A broad and undulating US framework of tariffs on imports into the world’s largest economy has hit exporters around the world – particularly those in Asia. Witness the 49% rate Cambodia faces, or the 46% on Vietnamese exports to the US. From a macroeconomic stance, the tariffs, which seek to re-balance trade, could boost inflation, curb exports and limit economic growth.
While many countries, including in Asia, hope that tariff rates can be negotiated down if barriers to US exports are lowered, President Donald Trump’s policies have the potential to fundamentally change the terms of global trade leaving countries dependent on exports to the US hardest hit. The question is whether economic, market, political and perhaps legal pressure could mollify Washington.
Regionally, Asia is being hit hard: the import tariffs on many local economies are comparatively high given that their large trade surpluses with the US have been used to calculate the levies. Vietnam, Thailand, and China face top levels under Trump’s latest package.
The blow comes as growth has been slowing. Activity as indicated by purchasing managers’ indices has declined: the PMI for Asia ex China fell to 50 in March from 50.7 in February. Three quarters of the countries in the survey saw their PMIs fall to below the boom-bust line at 50. A drop to below 50 would signal a contracting economy.
The new tariffs look to set weaken regional growth further as they undermine consumer and business confidence, weaken asset prices, and cause capital spending and trade to falter. Generally, the more open an economy is, the bigger its role in trade and capital flows, and the bigger the drag on growth from the US import tariffs will likely be.
China – Room for fiscal stimulus
If we add the new 34% tariffs to the 20% announced in February and March and assume they do not replace the pre-2025 tariffs, the total rate on Chinese imports into the US shoots to over 60%, according to estimates by our research team and those of the wider market.
While high, China could manage the impact: Beijing has already announced fiscal stimulus plans which our research team estimates amount to 1.6% of gross domestic product for the coming year.
If we also consider the effects on local consumer and business confidence as well as asset prices (and by extension on domestic demand), and add in possible measures by China’s trading partners to protect their industries from Chinese competition, China’s growth could be hit harder.
Perhaps unsurprisingly, Beijing has pledged it would ‘fight to the end’ if the US escalated the trade war further, commenting after the US president threatened additional 50% tariffs if Beijing did not reverse its own 34% ‘reciprocal tariff’.
Competitive currency devaluations?
With lofty US tariffs also imposed on China’s regional supply-chain partners, China’s ability to divert trade to other countries to offset the tariff impact might suffer.
If negotiations with the US fail, countries could impose retaliatory measures – as China did – and even depreciate their currencies. However, such measures would disrupt their own supply chains, slow trade and growth, and risk triggering a spiral of currency deprecation.
With the US dollar on a weakening trend, the option to depreciate one’s way out from under the tariff pressures looks closed off. Indeed, market expectations of US growth faltering faster than that of other economies has been weighing on the USD since January.
We expect China not to pursue currency devaluation since a stable exchange rate is still Beijing’s policy. However, the People’s Bank of China (PBOC) recently appears to have become more tolerant of a weaker currency, in line with expectations that it will accommodate a gradual and orderly depreciation to lessen the impact of the tariffs and stabilise the economy.
In the previous 2018-19 tariff war, the renminbi fell by a total of 14% against the USD in two years.
China’s central bank also signalled it would provide financial support to Central Huijin Investment, an arm of the country’s sovereign wealth fund, to help stabilise local markets. Central Huijin itself said it would buy shares listed in China via exchange-traded funds (ETFs) to reinforce local markets.
Boosting domestic demand could be another way for countries to counter the US tariffs. Generally, a country that runs a fiscal surplus is well positioned to take action to stimulate growth. Such moves could help retain investor confidence. Most Asian economies are running fiscal surpluses, giving them some defensive power to manage the shock.
Given China’s still feeble economic recovery amid deflationary pressures, we believe Beijing will have to intensify policy support if it wants to achieve this year’s target of 5% growth. Expect it to speed up planned measures and even introduce new stimulus.
What are the risks now?
- A significant risk now is that the tariff shockwill be magnified by retaliation. The US tariffs go into force on 9 April, so that is an important date in determining the scope for negotiation. China announced on Friday that it will impose reciprocal 34% tariffs on all imports from the US, effective 10 April. Similar responses from other trading partners would raise the risk of escalation and exacerbate uncertainty.
- Given the intricacy of supply chains in a globalised economy there is considerable scope for disruption beyond the direct impact of higher tariffs on import prices.
- Under a worst-case scenario, the selloff in equity markets could become disorderly that would add further to economic uncertainty and weigh even more on investment and spending decisions.
Overall portfolio positioning
Our equity portfolio management teams have been seeking to reduce risk since the policy announcements by trimming those positions vulnerable to a growth and/or tariff shock.
This has created some opportunity to rotate capital towards companies with strong balance sheets, minimum exposure to tariffs, domestic content manufacturing and supply chains and solid revenue backlogs given both revenue and earnings visibility.
Where appropriate we have shifted positioning to favour large cap companies with so-called long-cycle exposure
In multi-asset portfolios our equity exposures are broadly neutral relative to benchmarks. We continue to overweight gold and await more clarify on US policy before increasing fixed income risk positions.
Our fixed income team expect the US Federal Reserve to remain on hold initially, looking to manage the competing risks of higher inflation relative to weaker growth.
If the tariffs are sustained, we would expect the negative consequences for growth and employment to become apparent by September at the latest. This would lead the US Federal Reserve to continue cutting policy rates. We are positioning sovereign bond portfolios such they are overweight 5–7-year maturities in anticipation of a cycle of rate cuts by the Federal Reserve from September onwards and through into 2026.
Assuming that for the eurozone, tariffs are arguably a demand shock and disinflationary we are overweight eurozone duration and expect the European Central Bank to lower policy rates to 2% in 2025.
Given the considerable near-term uncertainty, we will update you on our analysis and positioning when there are significant developments.
