Manufacturing activity in Asia declined in May due to ongoing US tariffs and trade uncertainty, data released on June 2 showed.

Countries like Vietnam, Taiwan, Indonesia, Japan, and South Korea reported decreases in production and exports.

Vietnam’s new export orders fell for the seventh consecutive month, while input costs dropped for the first time in nearly two years. Taiwan saw a second straight month of declines in output and export sales.

Indonesia had its steepest drop in new orders since August 2021, and South Korea reported its sharpest production decline in almost three years. The Philippines’ manufacturing growth also slowed.

This contraction follows heightened trade tensions after US President Donald Trump announced plans to double tariffs on steel and aluminum.

He accused China of violating tariff reduction agreements, prompting China to file complaints about discriminatory US measures.

🔗 Source: Bloomberg

🧠 Food for thought

1️⃣ Trade wars historically trigger supply chain shifts across Asia

The current manufacturing slowdown mirrors historical patterns where trade tensions prompt companies to relocate production to avoid tariffs.

During previous US-China trade tensions in 2019, over 50 multinational companies began shifting production from China to Southeast Asia, with Vietnam seeing Chinese foreign direct investment increase fivefold to $1.56 billion 1.

Major tech manufacturers led this trend, with HP and Dell planning to move 30% of their notebook production from China in 2019, while one European electronics manufacturer relocated $18 million in annual spending and a Silicon Valley firm moved $120 million from Shenzhen to ASEAN alternatives 2.

These shifts typically favor lower-cost manufacturing hubs like Vietnam and Malaysia, which saw a 410% increase in planned manufacturing projects from China in 2018 1.

Companies generally adopt a “China Plus One” strategy, maintaining some Chinese production while diversifying to other locations to reduce risk exposure, creating both winners and losers across Asian economies.

2️⃣ Trade conflicts have cascading effects beyond immediate trade data

The current manufacturing contraction reflects how trade tensions create ripple effects throughout regional supply chains, not just bilateral trade.