Will Trump’s Tariffs Reshape Asian Economies?

Summary

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

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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.

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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]

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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]

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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]

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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]

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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]

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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]

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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.

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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]

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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.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's global head of fixed income and public policy research.

[B]

And I'm Chetan Aya, Morgan Stanley's chief Asia economist.

[A]

Today we'll talk about what U.S. tariffs would mean for Asia's economy. It's Tuesday, January 28th at 8am in.

[B]

New York and 9pm in Hong Kong.

[A]

Chetan, a week into the new Trump administration, I'm eager to talk tariffs with you. You and I came on the show before the US Election to discuss the potential impact of new tariff policies on China's economy in particular. And now that President Trump has taken office, he's been vocal about levying tariffs in a lot of places, including on 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. But there's still time before implementation as these legal options are developed. That's in line with our base case. But investors have been talking a lot about the idea that maybe these tariffs never go on. What's your view here and why do you think ultimately we are headed to a place where tariffs go higher?

[B]

Well, I think if you just look at the press comments that the president has made. At the same time, if you read through this America first document, we sort of think that there are five avenues under which tariffs can go up on China. Number one is the recommendation from the America first policy document that the agencies in the US Will have to study how the large trade partners which are running trade surpluses with the US are managing their trade practices. Number two, Apara in the America first document which is suggesting that the trade agreements that US and China signed in 2018, 19 how is China dealing with the commitments under that agreement? And number three is the clause which is currently exempting imports into the US under the minimus rule of imports under US$800 per bill being allowed to import without any tariffs being imposed. And what the document is suggesting is to assess what is the potential revenue loss occurring to the government and how can they plug that. Number four is a potential tariff action with the sale of a social media company. And number five, a potential tariff action which is linked to the fentanyl issue. So as you can see, 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. And Mike, some investors are also optimistic and thinking that there is a possibility of a new trade deal being taken up, but by US and China. What do you think are the chances of that?

[A]

I think they're quite low. So you mentioned five areas, a potential dispute that the US might want to use tariffs as a way of dealing with. And I think that speaks to the idea that the bar is pretty high for China to avoid tariffs relative to some of the other negotiations the US wants to engage in with other trade partners. Or maybe said differently, if the America first trade policy is pointing the US at closing goods trades deficits and improving security and making sure that it's not engaged with trade with other countries that are harming national security, it seems that there are more of those activities going on between the US and China than with other trade partners. Closing, for example, a $300 billion goods trades deficit would seem to be really, really diffic difficult within the structures of the economy. So if we're right and the chance of tariff de escalation with China appears to be slim, do you think Beijing for example, might use renminbi depreciation to mitigate some of those economic risks?

[B]

Well, yes, we do think that China's policymakers will allow depreciation in RMB when tariffs are being imposed. However, we also think that the depreciation this time that they will allow will be less than what they did in 2018 19. And China has already been facing some capital outflows and allowing a large depreciation could bring self fulfilling situation of more capital outflows and even sharper currency depreciation pressures.

[A]

Beijing also started introducing stimulus measures last fall to boost the Chinese economy. Would tariffs disrupt this policy?

[B]

Certainly in our base case, despite the policy stimulus measures that China is taking, we think that overall growth in China will be lower in 2025. Meaningfully and more importantly, in our view, China's biggest challenge is deflation and tariffs will only exacerbate deflationary pressures.

[A]

And so we're talking a lot about China here. But obviously there's a risk of tariffs being applied to a broader set of U.S. trading partners in Asia. Now that's not our base case. We think ultimately the focus will be on China because a lot of those trading partners will be able to come to agreements with the US to limit potential future tariffs. But of course there's a considerable risk that we're wrong. As we mentioned, this America first trade policy is developing a wide range of options to levy tariffs across multiple geographies and multiple products. If that were to come to pass, Chayton, what is it that other Asian governments might be able to do to mitigate the impact from higher tariffs.

[B]

First of all, this will be significantly negative for region's growth outlook and there are two ways in which region will get impacted. Firstly, because of the fact that China will be facing tariffs and China's growth will slow down, it will also have spillover effects for the rest of the region. At the same time, as you mentioned, there is a possibility that there are bilateral disputes opened up with other economies in the region and so that will also add to the downside pressure for regions growth. In terms of what they can do to offset this downside. 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.

[A]

Makes sense. Chetan, thanks for taking the time to talk.

[B]

Great speaking with you Mike.

[A]

And as a reminder, if you enjoy thoughts on the market, please take a moment to rate and review us wherever you listen and share thoughts on the market with a friend or colleague today.

[C]

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