Trump is back – what now for Asia?

United States President-elect Donald Trump’s proposed economic policies threaten to increase trade restrictiveness around the world. The execution of these ideas, which are more severe than what was implemented during his first presidency, risk impacting Asian trade through slower US and global growth, as well as fracturing supply chains in the region.

A material tariff increase on US imports from China would hurt demand across the board. Asian producers, both export and domestic oriented, will face greater competition. A universal 10 per cent tariff would have a milder impact, to the extent it could potentially be absorbed by reducing export prices and exchange rate weakness.

Asian economies are unlikely to be able to retaliate with tit-for-tat measures as they all run trade surpluses with the US.

It’s likely China would increase competition in non-US markets and within Asia. Economies heavily reliant on manufacturing trade, like Taiwan and Vietnam, face the highest risk, with Vietnam particularly vulnerable due to its exposure to US markets, and its role as a conduit for Chinese exports. India and Indonesia might fare better, but overall, no real winners are expected in such a conflict.

Significantly

During Trump’s 2017-2021 presidency US trade policies shifted significantly, in a bid to reduce the US trade deficit, protect intellectual property, and reclaim manufacturing jobs. This led to tariffs on Chinese imports from June 2018, which escalated to cover 66.4 per cent of imports by 2021.

These tariffs altered global trade, reducing US imports from China by over 20 per cent and increasing imports from other countries by 35 per cent. Vietnam and Taiwan benefited the most. Despite the trade war, China’s global export share grew by accessing non-US markets and re-routing exports.

These changes had varied effects on Asian manufacturing trade balances. Mainland China’s manufacturing trade surplus has grown, driven by products like smartphones, lithium-ion batteries, computers and photovoltaic cells.

Malaysia, Taiwan, and Indonesia saw gains in their trade balances, with electronics boosting Malaysia and Taiwan, and resources aiding Indonesia. South Korea, Thailand, the Philippines, and India experienced declines, partly due to Chinese market penetration.

Two of Trump’s current proposals warrant particular attention: the first, tariffs of 60 per cent or more on Chinese imports and circumventing their re-routing via conduit economies; the second, a 10 per cent universal baseline tariff on all imports. These policies might be diluted or implemented gradually, but until there are further details, it’s important to consider these proposals at face value.

Prohibitive

A 60 per cent flat tariff on all US imports from mainland China would be far more prohibitive than the tariffs implemented during Trump’s first term.

China is a major global exporter in key product groups. Replacing China’s manufacturing capabilities would be challenging due to its skilled labour, technical expertise, and economies of scale. Such a move may even raise global recession risks.

ANZ Research expects such a proposal would be diluted and/or phased in. As a base case, imports currently subject to 25 per cent tariffs may see a further 5 per cent increase, while products attracting tariffs of 7.5 per cent would be lifted to 15 per cent.

In aggregate, the average tariff on imports from China are likely to rise to 22 per cent. A punitive tariff of 10 per cent to 15 per cent may be considered at a later stage, bringing the effective tariff to between 32 per cent to 37 per cent.

Even so, tariffs of this order will lead to increased prices for US consumers and reduced demand, as well as margin compression for both Chinese exporters and US importers. This scenario would create a supply-side shock, resulting in higher prices, squeezed profit margins, and ultimately weaker economic growth.

For the rest of Asia, weaker growth in the US and China would have a negative impact with limited potential to offset losses.

Reorganise

A universal 10 per cent tariff is unlikely to reorganise supply chains. The main concern is whether and how much these tariffs will be passed on to consumers, reducing their purchasing power.

Studies indicate that tariffs from Trump’s first term were fully passed on, lowering household incomes by $US800 to $US1,300 in 2020, according to the Peterson Institute for International Economics (PIIE).

The exact impact on consumption is unclear due to the pandemic. The impact of a universal tariff will be more significant as it would impact a broader range of imports. PIIE has estimated imports subject to tariffs will rise from 1.8 per cent of US gross domestic product to 9.8 per cent. This would materially reduce household income and hurt aggregate demand.

Producers might need to absorb some costs through lower export prices, exchange rate adjustments, and margin compression. US aggregate demand is likely to fall, with Vietnam being particularly vulnerable due to its high exposure to US exports and reliance on domestic value-added in US final demand.

The likelihood of US producers replacing Asian imports in the near term is low. Malaysia, the Philippines and Taiwan could be vulnerable to shifts in the electronic integrated circuit supply chains. For the most part, the US is not a major producer of most of the products it primarily sources from Asia.

A universal tariff could trigger retaliation, escalating global trade tensions. In 2018, the EU, Canada, and Mexico retaliated against US tariffs on steel and aluminium. Asian economies, all running trade surpluses with the US, would be disadvantaged by such tit-for-tat measures.

There is a possibility Trump will train his trade-restrictive policies on economies that run large trade surpluses with the US. In such a scenario, China, Vietnam, South Korea and Taiwan would come under the scanner.

Arindam Chakraborty is an Economist and Sanjay Mathur is Chief Economist Southeast Asia and India at ANZ

This is an edited version of the ANZ Research note “Asia with Trump 2.0”, published November 8, 2024