Recent geoeconomic developments are affecting Asia in unique ways. The region—long a hub of manufacturing and supply chain operations for Western multinationals—is being hit hard by recent US tariffs. Asian governments’ responses have varied, from accelerating trade negotiations to seeking stronger ties with other economies to implementing retaliatory moves. Companies are reviewing their strategies for both the short and long term.
To learn more about policy directions across Asia and how companies are responding, Ziad Haider, McKinsey’s global director of geopolitics, recently sat down in discussion with two McKinsey senior advisers with deep expertise in Asian geopolitics. Shankar Menon was a national security adviser to India’s prime minister from 2010 to 2014 and before that was the country’s foreign secretary. He has also served as ambassador or high commissioner to China, Pakistan, Sri Lanka, and Israel. Marty Natalegawa is a veteran diplomat who served as Indonesia’s permanent representative to the United Nations and ambassador to the United Kingdom and Ireland. He was Indonesia’s foreign minister between 2009 and 2014.
Ziad Haider: The India–United States relationship has experienced some disjunction recently over US actions on tariffs. Is this a rift that can be healed, and if not, what does it mean for Western businesses that have viewed India as a market with a geopolitical tailwind?
Shankar Menon: I would characterize the recent events as a dip, because India–US relations have been on a steady improvement trajectory for the past two-and-a-half decades. In earlier months, both sides made optimistic statements about bilateral trade negotiations. The sudden imposition of punitive tariffs on India, supposedly because India buys oil from Russia, left many people bewildered. India has always maintained a relationship with Russia. Similarly, Prime Minister [Narendra] Modi’s recent visit to China was perceived as a reaction to tensions with the United States, yet China is India’s biggest neighbor. India–China relations, which went through a bad period following clashes at the border in 2020, started recovering about a year ago after the two leaders met. I think all the reasons why India–US relations improved over the past two decades are still valid.
In some ways, this dip may be useful in provoking both sides to recognize the relationship’s importance. In fact, a recent article in Foreign Affairs suggests that India and the United States should form an alliance based on five pillars, including technology and defense.1 The Indian government has used the dip as a spur for reforms that could improve relations with both the United States and the rest of Asia. The government has simplified the goods and services tax (GST), signaled increasing openness to foreign investment, and is trying to conclude bilateral trade agreements with the European Union and other economies.
Neither India nor the United States has done permanent damage to the structures of cooperation or stopped ongoing initiatives between the two countries. You might say that politics is 60 percent theater, and the theatrical part may have gotten a little out of hand here. President Trump has since tweeted that Prime Minister Modi is a great friend and leader, and Prime Minister Modi reciprocated. I see all this as part of a hard negotiating process, and I’m an optimist.
Ziad Haider: India’s policy of aligning with multiple geopolitical blocs may be in the spotlight, but India is not alone in this approach. Vietnam has its “bamboo diplomacy”2 and Indonesia has the bebas-aktif (independent and active) policy. Marty, can you help us understand how the Indonesian government’s focus on maintaining multiple relationships has affected investment flows into the country, particularly in the critical mineral sector?
Marty Natalegawa: Indonesia has always pursued an independent and active policy in the interest of preserving autonomy and a capacity for independent decision-making based on the merit of each case. That doesn’t mean we want to be in the middle: There may be occasions where we are closer to one group of countries or another. Since President Prabowo [Subianto Djojohadikusumo] came to office, we have seen an even clearer manifestation of that orientation. One of his first decisions was to join BRICS, the group of so-called Global South countries with India, China, and Russia.3 Although seen by some as an example of moving closer to China and Russia, from Indonesia’s vantage point, the move is simply an attempt to maintain equilibrium between different groups.
If you look at the top foreign direct investment [FDI] countries, however, they won’t necessarily correlate with that equilibrium we’re trying to maintain. Indonesia is overwhelmingly reliant on FDI through Singapore, China, and Hong Kong. Most FDI decisions aren’t based on the need to maintain autonomy in the political domain. Minerals, however, are one area where I think Indonesia will be receptive to diversification. In recent years, we have been developing our own capacity to process raw minerals. About 90 percent of investment in that effort has been Chinese led, but there are increasing calls for more diversification so we don’t put all our eggs in one basket.
Ziad Haider: The Indonesian government recently appointed a new finance minister. What does that mean for trade, investment, and business-related policies?
Marty Natalegawa: The former Finance Minister Sri Mulyani Indrawati represented stability and projected confidence in Indonesia’s economy. Her successor, Purbaya Yudhi Sadewa, has to earn that stature and the trust not only of the international community but the country. Right now, his primary focus is on Indonesia itself, because Mulyani had to make extremely unpopular decisions to finance expensive policies.
In terms of policies, I expect more of the same. In his first statement upon appointment, Purbaya emphasized the aim for 6 to 8 percent growth, which in the current climate is quite … courageous.
Ziad Haider: Let’s talk about China. In recent years, multinational companies have looked to India as a way to derisk their China strategies. Yet many supply chains in India still have a heavy Chinese component. Shankar, how is the Indian government thinking about the trade and investment relationship with China, and what implications do you see for multinationals’ supply chain configurations?
Shankar Menon: The Indian government has tried to rework the relationship with China over the past year. Trade never stopped despite the political trouble in 2020. China and the United States kept switching places as India’s biggest trading partner in merchandise goods. Now, the recalibration in the international trading system and the uncertainty that US tariffs have introduced have led India, like many other countries, to integrate more with the rest of the world. I think this is why there’s been an acceleration of trade agreement negotiations with the EU and attempts to explore collaboration with our ASEAN partners. I think multinational companies looking at India as a manufacturing base will find a welcoming reception.
Ziad Haider: Speaking of ASEAN, Marty, what’s your sense of ASEAN’s ability to maintain the delicate balance between United States and China, particularly around supply chains and trans-shipments?
Marty Natalegawa: One of the key themes that the ASEAN Business and Investment Summit in October intends to underscore is open regionalism. While there’s no unified ASEAN position on the reciprocal tariffs, the members wish to emphasize the notion of Southeast Asia being engaged. As Shankar mentioned, a crisis can compel action. In the past, whether it was the 1998 Asian financial crisis or the 2008 global financial crisis, an external shock often became a catalyst for more integration. President Trump’s reciprocal tariffs have renewed the impetus for ASEAN to finalize the China–ASEAN Free Trade Area 3.0 agreement. There’s a renewed emphasis on the Regional Comprehensive Economic Partnership as well. Countries in Southeast Asia want to continue to trade and are adopting a long-term view.
Additionally, in May, there was a special ASEAN–China–GCC4 summit where, for the first time, the three regions set out to deepen their economic ties. Perhaps much like the 1998 crisis motivated the ASEAN to develop the “plus-three relationship”—ASEAN plus China, Japan, and Korea—the current crisis is encouraging the region to pursue greater cooperation.
Ziad Haider: In studying the ongoing trade negotiations, we’ve found six themes on which I’d like to get your perspectives. First, we’re in a 10 percent-plus world of tariffs on exports to the United States. Second, the US government wants greater access to Asian markets for US goods. The third theme is Asian companies committing to purchase key US products, particularly in energy, defense and aerospace, and agriculture. Fourth, Asian economies are committing to invest in the United States, although when and how those commitments will translate into actual investments is an open question. Another important theme is trans-shipment penalties. The United States is seeking to reduce Chinese content in ASEAN supply chains but hasn’t defined the thresholds. Vietnam, for example, faces a 20 percent tariff rate, but that could rise to 40 percent if a trans-shipment penalty is included, creating uncertainty for manufacturers. Lastly, despite a number of announcements and frameworks, no final trade agreement texts have been released, which is a challenge for business planning.
As for how Asian governments are responding, we look at this through the lens of the INDRA framework (exhibit). First, they’re taking the initiative to announce investments in the United States to create goodwill and secure commercial opportunities. For example, Korea announced a $350 billion investment, $150 billion of which is earmarked for an initiative called Make American Shipbuilding Great Again. Governments are also negotiating trade agreements, diversifying trade relationships, and responding to other governments’ measures, such as China cutting off access to rare-earth metals earlier this year that US auto manufacturers rely on. The last element is anchoring. Amid trade disputes, governments are trying to anchor domestic companies and curb job losses through economic stabilization measures. Here in Singapore, anchoring also extends to securing an open global trading system. In September, Singapore joined 13 countries in launching the Future of Investment and Trade Partnership to facilitate investment, remove trade barriers, and set standards for the digital economy. Any other lenses you would add?
Shankar Menon: I like those lenses. One additional concern is that with tariffs and trade, we’re looking at the real economy, but there’s less attention on the impact on the global financial system. We’ve now brought politics into economics. We need to consider what kind of financial system we will have three or five years down the road. Certainly, for countries like Singapore, that will be very important, and it also matters to multinationals.
Ziad Haider: That’s a great point. I also think we’re at risk of having a myopic view of the new geoeconomic game. Asian companies and governments should be looking beyond tariffs to issues such as the growing geopoliticization of critical infrastructure including ports or undersea cables and the expanding use of geoeconomic tools including export controls and investment-screening regimes.
We find Asian companies are responding to geopolitical uncertainty in two ways: using a microscope to focus on ways to play defense and offense on tariffs, then picking up a telescope to assess the capabilities they will need to navigate a much more volatile world.
On the microscope side, many companies have taken a wait-and-see approach. Some are trying to optimize their portfolios. Businesses that are more defensive are also thinking about pricing—whether to share the burden of tariff costs with suppliers and customers or carry it alone. Another defensive move is to protect key markets and the relationships there by announcing initiatives to signal commitment to a market amid geopolitical tension with their home market. One of the world’s largest retail players that depends heavily on Chinese suppliers is helping those suppliers scale up their sales and services within China to buffer them from tariff-related headwinds. As for offensive moves, some Asian companies with existing facilities in the United States are expanding them, seeing opportunities amid deregulation and the push for AI and data centers, among other shifts. Others are boosting their corporate-affairs capabilities and stakeholder engagement or pivoting to new markets and tapping alternate trade corridors.
On the telescopic lens, many companies realize that multiple transitions are under way—not only geopolitical but energy technology, demographic, and capital. They’re exploring scenarios in which these different trends collide and asking: “What are our no-regrets moves? What big bold moves can we make? Where do we want to maintain options?”
Marty and Shankar, how do you think Asian companies should be responding?
Marty Natalegawa: There is no one-size-fits-all. First and foremost, business leaders should identify their vulnerabilities vis-à-vis the geopolitical developments. The separation between geoeconomics and geopolitics is increasingly tenuous. Are tariff policies being adopted to address economic priorities or are they geopolitical instruments? The distinction between national-level and regional- and global-level dynamics is also diminishing. Developments in the United States or in Thailand affect us all.
Shankar Menon: I agree that politics is now in command. For me, the biggest watch points are energy and technology. We need to watch those two revolutions carefully. If we let politics drive them, I’m afraid we’re in for a rough ride.
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