As Donald Trump prepares to return to the White House as US president, Wall Street banks are debating the economic and financial market implications of additional tariffs on imports into the United States. While predicting Trump’s moves is a futile task, one of the areas where there is consensus is that Asia is acutely vulnerable to the fallout from an onslaught of protectionism.
Given Trump’s obsession with bilateral trade balances, Asian economies are in the firing line. According to Morgan Stanley, seven of the 10 economies with the largest trade surpluses with the US are in Asia. Moreover, Asian economies are much more trade-dependent – exports account for between 37 and 85 per cent of economic output in Taiwan, South Korea and Malaysia – and are more sensitive to shifts in US monetary policy.
Many banks are using the impact of the 2018-19 US-China trade war as a template for their analyses and predictions of how the rest of Asia is likely to fare if Trump implements the extra tariffs he threatened to impose on China. Those in place so far are largely much lower than the 60 per cent levy on all Chinese goods he proposed during the presidential campaign.
However, today’s economic and financial landscape differs markedly from the one in 2018. Inflation and interest rates are much higher, posing a bigger challenge to Trump’s policy agenda but also amplifying the risks for the global economy and markets. Furthermore, China’s economy is in a far more precarious position, cyclically as well as structurally.
Several other factors increase Asia’s vulnerability to external shocks. First, economic activity in many countries remains below pre-pandemic levels. By contrast, output gaps – the difference between actual and potential output – in most economies excluding China were positive in 2017, giving the region “much more of a cushion to absorb a trade hit than it has now,” JPMorgan said.
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China sees slowest economic growth in over a year with 4.6% GDP in third quarter
China sees slowest economic growth in over a year with 4.6% GDP in third quarter
Second, Asian economies, with the exception of China and India, have become more reliant on exports in the past several years. While the share of exports to China has dropped, China is still far and away the region’s biggest export market. Furthermore, the proportion of Asian exports to the US has risen sharply since 2018, partly because of the surge in technological exports. Asia ex-China’s trade surplus with the US has doubled since September 2019 to US$400 billion, according to data from Morgan Stanley.