Businesses spent years diversifying away from China. Trump’s trade war could destroy those economies

By John Liu, CNN

(CNN) — For Tim Hsu, who sells modern lamps and ceiling lights mostly to American customers, US President Donald Trump’s historic tariff announcement has upended his carefully made plans.

Last year, the Taiwanese businessman decided to invest in Cambodia to diversify his production base beyond his traditional stronghold of south China. He was preemptively hedging against the risk of possible higher tariffs on China during Trump’s second term.

But Wednesday’s announcement of an unexpectedly harsh levy on all US imports from Cambodia, the highest rate in Asia and second-highest globally, has changed everything.

“If the 49% tariff remains unchanged, we will withdraw our investment from Cambodia,” Hsu told CNN.

For now, his next move remains uncertain as questions linger over whether the steep tariff will stay.

The Cambodian government took action Friday to stave off the levy by lowering its own tariffs on a range of American goods, including motorcycles and cars. “Cambodia requests to the US government to establish a negotiation mechanism and extend the deadline of the tariffs implementation,” Commerce Minister Cham Nimul said in a letter addressed to United States Trade Representative Jamieson Greer.

Pulling out of Cambodia is relatively easy for Hsu because the investment is still in an early stage. But for many other companies with long-established factories employing thousands of workers in the country, one of Asia’s poorest, the tariff news is nothing short of devastating. And it’s not alone.

Many countries in Southeast Asia and South Asia — including Laos, Vietnam, Myanmar and Sri Lanka — were hit by tariffs of over 40%, which could cripple their export-reliant and extremely vulnerable economies.

For more than 15 years, they had been benefiting from global investors looking for alternatives to China’s efficient supply chains, which were gradually getting more expensive.

US-China tensions and the Covid-19 pandemic in recent years have accelerated the trend. Labor-intensive industries — from garments to footwear and lower-end electronics manufacturing and assembly — have subsequently become a major driver of these countries’ economic growth.

Some had already struggled with the fallout from Trump’s funding freeze of USAID, which provides humanitarian assistance to a region particularly susceptible to natural disasters.

Ahmed Albayrak, a research associate at the Sydney-based Lowy Institute’s Indo-Pacific Development Centre, said Trump’s tariffs will hit Cambodia, a garment production powerhouse, the hardest among all Southeast Asian countries given its major export of apparel and footwear products to the US.

While it has seen impressive growth over the last decade, Cambodia remains one of Asia’s poorest nations. The country of roughly 17 million people is still recovering from its turbulent recent history, including a secret US bombing campaign during the Vietnam war as well as the genocide perpetrated by the Khmer Rouge, the brutal government ousted in 1979.

At least 1.7 million people, nearly a quarter of Cambodia’s population then, were killed by execution, disease, starvation and overwork under four years of their rule and the legacy of that trauma still echoes today.

Lost gains?

Today, its economy is dominated by agriculture, tourism, and particularly manufacturing, in part because labor is cheap.

More than 37% of its exports are bound for the US, according to a CNN calculation of data released by Cambodia’s ministry of economy and finance, making it especially vulnerable to US tariffs. Exports of apparel and footwear accounted for over 43% of the country’s overseas shipments last year, according to another CNN calculation.

As a result, the vast number of garment workers, many of whom get by with a $200 minimum monthly wage, will be the hardest hit. Last year, about one million people were working in the garment, textiles and footwear industry, according to the United Nations Development Programme. About 75% of those workers are women.

Major international brands like Nike and Adidas have been moving their production lines to Southeast Asia to reduce exposure to China, which has been locked in a geopolitical tussle with the US.

“The negative impact of this tariff on the broader economy will be huge,” Albayrak said, warning of shrinking production and job losses.

Trump has justified his global tariffs as a means to bring home manufacturing jobs. But Cambodia serves as a great example of why that goal is unattainable, according to Casey Barnett, president of CamEd Business School, a Phnom Penh-based private higher education institution.

“Cambodia’s exports to the US are socks, shorts, jeans, t-shirts, athletic shoes and clothes,” he said. “It’s just impossible to have low-skilled, labor-intensive manufacturing in the US so it will have zero effect of bringing manufacturing back.”

Cambodia’s economy has been built on exports to the US, which contribute to 27% of its gross domestic product, and that has brought millions of people out of poverty, Barnett said.

“It would be really tragic to see that lost, to have hundreds of thousands of young women suddenly jobless, unable to support their families, pushed into poverty,” he said.

For now, investors in Cambodia are hoping to weather the tariff storm, counting on potential negotiations between Phnom Penh and Washington to bring down the levies, according to Kevin Chang, founder of Stronghold Trustee, a Phnom Penh-based trust company with over 300 foreign clients in the country.

Immediately after Trump’s tariff announcement, Chang said many of his clients flooded him with calls. Still, Chang is adopting a wait-and-see approach.

“I don’t think it will be final,” he said. “I do believe, for the benefit of all, there’s going to be some solution.”

China is the target

Some experts believe the high tariffs on these Southeast and South Asian nations reflect Trump’s broader aim of targeting Chinese exporters that have relocated production overseas.

Other Southeast Asian countries hard hit by tariffs include Laos at 48%, Vietnam at 46%, and Myanmar at 44%. Like Cambodia, Laos and Myanmar are among the poorest countries in southeast Asia. Vietnam, another clothing manufacturing hub which has seen impressive growth and a rise in living standards, sent nearly 30% of its overall exports to the US last year, according to CNN’s calculation of Vietnamese government data.

Nearly half of Cambodia’s foreign investment last year came from China, according to a statement by China’s embassy in the country, citing a Cambodian government report.

“The real target of Trump policy is China,” according to Siwage Dharma Negara, a senior fellow at the ISEAS-Yusof Ishak Institute in Singapore.

This is a way the US wishes to counter China’s strategy of accessing the American market through third countries, he said.

Edwin Lai, an economics professor at the Hong Kong University of Science and Technology specializing in international trade, said the large trade deficits between these countries and the US, which were used to justify the high tariffs against them, are signs of Chinese investment being diverted to these countries.

The US is aware of it, and Trump wants to leverage these tariffs to pressure the countries into curbing Chinese investment, he said.

But by imposing such steep tariffs globally, Lai warned that the US risks isolating itself, while China emerges as a leader in global trade.

“The rest of the world will try to practice freer trade, and I can see that China has the motivation to be the leader,” he said.

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This story has been updated with additional content.