Our Chief Asia Economist explains how the region’s economies and
markets would be affected by higher tariffs, and other possible
scenarios in the US elections.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan
Stanley’s Chief Asia Economist. Along with my colleagues bringing
you a variety of perspectives, today I’ll discuss a question
that’s drawing increasing attention – just how the U.S.
presidential election would affect Asian economies and
markets.
It’s Wednesday, July 24th, at 8 PM in Hong Kong.
As the US presidential race progresses, global markets are
beginning to evaluate the possibility of a Trump win and maybe
even a Republican sweep. Investors are wondering what this
would mean for Asia in particular. We believe
there are three channels through which the US election outcome
will matter for Asia.
First, financial conditions – how the US dollar and rates will
move ahead of and after the US elections. Second, tariffs. And
third, US growth outcomes, which will affect global growth and
end demand for Asian exports. Well, out of the three our top
concern is the growth downside from higher tariffs.
The 2018 experience suggests that the direct effect of tariffs is
not what plays the most dominant role in affecting the macro
outcomes; but rather the transmission through corporate
confidence, capital expenditure, global demand and financial
conditions.
Let’s consider two scenarios.
First, in a potential Trump win with divided government, China
would likely be more affected from tariffs than Asia ex China. We
see potentially two outcomes in this scenario – one where the US
imposes tariffs only on China, and another where it also imposes
10 percent tariffs on the rest of the world.
In the case of 60 percent tariffs on imports from China, there
would be meaningful adverse effect on Asia's growth and it will
be deflationary. China would remain most exposed compared to the
rest of the region, which has reduced its export exposure to
China over time and could see a positive offset from
diversification of the supply chain away from China.
In the case where the US also imposes 10 percent tariffs on
imports from the rest of the world, we expect a bigger downside
for China and the region. We believe that in this instance – in
addition to the direct effect of tariffs on exports – the growth
downside will be amplified by significant negative impact on
corporate confidence, capex and trade. Corporate confidence will
see bigger damage in this instance as compared to the one where
tariffs are imposed only on China as corporate sector will have
to think about on-shoring rather than continuing with
friend-shoring.
In the second scenario, in a potential Trump win with Republican
sweep, in addition to the implications from tariffs, we would
also be watching the possible fiscal policy outcomes and how they
would shift the US yields and the dollar. This means that
the tightening of financial conditions would pose further growth
downside to Asia, over and above the effects of tariffs.
How would Asia’s policymakers respond to these scenarios? As
tariffs are imposed, we would expect Asian currencies to most
likely come under depreciation pressure in the near term. While
this helps to partly offset the negative implications of tariffs,
it will constraint the ability of the central banks to cut rates.
In this context, we expect fiscal easing to lead the first part
of the policy response before rate cuts follow once
currencies stabilize. It’s worth noting that in this cycle, the
monetary policy space in Asia is much more limited than in the
previous cycles because nominal rates in Asia for the most part
are lower than in the US at the starting point.
Of course, this is an evolving situation in the remaining months
before the US elections, and we’ll continue to keep you updated
on any significant developments.
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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