Podcast Summary: "Will Trump’s Tariffs Reshape Asian Economies?" Thoughts on the Market by Morgan Stanley Release Date: January 28, 2025

Introduction

In the episode titled "Will Trump’s Tariffs Reshape Asian Economies?" Morgan Stanley's podcast Thoughts on the Market delves into the implications of newly proposed U.S. tariffs under the Trump administration on Asian economies, with a particular focus on China. Hosted by Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Public Policy Research, and featuring Chetan Aya, Morgan Stanley's Chief Asia Economist, the discussion provides a comprehensive analysis of potential economic shifts resulting from these policy changes.

I. The Trump Administration's Tariff Policy

Michael Zezas opens the discussion by contextualizing the recent shift in U.S. trade policy under President Trump, emphasizing the administration's "America First" stance. He notes that tariffs are a central tool in this policy, aimed primarily at addressing trade imbalances and perceived unfair trade practices by major partners, especially China.

"The policy underpinning all of that appears to be a tariff review under the America first trade policy. That suggests to us that he's developing options to impose tariffs with China as a focus."
— Michael Zezas [00:21]

Chetan Aya elaborates on the administration's multifaceted approach to tariffs, outlining five specific avenues through which tariffs on China could be increased:

1. Trade Surplus Reviews: Evaluating how large trade partners with significant trade surpluses are managing their trade practices.
2. Compliance with Trade Agreements: Assessing China's adherence to commitments under previously signed trade agreements in 2018 and 2019.
3. Minimus Rule Adjustment: Revising the current exemption for imports under $800 to potentially increase tariff revenues.
4. Sector-Specific Tariffs: Considering tariffs related to the sale of a social media company.
5. Fentanyl-Linked Tariffs: Linking tariff actions to the broader issue of fentanyl.

"There are a number of avenues under which tariffs can go up on China and therefore we kind of keep that in our base case that tariffs will go up on China."
— Chetan Aya [01:11]

II. Investor Sentiment and Tariff Implementation

Zezas addresses the investor community's mixed sentiments regarding the likelihood of tariff implementation. While some investors are optimistic about the possibility of a new trade deal, Aya remains skeptical about the chances of de-escalation.

"I think the chances of that are quite low."
— Michael Zezas [02:47]

Aya underscores the complexity of negotiating with China, highlighting the substantial trade deficits and the multifaceted nature of U.S. trade objectives beyond just reducing deficits, such as national security concerns.

"If the America first trade policy is pointing the US at closing goods trades deficits and improving security... there are more of those activities going on between the US and China than with other trade partners."
— Michael Zezas [02:47]

III. China's Economic Response: Currency Depreciation

The discussion shifts to how China might counteract the economic pressures from increased tariffs. Aya anticipates that China’s policymakers will permit the depreciation of the renminbi (RMB) to alleviate some of the tariff impacts.

"We do think that China's policymakers will allow depreciation in RMB when tariffs are being imposed."
— Chetan Aya [03:57]

However, Aya cautions that the extent of depreciation this time may be more restrained compared to previous years (2018-2019) to avoid exacerbating capital outflows and severe currency pressures.

"The depreciation this time that they will allow will be less than what they did in 2018-19."
— Chetan Aya [03:57]

IV. Impact of Tariffs on China's Economic Stimulus

Zezas brings up China's recent stimulus measures aimed at boosting the economy, questioning whether tariffs might undermine these efforts.

"Beijing also started introducing stimulus measures last fall to boost the Chinese economy. Would tariffs disrupt this policy?"
— Michael Zezas [04:24]

Aya responds affirmatively, suggesting that despite the stimulus, tariffs will likely dampen China's economic growth in 2025 by intensifying deflationary pressures.

"Despite the policy stimulus measures that China is taking, we think that overall growth in China will be lower in 2025."
— Chetan Aya [04:32]

V. Broader Implications for Asian Economies

While the primary focus is on China, Zezas acknowledges the risk of tariffs extending to other U.S. trading partners in Asia, although this is not considered the base case scenario. He emphasizes that most other Asian countries are more likely to negotiate and mitigate potential tariff impacts compared to China.

"We're talking a lot about China here... there's a considerable risk that we're wrong."
— Michael Zezas [04:52]

Aya explains that additional tariffs on other Asian economies would further strain regional growth. The interconnectedness of these economies means that a slowdown in China would have spillover effects, compounding the negative impact on the region.

"This will be significantly negative for region's growth outlook... spillover effects for the rest of the region."
— Chetan Aya [05:37]

VI. Mitigation Strategies for Asian Economies

Addressing potential strategies to counteract the adverse effects of increased tariffs, Aya identifies two primary actions that Asian governments are likely to undertake:

1. Monetary Easing: Central banks in the region may lower interest rates or employ other monetary tools to stimulate economic activity.
2. Fiscal Expansion: Governments might increase fiscal spending to bolster economic growth.

However, Aya warns that these measures may not be sufficient to fully counterbalance the negative impacts of higher tariffs.

"We think that region's central bank will take up monetary easing and at the same time the governments will expand their fiscal deficit, but both of those measures will not be enough to fully offset the downside from tariff increase."
— Chetan Aya [05:37]

Conclusion

The episode concludes with a consensus that U.S. tariffs under the Trump administration are likely to increase, with China being the primary target. The anticipated tariffs are expected to have significant repercussions on China's economy and, by extension, the broader Asian region. While Asian governments may implement measures to mitigate these effects, the overall outlook remains cautiously pessimistic regarding sustained economic growth in the face of heightened trade tensions.

Notable Quotes

• "The policy underpinning all of that appears to be a tariff review under the America first trade policy. That suggests to us that he's developing options to impose tariffs with China as a focus."
  — Michael Zezas [00:21]

• "We do think that China's policymakers will allow depreciation in RMB when tariffs are being imposed."
  — Chetan Aya [03:57]

• "Despite the policy stimulus measures that China is taking, we think that overall growth in China will be lower in 2025."
  — Chetan Aya [04:32]

• "This will be significantly negative for region's growth outlook... spillover effects for the rest of the region."
  — Chetan Aya [05:37]

Final Remarks

Michael Zezas and Chetan Aya provide a thorough analysis of the potential economic ramifications of the Trump administration's tariff policies on Asian economies, particularly emphasizing the central role of China. Their insights offer valuable perspectives for investors and stakeholders navigating the evolving trade landscape.