What Trump 2.0 would mean for Asia

Similarly, the share of Chinese goods in US imports has fallen. The void left by mainland China has been filled by a rise of about 35 per cent from the rest of the world – within Asia, Vietnam and Taiwan experienced the sharpest gains.

Some of these gains reflected a continuation of pre-existing shifts in production patterns. Other factors such as a re-routing of mainland Chinese products and a reconfiguration of supply chains also contributed.

The more surprising change is that mainland China’s share of global exports has improved since the US-China trade war began, reflecting its ability to penetrate non-US markets or re-route its exports to the US via ‘conduit’ economies.

These shifts in trade patterns have had a mixed impact on manufacturing trade balances. We note that:

• Mainland China’s manufacturing trade surplus has widened, led by products such as smart phones, lithium-ion batteries, computers and photovoltaic cells.
• Malaysia, Taiwan and Indonesia experienced net gains in their manufacturing trade balance. For the first two, this came on the back of advances in electronics, whereas Indonesia’s gain was driven by the resource sectors.
• Conversely, manufacturing trade balances have deteriorated in South Korea, Thailand, the Philippines and India. These economies have also seen their bilateral trade balances with mainland China deteriorate.

The road ahead for Trump 2.0

Before delving into Trump’s election proposals, we should stress there appears to be bipartisan support in the US for restrictive trade policies with China. Notably, the Biden administration has not removed or lowered the tariffs it inherited.

Indeed, in May 2024, it imposed fresh tariffs on US$18 billion of imports from mainland China. It also strengthened export restrictions on mainland China for advanced technologies, including semiconductors and encouraged US allies to impose similar restrictions.

Other protectionist measures include the passage of the Inflation Reduction Act and the CHIPS Act, both aimed at promoting domestic firms through industrial subsidies.

Two of Trump’s current proposals warrant particular attention:

• tariffs of 60 per cent or more on Chinese imports and circumventing their re-routing via conduit economies, and
• a 10 per cent universal baseline tariff on all imports.

It is possible these policies will be diluted or phased-in gradually, but until we get more clarity, we take these policy proposals at face value. We also assume, in our analysis, a worst-case scenario where they are implemented in a single phase.

US-China trade tension: 60 per cent tariff on Chinese exports

The impact of a 60 per cent flat tariff on all US imports from mainland China will not be a straightforward extrapolation of the trends we observed during Trump’s presidency. It would be a much more prohibitive policy.

A 60 per cent tariff would triple the current levels and cannot be offset by adjustments in exchange rates and export prices. This would significantly disrupt existing supply chains.

Mainland China accounts for more than half of global exports in the top four product groups imported to the US imports from mainland China. China’s manufacturing prowess will be challenging to replace.

The burden of higher tariffs is likely to be shared by mainland China and the US, leading to two unsavoury outcomes: 1) higher prices for US consumers and potentially lower demand, and 2) margin compression for both Chinese exporters and US importers.

Weaker aggregate growth in the US and mainland China would have a negative effect across Asia. The potential to offset gains by diverting trade and relocating production to elsewhere in Asia is likely to be limited, considering the existing supply chains. Export competition among Asian economies in non-US markets will likely rise.

Key observations

Taiwan and Vietnam stand out as having the highest exposure to final demand in mainland China and the US and they would be the most vulnerable to slower growth.

Vietnam would be the most susceptible if the US targets goods with high Chinese input. Vietnam has seen the largest increase in both US imports and China exports.

It also has the lowest domestic value-add in its manufacturing exports to the US and the highest proportion of Chinese value-add in its imports from China.

South Korea and Thailand appear more vulnerable to competition with mainland China, given the combination of high export similarity with mainland China and the recent underperformance of their export sectors.

Export similarity with China

India could be the most resilient compared to other Asian economies. It has the lowest exposure to final demand in either mainland China or the US, fewer links with mainland China’s supply chains and its exports have outperformed amid competitiveness gains.

A broader trade war: 10 per cent tariff on US imports

As the 10 per cent tariff is proposed as universal, it would be unlikely to cause a reorganisation of supply chains. The bigger issues would be whether, and to what extent, they would be passed on to consumers.

For context, most studies suggest the tariffs introduced under Trump 1.0 were fully passed on to consumers. The impact of a universal tariff will undoubtedly be higher as it would impact a broader range of imports.

It is likely this additional burden would need to be partially absorbed by producers via a reduction in export prices, exchange rate adjustment and margin compression.

The exact burden sharing would depend on the state of the business cycle and consumption elasticities of specific products. Even so, odds are that US aggregate demand will fall. Vietnam looks particularly vulnerable.

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 top products it sources from Asia.

A bigger threat is that a universal tariff is likely to trigger retaliation, escalating global trade tension. When Trump imposed tariffs on steel and aluminium in 2018, the European Union, Canada and Mexico retaliated before subsequently reaching deals.

The bottom line: Trump 2.0 will be prohibitive for Asian trade

Trump’s current campaign proposals are far more severe than the trade policies he implemented as president. If the proposals of a 60 per cent tariff on Chinese imports and 10 per cent universal baseline tariff become a reality, the average US tariff would rise to 16.8 per cent compared with 2.2 per cent at present. This would be higher than that of any other World Trade Organisation member, save Barbados.

A recent study by Tax Foundation found Trump’s proposals would result in a net loss to the US economy. It would reduce US output by 0.1 per cent, employment by 121,000 and federal tax revenue by at least US$1.6 trillion. And demand for Asia’s exports will be negatively affected.

In this scenario, Asia’s trade would be severely impacted on the back of slower US and global growth and supply chains would be fractured. The scope for retaliation is limited, as all Asian economies in our study run trade surpluses with the US.

US bilateral trade deficits

These tariffs will emerge as mainland China’s domestic demand is weak. This weakness translates into higher competition in non-US markets as well as greater penetration of Chinese imports in home markets for the rest of Asia.

Those most reliant on manufacturing trade, such as Taiwan and Vietnam, are at the highest risk. Vietnam, particularly, is highly exposed to the US market and is also a conduit economy for mainland China’s exports to the US.

India and Indonesia should fare better, but the bottom line is there are unlikely to be any winners in a potential trade conflict of this magnitude.

Krystal Tan is an Economist, Raymond Yeung is Chief Economist, Greater China and Sanjay Mathur is Chief Economist, South East Asia & India at ANZ.