Trade War Between the United States and The People's Republic of China: Global Economic Impact and Implications for Timor-Leste

Trade War Between the United States and The People's Republic of China: Global Economic Impact and Implications for Timor-Leste

May 2025

I.            INTRODUCTION

In early April 2025, the global economy entered a renewed phase of uncertainty and geopolitical tension following a series of tariff measures introduced by U.S. President Donald

Trump. These measures have significantly disrupted global trade relations, particularly between the United States and the People’s Republic of China. The substantial increase in

import tariffs on goods from China and other countries—including Southeast Asian nations—has triggered instability across international markets.

This article aims to clarify the concepts of tariffs and quotas, distinguish their mechanisms and implications, and assess how recent U.S. trade policies may implicate Timor-Leste’s

economy. It presents a brief assessment of potential risks and strategic opportunities arising from ongoing changes in the global trade environment, with implications for national

economic resilience and policy responses

II. TARIFFS AND QUOTAS

1.      Understanding Tariffs and Quotas in International Trade

•  Tariff:
  A tariff is a tax levied by a government on imported goods. Its main objectives include:

1.       Protecting domestic industries from foreign competition

2.      Raising government revenue

3.      Reducing trade deficits

4.      Enhancing the competitiveness of local products

Example: If the government imposes a 20% tariff on imported bottled water, the retail price of the imported bottled water will rise, making locally produced water more price-competitive in the domestic market.

• Quota: 

A quota is a government-imposed limit on the quantity of a specific good that may be imported within a designated timeframe. Unlike tariffs, quotas directly restrict import volumes.

Example: If the government sets a monthly limit of 97.5 million liters of bottled water (beverage) imports from Indonesia, any imports beyond that threshold will be prohibited—even if the product remains affordable.

• Key Distinction:

a)      Tariff: Increases the price of imports but does not restrict the volume

b)      Quota: Directly restricts the volume of imports, irrespective of price

1.      U.S. Tariff Policy and Its Impact on Timor-Leste’s Economy

It is particularly noteworthy that, under President Donald Trump’s administration, the United States implemented a basic or universal tariff policy applicable to all importers. In addition, President Trump introduced an additional measure known as the reciprocal tariff. This policy officially took effect on April 9, 2025, marking the beginning of a new U.S. tariff regime targeting foreign products.

Under this policy, the United States imposed a significant additional tariff of 125% on products imported from China, on top of the existing 20% tariff, resulting in a combined total of 145%. The policy also extended to several other economies, with tariffs applied as follows:

1.       Hong Kong and Macau: 32%

2.      Cambodia: 49%

3.      Vietnam: 46%

4.      Thailand: 36%

5.      India: 26%

6.      South Korea: 25%

7.       Indonesia: additional 32%

8.      Timor-Leste were subjected only to the basic 10% tariff, with no additional tariffs applied.

How Do Trade Policy Decisions by the President of the United States Affect Timor-Leste’s Economy?

From the author’s perspective, trade policy decisions made by the President of the United States can have both direct and indirect effects on Timor-Leste’s economy, particularly in the areas of imports, exports, logistics distribution, and investment. At the same time, these trade policies may present strategic opportunities for the country.

A. Direct Impact on Timor-Leste (Minimal)

1. The volume of trade between Timor-Leste and the United States remains relatively low, resulting in limited direct impact on exports and imports.
2. Timor-Leste currently faces a basic import tariff rate of approximately 10%, a level considered moderate compared to the higher tariffs imposed on countries such as Indonesia and Vietnam.

B. Indirect Impacts (Requiring Attention)

1. Global uncertainty and insecurity resulting from aggressive trade policies may weaken investor confidence, which is vital for the economic development of emerging markets like Timor-Leste.
2. Disruptions in global supply chains could lead to higher input and logistics costs for imported goods.
3. Inflationary pressures may reduce household purchasing power, negatively affecting local consumers and the domestic market.

C. Impact on the Investment Climate

1. International investors may redirect capital to markets perceived as more stable and lower-risk due to escalating trade tensions.
2. In the absence of progress or meaningful improvements in the investment climate, Timor-Leste risks missing out on opportunities to attract foreign direct investment (FDI).

D. Implications for Timor Leste’s petroleum fund

Timor-Leste experienced investment losses of approximately USD 450 million in the most recent quarter, largely due to heightened volatility in global financial markets. Investments in U.S. assets—particularly bonds and equities—yielded lower returns amid ongoing market disruptions. The imposition of a 10% baseline tariff on Timor-Leste’s exports, while relatively modest, could further impact the long-term returns of the Petroleum Fund, which is heavily concentrated in U.S. Treasury securities and other low-risk assets.

E. Strategic Opportunities for Timor-Leste

1. Geopolitical shifts may offer Timor-Leste the opportunity to accelerate its accession to ASEAN, enhancing its regional integration and economic diplomacy.
2. Strengthening regional economic integration could help reduce Timor-Leste’s dependency on the U.S. market and support diversification of its trade partnerships, including increased engagement with China-centric trade networks.
3.  

III. CONCLUSION

1. Tariffs and quotas are key instruments of international trade policy used to protect domestic industries and regulate imports.
2. While the direct effects of the U.S. tariff policy on Timor-Leste remain limited, the broader psychological and economic repercussions may hinder development and investment if not carefully managed.
3. Timor-Leste must adopt forward-looking policies to mitigate risks and seize new opportunities presented by shifting global trade patterns.
4. Increased pressure on exchange rate stability and declining Petroleum Fund returns underscore the urgent need for economic diversification and improved resilience.

Editorial Note

This article is intended as a policy insight to foster dialogue and raise awareness on trade and economic issues impacting Timor-Leste—particularly within the context of escalating global trade tensions.

Written by: Hernani Agostinho Soares

Vice Chairman of CCI-TL for Strategic Planning, Economic Development, Research, and Innovation