A new report from the World Bank identifies three major external factors reshaping the economic outlook for the East Asia and Pacific (EAP) region: the Middle East conflict, tariffs, and the artificial intelligence (AI) boom.

       Aaditya Mattoo, Director of Research at the World Bank, explained the current state of the "ASEAN-5" countries in response to recent tariff changes, noting that Vietnam is among the most severely affected. He acknowledged the region's remarkable resilience in the past but cautioned that current difficulties could exacerbate economic hardships and suppress productivity growth. "Moderate support for people and firms can sustain today's jobs, and restarting stalled structural reforms can unleash tomorrow's growth potential."

   The ASEAN Country Most Affected by U.S. Tariffs   

       The World Bank report states that the U.S. government's so-called "reciprocal tariffs" have now been replaced by 10% global tariffs imposed under Section 122, a temporary measure in effect until July 2026.

       Micro-simulation results indicate that, under three different scenarios, tariffs are expected to negatively impact the real income of several developing EAP economies. These scenarios are: the level of U.S. trade protection as of February 7; the level of U.S. trade protection excluding tariffs imposed under IEEPA but before the implementation of the 10% global tariffs; and the current scenario.

       The World Bank stated that, unsurprisingly, Cambodia, Thailand, and Vietnam face the highest risk of potential negative impacts from U.S. tariffs.

       The report notes that the precise impact of the Middle East conflict depends on each country's specific exposure, vulnerability, and policy space. Major Southeast Asian economies could all be affected, with Vietnam expected to experience the largest growth slowdown in 2026, with its economic growth rate projected to ease to 6.3%.

       Mattoo explained that the report provides estimates of the magnitude of the tariff impact on the region. "As I mentioned earlier, Vietnam is a prime example. These figures are model-based, not actual statistics, but they suggest that among the hardest-hit countries, Vietnam stands out: its GDP growth rate could potentially lose a full percentage point due to the tariff restrictions."

     "For other countries, such as Thailand, the impact is estimated to be around half a percentage point. Some countries are less affected, primarily because the U.S. has not imposed tariffs on their exports, such as electronics or semiconductors," he said.

     "Thailand is affected because its exports include auto parts, and the specific tariffs applied to that sector cover those products. In contrast, countries like Malaysia and the Philippines are less impacted because their electronics exports currently face relatively lower tariffs or trade restrictions," Mattoo noted. He observed that looking at U.S. tariffs on the ASEAN-5 countries, these levels were raised significantly by about 15 percentage points at one point in 2025 before partially retreating. Following a U.S. Supreme Court ruling that deemed the so-called "reciprocal tariffs" illegal, tariffs were lowered by 6 percentage points, but then new tariffs were introduced for a six-month period.

     "Thus, the current tariff situation means that for EAP economies, the average U.S. tariff level is around 14%, which is about 9 percentage points higher than the 2024 level," he explained. Among these countries, some, like Malaysia, face relatively lower tariffs of about 6%, while others, like Cambodia, face higher tariffs of about 23%.

       He added, however, that the extent of the impact is not solely determined by the tariff level faced. The World Bank report indicates that for most countries, the difference between U.S. tariffs on China and those on EAP economies has narrowed compared to the end of 2025, although the gap remains wider than a year ago.

       Mattoo explained: "The gap used to be about 5 percentage points, but now it has narrowed to about 1.5 percentage points, which is very small."

   Negative Impact of Economic Policy Uncertainty   

       The World Bank report highlights that economic policy uncertainty, particularly regarding trade policy, remains high and could negatively affect economic activity in the region.

       This uncertainty is dampening investment and employment across the EAP region as firms adopt a "wait-and-see" approach, deferring capital expenditures and prioritizing liquidity.

       Evidence from firms in the region suggests that a one-standard-deviation increase in external policy uncertainty significantly dampens investment growth and slows hiring. These effects are transmitted through production networks. "Evidence from Vietnam indicates that a sharp rise in global uncertainty negatively impacts employment quality in the region, specifically by increasing the likelihood of temporary employment contracts and putting downward pressure on wages," the World Bank report stated.

     "In many cases, I believe it's not the actual level of tariff protection itself that hinders investment, but rather this pervasive atmosphere of uncertainty. Because firms cannot predict the future direction, they tend to hold back and delay investment. And this situation can have a substantial negative impact on economic growth," Mattoo said. "As our research shows, this uncertainty negatively affects not only the total level of employment but also its composition. So, I think in absolute numbers or GDP terms, the direct impact of tariffs is actually not that significant."

       He noted that in a research paper co-authored with Dr. Alessandro Barattieri, they argue that economies could view these tariffs as a catalyst for their own reforms.

     "If countries undertake reforms in their services sectors and work to eliminate various non-tariff trade barriers, the gains from doing so would far outweigh the costs incurred from the tariffs," Mattoo said. "This is a key point we want to emphasize: countries have significant agency over their own destinies. The benefits from implementing their own reforms are many times greater than the costs of, say, implementing foreign protectionist trade policies."

     "In my view, the gains from reforming non-tariff barriers in goods and services trade could well exceed the associated costs," he stated.