sector boosts exports to the United States, demand for intermediate goods rises. While China has been a major supplier, tighter controls on Chinese parts open the door for Korea to expand its role.

The real contest is just beginning. The goal is not simply “Made in Asean,” but rather “Made by Korea in Asean.” Nurturing local supply chains and partners is a more strategic response to uncertainty than relocating production sites. It is a long-term investment in resilience — and potentially, in leadership.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.