The Rising Risk of Trade Tensions in Asia

Summary

Thoughts on the Market: The Rising Risk of Trade Tensions in Asia

Podcast Information

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Description: Short, thoughtful, and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.
• Episode: The Rising Risk of Trade Tensions in Asia
• Release Date: February 11, 2025

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Introduction

In the February 11, 2025 episode of Thoughts on the Market, Morgan Stanley's Chief Asia Economist, Chetan Aiya, delves into the escalating trade tensions between the United States and Asian economies. The discussion centers around the aggressive tariff strategies employed by the U.S. administration and the potential ripple effects across Asia.

US Tariff Actions and Reciprocal Tariffs

Chetan Aiya begins by highlighting the intensified tariff measures initiated by President Trump, noting that these actions surpass those taken in 2018 and 2019 in both scope and aggressiveness.

“President Trump's recent tariff actions have already been far more aggressive than in 2018 and 2019, and this time around, multiple trade partners are simultaneously facing broad-based tariffs and tariffs are coming at a much faster pace.” [00:30]

One of the cornerstone policies discussed is the imposition of a sweeping 25% tariff on all foreign steel and aluminum products. Furthermore, President Trump has signaled intentions to introduce reciprocal tariffs, aiming to match the tariffs imposed by each Asian country on U.S. imports.

“Trump has also indicated that he would propose reciprocal tariffs on multiple countries to match the tariffs levied by each country on U.S. imports.” [01:15]

Impact on Asian Economies

The prospect of reciprocal tariffs places significant pressure on Asian economies, particularly China, which may face heightened exposure to tariff increases. Currently, Asia maintains slightly higher tariffs on U.S. imports compared to those imposed by the U.S. on Asian goods.

Aiya points out that:

“Six economies in Asia do impose higher weighted average tariff on the US than the US does on individual Asia economies. The tariff differentials are most pronounced for India, Thailand, and Korea.” [02:10]

These disparities suggest that India, Thailand, and Korea are at risk of experiencing tariff hikes of 4 to 6 percentage points on a weighted average basis if reciprocal measures are enacted. While individual products may encounter even higher tariffs, the overall impact from steel, aluminum, and reciprocal tariffs is deemed manageable.

However, the broader picture indicates a potential escalation of trade tensions, especially since seven out of the ten largest U.S. trade surplus economies are in Asia.

Responses from Asian Policymakers

In response to the looming tariff threats, Asian policymakers are proactively seeking ways to mitigate the adverse effects and address demands from the U.S. administration.

Japan's Prime Minister Ishiba has committed to increasing investments in the U.S. and is strategizing to raise energy imports from the U.S. This move aims to reduce the U.S. trade deficit with Japan, signaling a cooperative approach to easing trade tensions.

“Japan's Prime Minister Ishiba has committed to increasing investment in the U.S. and is looking to raise energy imports from the U.S. this is seen as a positive step to reduce the US Trade deficit with Japan.” [02:45]

Meanwhile, India is taking steps ahead of the scheduled meeting between President Trump and Prime Minister Modi. India is lowering tariffs on U.S. imports and may propose increasing the importation of oil, gas, defense equipment, and aircraft to narrow its trade surplus with the U.S.

“India has already taken steps to lower tariffs on the US and may propose increase in imports of oil and gas, defense equipment and aircrafts to narrow its trade surplus with the U.S.” [02:55]

Specific Focus on China

China remains at the epicenter of these trade tensions due to the complex and wide-ranging issues underpinning the bilateral relationship. Unlike other Asian economies, China has been the only economy where tariff hikes have remained in place without reciprocal measures.

Aiya notes that:

“China has been the only economy so far where tariff hikes have stayed in place. Indeed, the recent 10% increase in tariffs has already matched the increase in the weighted average tariffs that transpired in 2018 and 2019.” [03:10]

Looking forward, tariffs on Chinese imports are expected to continue rising throughout 2025, exacerbating the already strained trade relations.

Overall Implications and Concerns

While the direct impact of tariffs on steel, aluminum, and specific reciprocals appears manageable in the short term, the larger concern lies in policy uncertainty. This uncertainty has the potential to weigh heavily on corporate sector confidence, leading to reduced capital expenditures (capex) and stifling the growth cycle.

“The bigger concern for us has been that this policy uncertainty will potentially weigh on corporate sector confidence, capex and growth cycle.” [03:30]

Aiya emphasizes that the continual stream of tariff threats from the U.S. administration not only affects immediate trade dynamics but also introduces a long-term cloud over economic stability and growth prospects in the region.

Conclusion

The episode concludes with a sobering assessment of the current trade landscape. While immediate tariff impacts are within the realm of manageability, the overarching policy uncertainty poses significant risks to economic confidence and growth in Asian markets. Policymakers and businesses alike must navigate these turbulent waters with strategic foresight to mitigate potential adverse effects.

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This summary provides a comprehensive overview of the key discussions and insights shared by Chetan Aiya in the episode, capturing the nuances of rising trade tensions and their implications for Asian economies.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Chetan Aiya, Morgan Stanley's chief Asia economist. Today, the possibilities of reciprocal tariffs between the US and Asian economies it's Tuesday, February 11th at 2pm in Singapore. President Trump's recent tariff actions have already been far more aggressive than in 2018 and 2019, and this time around, multiple trade partners are simultaneously facing broad based tariffs and tariffs are coming at a much faster pace. The risk of trade tensions escalating has risen and the latest developments may have kicked that risk up another notch. The US President is pushing a sweeping tariff of 25% on all foreign steel and aluminum products. Trump has also indicated that he would propose reciprocal tariffs on multiple countries to match the tariffs levied by each country on U.S. imports. This potential reciprocal tariff proposal suggests that Asia x China may be more exposed to possible tariff hikes. As of now, Asia's tariffs on US Imports are for the most part slightly higher than US Tariffs on Asian imports. And based on latest available data, six economies in Asia do impose higher weighted average tariff on the US Than the US does on individual Asia economies. The tariff differentials are most pronounced for India, Thailand and Korea. These three economies may face a risk of a hike in tariffs by 4 to 6 percentage points on a weighted average basis if the US imposes reciprocal tariffs. Individual products may yet face higher tariff rates, but we think overall impact from steel, aluminum and reciprocal tariffs will be manageable. But look, trade tensions may still rise further given that 7 out of 10 economies with the largest trade surplus with the US are in Asia. Against this backdrop, policymakers may have to look for ways to address the demands from the US Administration. For instance, Japan's Prime Minister Ishiba has committed to increasing investment in the U.S. and is looking to raise energy imports from the U.S. this is seen as a positive step to reduce the US Trade deficit with Japan. Meanwhile, ahead of the meeting between President Trump and India's Prime Minister Modi later this week, India has already taken steps to lower tariffs on the US and may propose increase in imports of oil and gas, defense equipment and aircrafts to narrow its trade surplus with the U.S. however, as regards China is concerned, the wide scope of issues in the bilateral relationship suggests that US Administration would cite a variety of reasons for expanding tariffs. As things stand, China has been the only economy so far where tariff hikes have stayed in place. Indeed, the recent 10% increase in tariffs has already matched the increase in the weighted average tariffs that transpired in 2018 and 2019. And we still expect that tariffs on imports from China will continue to rise over the course of 2025. To sum it up, there has been a constant stream of tariff threats from the US Administration. While the direct effect of tariffs appear manageable, the bigger concern for us has been that this policy uncertainty will potentially weigh on corporate sector confidence, capex and growth cycle. Thanks for listening. If you enjoyed the show, please leave us a review wherever you listen and share thoughts on the market with a friend or a colleague today.

[B]

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