Asia sees looming shocks from Trump’s second presidency

A probable trade shock for Asia in 2025

Asia should rightly be very concerned about Donald Trump’s second presidential mandate. The region’s economy, which is currently characterised by high levels of openness to trade and investments, making it the hub of global supply chains, will be severely impacted by Trump’s isolationist and protectionist policies. Therefore, based on his campaign pledges, Trump’s official start of rule on 20 January 2025 is being nervously anticipated. The central issue will be his stated hike of import tariffs up to 60% on all Chinese imports, and to 10-20% on imports from all other countries, including Asian countries. At the end of November, he announced that a 10% tariff would be added to the existing fees on Chinese imports, and although Trump’s tariffs should be used as a negotiating tool to extract trade and economic concessions from bilateral trading partners, a flat increase in tariffs seems almost certain – the uncertainty lies more in the timing and rate of any increases. This will certainly be an issue for China, which has the largest trade surplus vis-à-vis the USA. It is also considered the number one economic competitor across the US political spectrum and will be the country most affected by the intensifying trade war. However, inflationary fears in the USA and a potential trade deal between both economic superpowers could eventually limit the extent of tariff hikes on Chinese imports.

That said, the trade shock is expected to impact the entire continent, especially Southeast Asia, which exports 15% of its goods to the USA (its largest market), and East Asia. More specifically, those Asian economies that run a trade surplus with the USA and that have, until now, greatly benefited from rerouted Chinese investments and exports in order to circumvent US trade restrictions on strategic goods (such as semiconductors, EVs), are likely to be obvious US targets. It is likely that the USA will decide to focus not only on Chinese exports but also Chinese investments worldwide, in an effort to fight against loopholes in the US trade restriction regime. Therefore, Vietnam, a big winner with a wide bilateral trade surplus, is particularly at risk, followed by countries such as Thailand, Taiwan and Malaysia. The US government’s recently announced tariff hikes on solar panel imports from four Southeast Asian countries that currently benefit from China’s shifted production could be interpreted as a step in that direction. 

In the near term, the prospect of tariff hikes should lead to a temporary surge in Asian manufacturing exports to the USA. In the event of aggressive tariffs, which would most likely be implemented from the first half of 2025, Beijing would probably increase support to its ailing economy to mitigate risks of domestic instability. Yet despite these expected supportive developments, Asian countries are on the verge of facing a substantial shock, both indirectly as a result of weaker exports to the USA via China, the region’s dominant economic and financial player, and directly via bilateral import tariff hikes. In short, Trump’s “America First” and anti-China policies are expected to harm Asian economies and destabilise global supply chains.

Potential currency and inflation pressures lie ahead

Although the expected impact on trade is clear, there are two other economic consequences that could emerge from Trump’s trade and economic policies. First, a wave of currency depreciations across the region as a result of punitive tariffs on Chinese exports is likely to lead to capital flight from China and depreciating pressures on the RMB. In a region with fierce competition between countries in some sectors such as electronics and textiles, this could trigger a currency war. This depreciating trend could then be exacerbated by high US interest rates (amid heightened inflation expectations in the USA) and a stronger US dollar in 2025, thereby maintaining depreciating pressures on Asian currencies.

Secondly, inflationary pressures are likely to be fuelled by weaker Asian currencies, tighter foreign labour restrictions in the USA and higher import tariffs (from the USA but also potentially to some extent from retaliating trade partners on US exports such as China, India or Japan). These factors could maintain inflation at a higher level, and thus maintain higher interest rates in Asia as well.

Geopolitical risks made even more uncertain

Since Trump first served as president, the world has changed significantly. The world order is more fragmented, there are now two ongoing major conflicts and the geopolitical risks in Asia have increased. However, this will have no impact on the US foreign policy’s top priority, which was and will remain China: its number one rival. Meanwhile, Trump’s choice of a more isolationist policy and his opposition to multilateralism will create uncertainty around the US military commitment to its Asian allies. This is very concerning in a high-risk region threatened by several major conflict risks, particularly given the president-elect’s reluctance to enter into any conflict and fight against a nuclear power such as China. That said, US security alliances will continue simply because of the country’s need and broad political will to constrain China, but in return for the US umbrella, higher financial contributions in defence will be asked of its Asian allies. This transactional approach creates uncertainty and will certainly encourage Japan and South Korea to further raise their military spending. This reasoning also applies to Taiwan, where a tentative US military intervention would prolong the USA’s historic strategic ambiguity in the country, as opposed to Biden’s seemingly pro-intervention stance. Based on China’s intensification of military pressures around Taiwan, Beijing could be inclined to test the USA’s ambiguous support as of next year. Another conflict risk to monitor under a second Trump presidency will be North Korea, as military tensions and strikes have sharply intensified on the Korean peninsula, leading to higher risks of miscalculation and clashes. Strengthened by its security partnership with Moscow, it is expected that Pyongyang will attempt to reach out to the new US president with the aim of easing economic sanctions.

China: a victim of Trump’s policies but winner in the long term?

There is no doubt that higher import tariffs could hit the Chinese economy hard, especially amid prolonged economic turmoil and given the policy choices made in terms of advanced goods exports to drive GDP growth. However, China has the tools to mitigate the overall impact and could win out in the long term in various areas. Faced with aggressive US trade tariffs, Beijing has leverage and is expected to retaliate through its supply chain dominance on critical minerals, for example the recent export ban on gallium, germanium and antimony to the US, and by imposing sanctions against US groups that are still very active in China. High US import tariffs could also lead many countries in favour of multilateralism and free trade to turn more decisively towards China, seen as the more reliable partner not only in Southeast Asia where trade and economic links are already very close but also in the Global South in general. Moreover, an isolationist and transactional Trump in power could favour China’s long-term regional and world ambitions, and would likely accelerate the ongoing creation of a new world order that is moving away from the West, which will represent a long-term loss for US interests. Furthermore, when it comes to conflict risks, for instance in the South-China sea, an erratic US stance over time could push sovereignty claimant countries like the Philippines to adopt a weaker stance vis-à-vis Beijing in defending their maritime rights. On another note, in terms of climate change, the credibility gap between China and the USA – which will soon withdraw from the Paris Treaty for the second time – could lead to China eventually taking a leadership role in climate talks, favoured by its dominant position in green technologies and tight economic relations with emerging and developing countries. The latter will also have a relatively more positive image of China on an issue that is extremely crucial to them. The combination of all these expectations will obviously depend on future US foreign and trade policies that have yet to be implemented, but despite high levels of uncertainty, future trends may not deviate much from these potential scenarios.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com