Our Chief Asia Economist Chetan Ahya discusses the potential
impact of tariffs on China and other Asian countries following
the US election.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan
Stanley’s Chief Asia Economist. Today on the podcast – with a
Republican White House now in place, tariffs are the key issue
that will matter to Asia.
It’s Tuesday, November 12, at 2 PM in Hong Kong.
With the US election results in, the question now is not if there
will be tariff hikes, but when and how much. Will China alone see
rising tariffs, or will there be universal tariff imposed on all
imports to the US?
The previous president Trump administration imposed several
tariffs on Chinese imports beginning in 2018. And looking back,
our learning is that weaker corporate confidence weighed more
heavily on Asia’s growth outlook than the direct effect of
tariffs on exports. Just to elaborate on the point on direct
impact of tariffs: Despite the tariffs imposed on China during
that period, what we observed is that China’s market share in
global goods exports improved after the US started to impose
tariffs on imports from China.
Looking forward, let’s consider a scenario of 50 per cent tariffs
on China alone. The hit to global and China corporate confidence
may not be as large as it was in 2018 and 2019. This is in part
because US-China trade tensions have persisted for several years
now. Companies have invested in diversifying their supply chains
since then, and the US share in China's exports has declined
since 2017. Given all this, the drag on China’s exports may be
less than the 1 percentage point that we saw last time.
The rest of Asia would also experience a slowdown, but we think
the overall drag on growth would be less significant this time.
The effects on individual economies would differ based on their
exposure to China. We think Australia and Indonesia will be more
exposed. Korea, Taiwan, Malaysia, and Thailand would be
moderately exposed. And India and Japan would be less exposed
given a low share of export to China.
But what happens if the US imposes 50 per cent tariffs on China
and a 10 per cent universal tariff on the rest of the world? In
this scenario, the damage to corporate confidence and the global
capex and trade cycle would be much larger. The drag could be
similar or greater than what we saw in 2018 and 2019. Asia
excluding China has now become more dependent on the US as a
source of end-demand. Global supply chains might have to be
rewired yet again. This would cause a significant disruption to
the corporate sector and a material impact on Asia’s growth
trajectory.
Of course, the final effect of US tariffs on Asia growth would
also depend on the scale of policy support. Asia’s policy makers
could allow their currencies to depreciate in response to a
strong dollar. Then, against a backdrop of weaker currencies,
Asia’s central banks could be constrained in their ability to cut
rates immediately – similar to what happened in
2018-[20]19.
Hence, they would prefer to take a fiscal easing first. Back in
2017-[20]19, Asia's fiscal deficit widened in aggregate by 1.1
percentage point as policymakers sought to provide some cushion
to growth downside. Once currencies stabilize, they will take up
monetary easing.
Things may move quickly once Trump takes office in January, and
we will continue to keep you updated.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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