You're listening to Asia Centric from Bloomberg Intelligence, the podcast that explores the big ideas in trans moving money across the region. I'm John Lee in Hong Kong, and I'm.
Katidmitriva, also in Hong Kong.
Katya, were literally days away from President Trump being inaugurated.
Yeah, that's right, full disclosure. We're recruiting this a week in advance. But yes, right now as the listener is listening, we're a few days away from January twentieth and the inauguration, and I mean something we've been looking forward to for a while. Last time around, it was chaotic in DC, but I think it was probably even more chaotic here in Asia.
Absolutely, right. A lot of the Asian economies bore the brunt of the protectionist policies, namely China, but there were also some countries that benefited.
Yeah, there were a lot of countries in Southeast Asia in particular. I mean you look to Vietnam and Malaysia and some of these countries where a lot of production shifted, and this time they might actually be in the crosshairs.
That's right, And today we have the perfect guest to discuss all these issues. We have soul No Varma, chief economists for the Asia Pacific Extra PAN region at MURA, based in Singapore.
Sauna welcome, Thank you, Verma, John and Katya. Pleasure to be here.
Great to have you here. You began covering Asia economies kind of in mid twenty nineteen. You had covered some before, but of course your role expanded. Basically it was in the heart of the first trade war. So just to give us an idea, I mean, what was that time, like, give us maybe a preview of what we should expect in the next four years.
Yeah, I think the bottom line has buckled up. I think you know, back then it clearly appeared off way elevated uncertainty, uncertainty with respect to what really Trump stood for, whether it was just campaign rhetoric or we would see
implementation of some of the threads. Then there was uncertain with respect to the timing of when the tariffs would be imposed, the tit for tat retaliation that we saw between US and China, China's currency weakening, its pillovers onto Asia, and as you said, I mean we did see losers and winners from US China trade tensions. And you know, when we talk about the countries that were losers. It was not just China. In fact, it was some of the more open economies in the region that were hurt
by much more than China. But there were winners in Southeast Asia from trade diversion, some countries actually even outside Southeast Asia, which benefited from reshoring of some of the production supply chains. And of course the relocation and the China plus one strategy that has gained traction and continues to gain traction. So we'll see a lot of this for sure in the next four years. But I think there are also a few things that are a bit
different this time. You know, back during Trump one point, oh, it took almost one year for the tariffs to get implemented. This time around, you know, our view is he's going to implement the tariffs fairly quickly. Obviously, the tariffs are also not just on China. You know, the threat is across the board this time around, so that's quite different
to his first term. I would say Asia is also a bit more prepared this time, so when you look across the region, you actually see policymakers preparing for different scenarios. You know, do we buy more energy from US, do we buy more defense from US. Should we be lowering some of our import tariffs.
Preemptively trying to keep Trump happy preemptively.
Well, they're preparing for scenarios. They don't know what exactly to expect. So Asia is clearly preparing this time. But I do think, you know, trade diversion as we saw during the first term is not going to be as easy this time. I mean, there's talk about plugging some of the loopholes in terms of the trade diversion that's
taken place. And from a more macro perspective, you know, what's different is really US is entering the second Trump presidency with a very high inflation and that makes the sort of US macro environment a lot more challenging from Asia's perspective as well, in terms of FED policy, and also China economically is much weaker today in fact countries, you know, bearing some of the adverse impact from its
over capacity. So some things are similar, but there are also a few things that seem to be a bit different.
And you did mention how inflation is elevated in the US and despite all what you know, the incoming Trump administration is saying. I think they probably know that tariff's increases inflation. Do you think that they will actually, you know, to a widespread ten to tariff across all imports. Do you think it's going to be less? And what do you think they're going to impose on China?
You know, that is actually the million or billion dollar question right now, and there is clearly a lot of uncertainty around this. The question is whether this is just a negotiating ploy or we will actually see an implementation. What's very clear is that trade policy is at the
forefront of Trump's agenda. It's actually something he's believed in you for many, many decades actually, and the agenda is really to get us manufacturing back, to get some of the jobs back into the US and really reduce the reliance on China. And his focus is on reducing the trade imbalance that is built up between US and rest of the world. You know, China, Mexico, Vietnam. These are obviously there in the top countries which run a large trade surplus with the US, but there are a lot
of other countries as well. So I think we should take what he's saying more seriously. There are trade offs even for the US in terms of, as you say, the risk of higher inflation from the implementation. But if the game plan is medium term getting more resilient US back, then the implementation is quite likely. So I mean, our base case at Nomera is that he is likely to
follow through on his campaign rhetoric. So we're expecting these sixty percent tariff on China and around ten percent on the rest of the world, and the implementation we think will be fairly quick. It's not going to be delayed as was the case in the first term, and you know, should get implemented through the course of twenty twenty five. So yes, I think we need to be prepared.
So now you mentioned something there just now before moving on to broader Asia. You know, it might seem obvious, but I think it's worth exploring this idea that Trump wants to reduce the US reliance on China. But as an economist, you know, I wanted to ask is that even possible? Because yes, imports into the US from China have gone down since twenty eighteen, But I mean, you have to think about transshipments, you have to think about
parts that are in other goods. Is it really even possible to cut China out as much as he's hoping to.
It's not at all easy, and what we've seen in the last twenty class years is just how vital China is in the entire global supply chains. In fact, I mean, I would say, actually meaning off China is going to be extremely difficult. Even you know, when we think of countries like Vietnam, for instance, if a textile manufacturing has moved to Vietnam, they are still importing the buttons from China.
So China is so critical in terms of the supply of these intermediate products that it's actually going to be very difficult. Like even if you move the supply chain out of China, these new emerging supply chains actually still depend on China to make these intermediate products. So it's going to be tough. Now. I think specifically for US, you know, their focus is a lot more on some
specific product categories. I don't think US is trying to bring Doyt manufacturing back, right, so you know, when it comes to some of the low tech manufactured products or mid tech manufactured products, there's still space for these supply chains to be outside US. But there are specific products, particularly ones that are you know, of importance from a national security and from a more strategic perspective, whether it's steel, semiconductors, and you know, areas where US wants to focus on,
could be auto's, some of the green tech products. Those are the supply chains where there is clearly a lot more focus to actually get manufacturing back. So so yeah, it's tricky.
You also mentioned another interesting fact you've mentioned. Under Trump one point zero, there's a lot of reshuring which benefited you know, obviously countries like you know, Vietnam, Malaysia, But you mentioned that it's going to be a lot more difficult this time around. Can you explain and does that mean that maybe Southeast Asia will not benefit as much as previously thought.
I think the one interesting thing actually this time around is the focus on some of the third countries that have been used to bypass trade tariffs. So, for instance, if you look at the trade between US and China, China's exports to the US or China's shared and US imports has declined, which was basically the objective, But we have seen an increase in the share of exports from
Mexico and from Vietnam in some cases. I won't say this is true in all, but in some cases actually the local value edition that is being done by some of the manufacturers in these countries is not very high. So there is a clear case of bypassing tariffs that has been done, and this is something that is in focus in the second Trump presidency. Now I don't think it's going to be very easy to implement this, like how do you you know, exactly estimate which product is
seeing more valuation versus you know, less valuation. And it's extremely complicated because we're talking about, you know, not at a country level, it's at a product level, and then within a product there are different kinds of products. So implementation is going to be very difficult. But basically, the countries that have benefited purely because of trade diversion and no additional local valuation could be at risk of tariff in this second Trump presidency. But it also I think
there is still space for countries actually to benefit. So, for instance, countries where the local valuation is much higher can still benefit in the second Trump presidency. Some of the low tech manufactured products or the mid tech manufactured products where supply chains are still shifting, there are countries
that can actually still benefit. So we had actually done a report in mid twenty twenty four looking at basically data for about seventeen eighteen months, covering about a sample of one hundred and thirty companies to basically identify which countries were actually benefiting from supply chain shifts. You know, we'd done a similar study back in twenty nineteen, and
then we updated the study in twenty twenty four. So what was interesting is that during the twenty nineteen study, it was actually largely Vietnam that was benefiting from the supply chain in shifts. But in the more recent study that we did, actually India emerged as the biggest beneficiary from these supply chain shifts that are ongoing in sectors
like electronics. Obviously smartphones is one sector where India is benefiting, but also Malaysia which is up and coming in terms of again electronics, in data center, in semiconductor assembly and testing. And what's interesting is that you know who's investing in these countries. So unlike Vietnam, where a lot of the investments have also come from China, in India, bulk of the investments have actually been from US, European or Developed
Asian multinational companies. Similarly, in Malaysia, it's a bit more mixed, So I think there will still be beneficiaries, but obviously the loopholes are going to get closed.
Yeah, you mentioned the loopholes there. There was a Harvard business paper that I was reading that estimated that it was about sixteen percent. One six up to sixteen percent, I should say, of goods that were shipped from Vietnam to the US were actually that transshipment that you're talking about. In other words, it wasn't necessarily anything that local manufacturers were adding value. It was purely putting it in a box, slapping a label on it saying it was from Vietnam
and not China. But to your point, it is so difficult to first of all identify that there's a whole, and it's not just difficult, but it's also a lengthy process. What is your assumption in terms of the perhaps the flow of tariffs. You know, we've been promised by Trump on day one tariffs potentially on Mexico and Canada. We know he's going to add tariffs on China. But sort of the order of it and the magnitude of course
matters as well. So what's kind of your assumption for that, what countries will get hit first, and how long maybe will we wait for other countries to get hit?
Yeah, I think if we follow you know what Trump is saying on his social accounts, China, Mexico, and Canada seem to be in the front in terms of the firing line. So our assumption specifically within the Asia region is the China tariffs, you know, ramping it up to sixty percent, that gets implemented in the first quarter, in the first half of this year itself, and then essentially the gradual ramp up on the rest of the world
takes place over the course of twenty twenty five. But some of these other countries that are in the cross firing line because of trade diversion, as you said, I think it's going to take a bit more time to conduct studies and analysis, so their tariffs it could take a bit more time to come through. Also, there is
uncertainty all said and done. I mean to the extent that you know, Trump is using threats on other countries more as a negotiating ploy to get them to increase their defense spending or to get them to buy more US energy products. There could be specific cases is where you don't see actually the kind of tart of implementation that he's threatening on a few countries. So I think
we're dealing with very elevated levels of uncertainty. But that said, I think the baseline objective that he has to be taken very seriously in our few.
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as over two thousand equities and credits. If you like what you hear, don't forget to subscribe and chairm So now you're the head economist for Nomura based in Singapore, and you look at across the Asia Pacific region if you had to sort of do a simplistic ranking, so obviously China's going to be the most impacted. I'm assuming that some of the other open economies that rely on exports are also going to be negatively impacted. But who
are the relative winners? Can you sort of give us some ranking of which economies should do relatively well versus relatively badly?
Yeah? Sure, so I think we need to think about this both in terms of like the near term impact, but also sort of the medium term impact. If you think about the near term impact, the higher tariffs, more uncertainty, weaker global demand, weaker exports, that's pretty negative for the open economies in the region. So the likes of South Korea, Singapore, you know, these will be impacted more negatively just because they are open economies. But from a more medium term perspective,
I think there are two trends that are important. One is really the rise of DM industrial policies, so you know, us trying to get semiconductor supply chain back or trying to get the you know, EV supply chain back, and this is not just US obviously, you know you're seeing the rise of industrial policies even in Europe. And the second trend is really the rise of China in the manufacturing supply chain. And China has moved up the value chain and today is you know, a global leader in
some of the high tech manufacturing likes of evs. So some of the countries like South Korea, I would say, in particular, I think the question is, you know, the business model, the growth model going forward, because you know, these are these sectors in which Korea has done exceedingly well, but there is now this threat coming through both from the US industrial policies but also the rise of China.
In terms of the winners from this trade tensions, I think the countries which are receiving a lot more of funding from non China destinations and which are competing more in the low tech to mid tech manufacturing which is not at risk necessarily from US industrial policies, other ones that should be relative beneficiaries. Again, the winners, you know, from a near term will be countries that are more domestic demand driven, and again I would put India in
that bucket. India is also a strategy counterweight to China, you know when it comes to US policies, and Malaysia, which we also think is actually seeing a lot of benefits from the shift in supply chains that are ongoing right now. So we think Indian Malaysia will be the two big winners this time around.
We've talked about a lot of Southeast Asian countries here, and how do you think they'll react Because we'll probably have US tariffs on Chinese goods, will probably have China offsetting and re routing those exports. How would we to Southeast Asia, So what are the risks there and how do they kind of manage that relationship.
Yeah, no, absolutely, as you said, you know, and I would say this trend of increased China exports to rest of Asia is a trend that has really accelerated post the pandemic because of the weakness in China's own demands. So Asia is definitely seeing a lot of the channel over capacity ongoing. And you know what's interesting is that this is actually visible across a range of product categories.
So whether it's sort of the low cost products with you know, through the e commerce platforms, metals, chemicals, autos, even capital goods and intermediate products of course, you know, across countries. So this is actually across the board. And as you said, with the Trump tariffs, we are likely to see in our view, redirection of these exports into the rest of the region. So it does complicate actually the economic picture for these countries because there's a surge
and imports, the trade imbalances are worsening. There's a negative impact on production factories, kpex is getting impacted, the semi sector is you know under pressure, profitabilities under pressure, and you know, job creation is becoming a challenge, So a whole host of challenges that these countries are facing. And in fact, you know, in response to this, we've also seen some change in how some of these Asian countries have responded to the threat of more imports from China.
I would say, a more subtle form of a rise in Asian protectionism, in fact, in the form of things like increasing the vat on low cost products or banning some of the e commerce apps for instance Timu and Shean exactly. There have been also changes in the incentive struct which I think is important for these countries in terms of putting policies in place such that there is less reliance on imports and more reliance on local value edition that comes in because of these, you know, so
more investment from China rather than imports from China. So all of this is going on, and as you said, with US status, this is going to be a bigger challenge. But the end, at the end of the day, you know, Asia and Southeast Asia in particular has to balance its relationship with China, both for geopolitical as well as an economic reason. I mean economically, China and Southeast Asia have
a very strong investment and trade relationship. A lot of the investment in infrastructure factories today in Southeast Asia is coming from China. And you know, as we were discussing, China is extremely important in the supply chains. So if you want to benefit from the supply chain shifts, your intermediate products are still coming from China. And I mean geopolitically, I think the you know, question really for countries is how reliable will US be as a defender of regional security?
And there are question marks on this and so all said and done, I think for Asia and for Southeast Asia, it's all about you know, balance and you know, managing both US and China, which is you know, not easy.
It must squeezed between two of the world's largest economies.
There must be a real hard balancing act because like you look at something like electric vehicles are evs. Now, there's a flood of EV's going into Southeast Asia. I know you're based in Singapore, I know that there's a lot more Chinese EV's on the road there. But you have a place like Thailand. They've got a big car manufacturing industry and you're seeing they're being impacted by these Chinese imports.
Absolutely, And in fact, you know, Japanese firms were actually the first ones to invest in Thailand in the plans, etc. And we've seen a couple of Japanese auto plants actually shut down because of the rise in the ev were seeing from China. It's tricky and in my view, a lot of these countries in Asia still I would say developing countries, right, I mean, they need to create jobs, they need to create growth. They're not at that stage of economic development where they can directly compete on high
end semiconductor. Therefore, it's important for them to put policies in place such that there is more domestic value addition that comes in that for whichever product category that they're focusing on, that they create an ecosystem in place. And this requires different kinds of reforms. I mean some of the you know, basic stuff in terms of better infrastructure, better ease of doing business is where you start off with.
But over a period of time, you know, you need to invest in innovation, in R and D and education skilling, so a lot of work homework actually that these governments also need to do to ensure they have a more sustainable growth over time.
So now I love to bring the conversation to India. Now, India has been the one shining light, one shining you know, great economy over the last few years. Obviously China has been weeks, a lot of investors have been focusing on India. But recently we noticed that the authorities downgraded their economic forecast. Now we used to like eight percent GDP growth handle for India. Now it looks like it's been downgraded closer to sort of six percent. What's your view? Should we
be getting worried here? So?
I mean, I would say, like in there facing a cyclical growth challenge and the twenty twenty five is going to be a difficultier on growth, but I don't think it's a structural growth challenge, So I would differentiate the two things. So what's happening really is post pandemic. You know, we did see, as you said, close to eight person growth on average, but a lot of that was actually pent up demand, which has essentially normalized. And we've seen
some moderation in urban income growth. The huge increase in credit growth, particularly for consumers, that is slowing down, partly because of the macroprudential tightening that the Reserve Bank of India has implemented mountropolicies. On the tighter side, India is also facing the threat of more imports coming in from China. So you put all of that together and essentially we've seen slow down in private consumption and a slow down
in private investments. So twenty twenty five will be difficult on growth. You know, the trend growth in India is somewhere around the seven percent six and a half to seven percent in that range. So this year we think is going to be a of below trend growth and like the rest of Asia, and there is also seeing pressure on the currency, so that's creating challenges on the
MOUNTRA policy front. The reason I say this is not structural is because unlike the period from twenty eleven to twenty twenty, balance sheets are actually in a much better shape, both in terms of corporate balance sheets as well as the balance sheet of the banking system. As we discussed, you know, India is already benefiting on the supply chains.
This is right now fairly focused on smartphones, but this is how it typically starts, and the focus from the government site in terms of policies and reforms is to integrate even more on the global supply chain. There's a lot of spending on infrastructure that's going on and will continue going forward. Working age population is increasing, household incomes are going to increase, the middle income classes rising, and India has you know, historically had a big advantage in services,
not in manufacturing, but in services, particularly in technology. In the last four or five years, we've actually seen this benefit actually spread out outside it to the non IT services as well, what we call these new global capability centers which are cropping up. So India is benefiting from you know, things like R and D strategy consulting which are being set up. So I think there are still
a lot of opportunities. Yes, a lot of challenges in terms of trying to grow in a global environment where countries are becoming a lot more protectionist, so it's more challenging in their needs to create more jobs. But I think the fundamentals are in place. So it's a tough year, but growth will bounce back. Well.
Maybe good to end on that more optimistic note. Thank you for joining us so much today.
So no, thank you very much for having me.
You've been listening to Asia Centric from Bloomberg Intelligence. I'm Katy Dmitrieva. You can find me on Twitter at Katia Dmi or on LinkedIn.
And I'm John Lee and you can find me on LinkedIn by searching John Lee from Bloomberg Intelligence.
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