Asian countries that have been enjoying trade diversion since the start of the trade war between China and the US in 2017 may not have it easy going forward.
A large part of it will depend on how the US views trade diversion.
The real question is what Washington will do about Chinese goods making their way in through third countries.
We have seen some examples of this taking place under the previous administration where they were not happy with Chinese goods entering the US by Mexico.
Last July, the Biden administration imposed tariffs on steel and aluminium shipped into the US from Mexico that were made elsewhere, in a bid to address China’s manufacturers circumventing import tax by routing goods through a third country.
Steel not melted or poured in Mexico was slapped with a tariff of 25 per cent while aluminium saw a 10 per cent tariff.
During his presidential campaign trail, Donald Trump threatened 100 per cent tariffs on China-related automakers that move their production to Mexico in attempts to skirt tariffs.
This comes on top of the threat of 60 per cent tariffs on China imports and a universal 10 per cent to 20 per cent tariffs on all other imports to the US.
Whether it is merely rhetoric or otherwise, it should not be taken lightly.
Trump has won a mandate to pursue these policy areas (tariffs, protectionism and bringing jobs back to America).
His administration picks, including the no-nonsense investment banker and George Soros protégé Scott Bessent as Treasury Secretary, signal that this agenda isn’t just for show.
Chances are, he’s going for it.
Plus, control of both houses of US Congress means he will also likely be able to implement them.
In the initial term, growth in the US should be quite resilient as the country is at potential growth — the rate of expansion an economy can sustain at full capacity and employment.
However, over time, the extensive tariffs proposed will result in higher costs of production and a decline in the purchasing power of consumers, which will then lead to lower economic growth of the country.
If these tariffs are rolled out this year, I’d expect a lower growth to hit around 2026, once the full effects have kicked in.
Even so, the US is unlikely to be the country that will be the most affected by its actions.
Higher inflationary pressure might limit how much the US Federal Reserve can reduce interest rates but the US economy will not be the one to suffer the most severe repercussions from tariffs.
This is because the US is not the most open of economies — being a very large economy, the US imports and exports as a share of GDP (the standard measure of openness) are relatively low compared to many other countries.
Countries more dependent on external trade would suffer more from increased protectionism.
CHINA’S NEXT MOVE
The impact on China, should the Trump administration follow through with the 60 per cent tariff threat, would be significant.
Despite that, China has the fiscal policy space to implement a domestic stimulus to protect its economic growth.
The net impact from such tariffs, assuming the Chinese government implements domestic stimulus, could mean a net impact of half a percentage point from the country’s growth.
In the last five years, China has been successful in diversifying its export markets quite remarkably — a positive sign for the country’s exports.
Currently, China exports more to the rest of the world than it does to the US and the EU — the two big industrial nations.
That’s a positive; it has some safeguards with other export markets.
Regardless of countermeasures, a 60 per cent tariff in the US is still a very large hit and its exports will decline.
What is likely to happen in such a scenario — where tariffs are imposed not just on China but on other countries — is that the countries will retaliate.
This is not positive for the world economy as world growth will be lower.
Several countries that are subject to tariffs will see their currencies put under some pressure to depreciate.
At current policy settings, I’m projecting global growth at 3 per cent for this year and 2026.
For China, the outlook stands at 4.1 per cent this year, slowing to 3.6 per cent in 2026.
Asia’s highly integrated economy and supply chain would also mean that it would become collateral damage if China’s exports to the US were to suffer a 60 per cent tariff.
In my 92-page 2025 investment outlook report, I pointed out that intra-regional trade in emerging Asia had increased to 23 per cent of total exports in 1H2024 compared with 21 per cent in 2018 and 10 per cent at the start of this century.
One of the risks, though, is a slowdown in China’s exports would likely lead to a dwindling of its imports.
Given that China is an important trade partner to many countries in the region, they would be negatively affected by the lower imports.
The universal tariff proposed would serve as a double whammy to countries where the US is an important trade partner as well.
WHICH ASIAN COUNTRIES ARE IN TROUBLE?
Malaysia could be vulnerable.
For 2023, its largest trading partner was China, taking up a 17.1 per cent share of Malaysia’s total trade, amounting to RM450.84 billion.
Trade with the US was not too far behind, amounting to RM250.25 billion, representing 9.5 per cent of total trade.
For the first 10 months of 2024, exports to China amounted to RM153.16 billion, representing 12.3 per cent of total exports while exports to the US totalled RM159.41 billion, or 12.8 per cent of total exports.
Nevertheless, it should also be noted that ASEAN as a region has remained the largest trading partner for Malaysia, taking up 27.3 per cent of total trade in 2023, valued at RM720.66 billion.
Total exports to ASEAN for the first 10 months of 2024 totalled RM365.39 billion (29.4 per cent of total exports).
While regional integration would help to mitigate some of the effects of tariffs, countries like Malaysia will still be negatively affected on account of its exposure to the countries involved in the trade feud.
There is also the risk where China allows its currency to depreciate in the event that it is severely impacted by the tariffs that result in a slowdown in trade.
In principle, that would put pressure on Asian currencies to depreciate as well.
That could be destabilising.
However, Asian countries have not always felt the pressure to depreciate their currencies because China has done so.
We should refer back to the US-China trade war period in 2018 and 2019 where China’s currency weakened but other Asian currencies did not follow suit.
The renminbi depreciated about 12 per cent against the US dollar then, but there was a 10 per cent appreciation of the greenback and the renminbi’s depreciation was not solely driven by the tariffs.
It is a risk of pressure to depreciate currencies because we have not seen a world where China faces 60 per cent tariffs.
We are in a new world but let’s wait and see what kind of retaliation from other countries would take form.
I know this might not be the most popular take, but Trump’s playbook—tariffs, tax cuts, deregulation, mass deportations, Department of Government Efficiency (DOGE)—is exactly what this moment seems to demand.
It’s not emphatic, liberal, progressive, inclusive and universal or fair—all those politically nice words.
If the goal is to put America first and supercharge its economy, then it makes sense.
I’ll break it all down next week.
WHO COMES OUT STRONGER?
While the threat of tariffs has worried economies around the world, some economies have good prospects, taking into account a medium-term view of three to five years.
In Asia, Vietnam and India appear to be in a relatively favourable position because their diversified export base implies that they are not over-dependent on exports to the US.
India has the benefit of strong domestic drivers of growth, especially because of its favourable demographics.
Meanwhile, Spain is a European Union country whose growth has been strong, which in part is due to higher immigration compared to other European countries.
Morocco in North Africa is in its early stage of development and is benefitting from reforms.
It is always difficult to think of immediate-term sweet spots.
Countries that have managed to bring inflation down relatively well can now ease monetary policy more aggressively to protect growth.
The near-term challenge for most countries is always the policy space to support economic activity.
On these criteria, one would have to look at both fiscal and monetary policy space.
Medecci Lineil has over a decade of experience leading a niche-focused team within Goldman Sachs’ investment banking division (IBD). His expertise extends beyond the bank, having been instrumental in establishing consultancy firms in Kuala Lumpur and Singapore, where he serves as a founding board member.
