US President Donald Trump announced what he calls reciprocal tariffs in April on dozens of America's largest trading partners. After the biggest market sell off since the COVID nineteen pandemic. Trump put them on pause for everyone but China. Since then, the administration has announced temporary reprieves for a number of important items like smartphones and other electronics. But the risk remains, and it seems that Asia's economic outlook hangs in the balance.
You are listening to Asia Centric from Bloomberg Intelligence. I'm Katydmitrieva in Hong Kong, and today we're unpacking a lot, but the risks of Trump tariffs to Asia, where countries go from here everything. I'm joined today by Frederick Newman, chief Asia Economist at HSBC and co host of another podcast you should probably be listening to. If you're listening to this one called Under the Bandry, it's all about Asia economics and markets.
Welcome bread, Oh thank you, Katya. It's such an honor to be here. I listened to this podcast all the time religiously, so this now, I guess I'm gonna hear myself when I go out for a run.
We paid him to say that. So, first of all, I wanted to take a step back, because of course there's been so many moving pieces just in the past couple of weeks, but to just back to basics. What are tariffs generally, who pays them, and what are the economic effects.
So terrrists are a very old tool in the global toolbox. So it was quite common in the eighteenth century, nineteenth century, and twentieth century, and then we did away with them more or less over the last seventy years or so. Gradually they were reduced, and now they're back. They're back in big time, in a big way, a big way. Yeah. And so essentially it means that US customs will charge a fee for every good that comes into the United States from China. And who pays for this is a
is a controversial question because it is a bit controversial. Yeah, So I think in practice it's of course, if you want to buy that good as a US consumer, you'll pay more for it because you know there is a that teriff on it. It's a tax. But you might not pay the full amount of that tax because the seller in China, say, might also want to incentivize you to buy it, might cut the prices to get the deal done. So there might be a little bit of a burden that falls in the Chinese export, a bit
on the US importer US consumer. But generally speaking we say that the importing country pays more of the tax. That's generally the case, but how much is obviously up to debate. But you could probably say that US prices will go up as a result, at least until the US can produce these goods themselves.
And what kind of timeline are we talking about here, Like, is it the case that once these things are announced, companies, You know, I've been talking to companies already implementing some plans. When it comes to tariffs, I mean, how soon could we be seeing these effects, both on the inflation side but also on Asia. Here in Asia very very quick.
So the terriffs are most of them are in effect already, and that means that any container comes into the United States today you have to pay these tariffs. And we only have about inventory in the US for a few weeks, so you can see that you might want to draw down the existing inventory. But once the shelves are empty, you need to replenish them with new goods from overseas, and of course that's when you then start to raise prices. So in a matter of weeks you could see higher
prices for some essential items. And that's actually why some of the producers rushed goods before the deadline to the US. Reportedly, you know, there were Boeing seven or sevens were being chartered to bring in goods into the United States just under the deadline. But of course that inventory will be absorbed quite quickly, and then of weeks you see price essentially go up.
You know, we, like you said, tariffs have been in place before. That's nothing new, but I guess the size and scope of these particular tariffs. We were just talking before we start recording about how fast paced everything has been. I mean, how significant is all of this for both businesses and government officials trying to run their economies.
We really haven't seen this in decades, right, So we have to go back to the nineteen seventies on the Nixon presidency, there was a ten percent tariff there was in post, but only for four months and then got taken off again. Now we're talking much higher tariffs ten percent in most countries, but on China, of course, it's well of one hundred percent one hundred and forty percent, and so these are much much bigger terrfs. So we have to go back to the nineteen thirties to see
a similar level of terrorfs in the United States. And back then when these teriffs were imposed, it took about two years that were gradually brought in. They weren't brought in sort of immediately from one week to another. It's not just the level of these terrorsts, which are quite high, but also the speed with which you're implemented is also we haven't really seen that any decades. We would say, how.
Does that make it your life difficult? In terms of forecasting, I mean, do you just do a bunch of scenario analysis? Like how do you actually forecast this?
Yeah, scenarios is one thing. First of all, you have a good understanding of how the global economies interconnected, how exposed individual countries are to the US market, to exports, how consumers might behave for different goods when prices increase, and so you have to make some you know, basically framework analysis, and then you start to talk about scenarios. Okay, we know what's happened now with terrorists. This can mean this for the economy. We know that probably Chinese growth
will fall, we know US inflation will go up. We can kind of have a guess of that. But then scenario analysis when it comes to what might change, because this is still a moving target. So the forecasting is not just estimating the but also trying to guess what else might change in the coming weeks. And here that's the exhausting part because things seem to be changing every twenty four hours and so you start to retweak your models.
And that's what scenario analysis comes in, trying to predict what policy will be because terrorists could be unwound again, they could be raised again, so there's a lot of interplay that you have to kind of make some assumptions around.
So a scenario, the reciprocal tariffs or whi Trump is calling reciprocal tariffs were announced, they were paused. Let's say they go in what will be the impact on Asia?
So there were only paused on other Asian countries, there's still apply to a large effect on China, right, and so that already matters because if one country receives terrorists but others much smaller terrors, then the ones that receive smaller terrors aren't as impacted because they can take market share from the large economy that has much higher terror.
So in this case, for example, because you see China having large terraffs, but say Vietnam as smaller terrors, actually Vietnam might not be as negatively impacted because they are now more competitive than China is in terms of selling into the US market, so you have to take that into context as well. Nevertheless, there is no real winners
from these terrors. Ultimately, you would expect that growth in Asia will slow and probably slow by you could say half a percentage point or percentage point, which is quite significant actually, just from the impact of trade. And then you have to add things like the impact on investment because which company will want to invest not knowing what future terrors look like. Then you have to look at the impact on financial markets and how consumers might feel
if stock markets go down. So then you could say, well, the impacts WEB could be potentially larger than that could be up to a percentage point. From most countries in Asia and the region, there are some differences. Their economies like Vietnam are much more exposed because they're manufacturing driven. They expert a lot to the US. Their economies like the Philippines, for example, it doesn't sound that many manufactured goods to the US. So it's a bit of a
difference here. But by and large, half a percentage point to percentage point in growth is already a fairly large hit to growth. That's a growth shock, we would call in economics. And that's enough to then essentially lead us to worry about our recession and looking for interest rate cuts, for example, by policy to help to cushion the impact.
Because you use the red recession. How likely is that to come from the tariffs? Again, we don't know after this ninety day pause sort of what the shape of those tariffs will be, if there will be carve outs exemptions, But let's assume that that level is put into place as has been announced. I mean, how high does the percentage chances of a recession go? What is the risk of a recession in some of these countries or even in the region in general.
Or some countries it is higher than for others. And that's because some countries have a lot of domestic growth and so the export the slowd on doesn't matter that much. So if you take India, for example, India doesn't export that much, but it's a big giant economy in itself, and so there will still have some growth even it slows down. But then you look at an economy like Korea, for example, you look economy like Japan which has both have very low growth anyways, and so a percentage point
reduction could tip them into potentially recession. So the recession risk there is much much higher than that. But we should also say that the recession risk in the US is not zero as well, and if there is a recession in the US as a result of that, then the recession risk in other parts of Asia goes up even more because of course, US recession means the US will buy fewer goods in general, not just be the terrorists,
but also because demand slows. So we're watching very closely, for example, what happens to the US as well here. But bottom line is probably we can narrowly avoid in most countries, but not in all of the countries in Asia.
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It just strikes me as this trade war is quite different from the first trade war under Trump one point zero if you want to call it, because there were winners in that. There were winners in the Forum of Vietnam, which took some of the market share, and a lot of Chinese US companies ended up moving there. I mean you said earlier there won't be any winners this time, but could there be kind of new countries emerging as potential manufacturing zones if they have a lower tariff.
There could be the reason. And I think you hint at this rightly that it feels different this time than last time, and for two reasons. One is a tariff so much higher that's from China, for example. But the other thing is that we don't have clarity as to
what future teriffs will be. So if you think about Vietnam, for example, we don't know whether in three months from now, Vietnam might have fifty percent terif or ten percent tariff because there's a lot of uncertainty, and so that really means that Vietnam can't fully capture that opportunity because we
don't know what the future trade regime is. So we talk in the economics a lot about uncertainty matters enormously, right, and so if you have that uncertainty, then everybody is going to hold back investing in any country because they don't know where they'll be. That country will be hit. And so you could then say winners only merge once it becomes clear what the future trade policy will be, and that could happen maybe in a few months from now, when we get a much clearer sense Okay, this country
received terrors, those countries will not. Maybe they strike a deal with the US and that deals give certain and then we can talk about winners. And so picking winners, if you will, is partly a political question. So which country can strike a deal with the US that gives it certainty as to the future trade relations. So it's not an economic question as much as a political question.
And so we look at we know that India and Japan and Vietnam negotiating with the US proposing deals other countries as well, and who will emerge there with a deal that we have to see. But you're right, Once you have a deal in place and there's certainty, then investors companies can say we're putting money into this country because we know we have some certainty as the terrors, and then you'll see that investment come in and the
country can really capitalize on it. But we're not at that stage yet.
Yeah. Really, the only country where we do have some certainty is probably China. But it's certainty to the negative.
In other words, yeah, that's certainty. That's the wrong type of certainty. Although even there, I think that it's still fluid because you might even see some sort of deal being struck between China and the US. It's not inconceivable, right. We know we had a deal in the first Trump administration, is so called Phase one deal. Even here there could be potentially both sides say, you know what, this is
a bit extreme what we did. Let's wiggle it down to say fifty percent terrors, and that would change things quite a lot for the business outlook for China as well. So I would say even with China, it's not clear yet this is locked in place.
Is it also your sense that this isn't necessarily the death blow to China's economy either. I mean, you guys actually talked about this recently on your podcast and you had your China economist on discussing this very point. The tariffs as they're announced right now, which are very high. You know, they're one hundred and forty five percent plus the twenty percent from the previously implemented, so this year one hundred and forty five percent were added. But what
would that do to China's economy this year? Because there's a sense that it doesn't necessarily spell disaster. Yeah.
So China's economy, we have to remember, is very big, and it's actually quite domestic. And so when we look at putting all exports together go to the United States, what share does it make up of China's economy, And it turns out is only roughly two point five percent. There's a bit of a discussion around the numbers, but you could say it's you know, maximum three percent, maybe anywhere besieon two and three percent, which is a large
number of that would to disappear overnight. Then of course, your economy with three percent smaller two and a half percent smaller. You're growing at five percent, so you could say you'd still got some growth, but it would have your growth rate. So from that perspective, it's not really the end of the world. It just comes at a very awkward time for China because domestic demand is very, very weak. We have a real estate market there that's a bit wobbly, we have consumers are a bit sluggish
at the moment. So it's manageable for the Chinese economy in the long run. They can live without access to the US market. So it's probably a bigger deal for some of the smaller Asian economies if they were to receive the same amount of terrorists as China received, because their exports are much more important part of their economy. They don't have the domestic kind of depth, if you will,
the big consumer market one point four billion consumers. So it's a challenge for China, but it's as you say, it's not sort of terminal for the economy. It has ways of kind of grinding through that.
And they are focusing more on the consumer this year, and ironically, Trump's policies maybe forced policy makers in China to speed that process up.
Yeah, that's right. And actually, you know, if you talk to economists over the least ten years or so, many would have said that there is an emerging imbalance in China. And what they meant by this is that to say China was very reliant on investment and exports and less reliant on domestic consumption, and that there was always this idea that they had to rebalance away from exports investment
towards consumption because it was just getting too out of whack. Now, the Chinese policy makes have tried to push in that direction, but it never really worked. And so now we could say here with a terrorist, now comes a big opportunity to actually implement these policies that will kind of really energize domestic consumption. And so in some ways we might come out at a better place for China because some of the reforms that many people hoping for China might
not be accelerated because there's this external constraint. You can no longer export as much, and so you need to think more about where else could growth come from, and this could energize sort of the switch towards domestic consumption. That's at least a hope where it will happen that. That's of course a different question, but that's good of the hope. I think that would be the positive story emerging out of this.
So why is that important? You know, we've talked a lot about this on the podcast, about this shift, But why is it important for an economy, especially China, to pivot towards that consumption model and away from this sort of over alliance on.
Trade tennessee armously normsly successful. I mean, no other economy has in a few decades really delivered that type of growth and prosperity and lifted people out of poverty amazing. But in large part this was done by prioritizing investment, so very high investment rates, and that investment, of course produces goods, and there were so many goods being produced at that the doromestic consumption wasn't big enough to absorb them, so you had to export them to the rest of
the world. The problem now is that the rest of the world is no longer there to buy all these goods. It's not big enough. So now this growth model is
running a little bit into constraints. You can't just keep investing, investing, investing, and keep your consumption low, you need to essentially now say okay, we've invested enough, we slow down our investment, but now we start to buy our own goods essentially from the investment stock we've built up, because otherwise you can't just invest, invest, invest capacity and hope that the
rest of the world will buy it. At some point, the rest of the world runs out of money or they run out of political world to buy your goods. And that's sort of the turning point we have China. It didn't matter twenty years ago, China wasn't a large an economy, could still invest in sell to the rest of the world. There was enough demand. Now China's so large that the rest of the world may not have the ability of the appetite to buy all these goods. So where does in demand come from?
Where you have to look internal, Yeah, because we've seen that pushback kind of growing across even Asia, right, a lot of emerging nations, Like it's not just Trump, you know, it's in Mexico, it's in Brazil, it's here in Indonesia as well.
Yeah, so many countries have sort of they're very strong trade relations with China. China is a big market in its own right, but China is also a very strong competitor. So the more competitive China becomes, of course more some of these countries also see price pressures on their own industries, and that's essentially a bit of a political problem because
then these industries say we need protection. Well, then terrorists would go up in all these countries and so then China would suddenly face you know, a lot of terrants, not just in the US, sup in other countries as well. And we call this sort of a tariff cascade that the US starts something, but other countries then follow and to avoid that happening, and nobody really wants it's not
helpful for the world for this to happen. The best solution would be to create demand in China to alleviate the pressure on exports to drive down prices in other countries.
So it's like very hinges on that right now.
In some ways it sounds hyperbolic, but you could say the fate of the world economy and large part depends on whether China can rebalance this domestic economy. So we tend to look at the terroriffs and the US and it's very disruptive, but there is an underlying logic here that in some ways to really bring the global economy to a more sustainable path, countries also need to fix their domestic side. The domestic side intimately linked to the global side, and there are two economies that need to
fix their domestic side. One is the US probably consume a bit less, save a bit more by fewer goods some overseas. But conversely China should probably buy more goods and produce fewer goods. And so if we can get that realignment, then actually the pressure for terrafs would go away, would have much more stable global growth, and that's going to be the challenge in the next few years.
For the rest of the year. You talked earlier about the negotiations between countries like Vietnam, Japan with the US to try to get exemptions from these tariffs. The IMF World Bank meetings are coming up in DC, and it just strikes me that it's a really interesting moment we're in where these World Bank meetings are happening. There's a trade crisis, and you know, it happens to be taking
place in the location that arguably started this crisis. How much I guess negotiation do Asian countries need to do to get these tariffs lowered, but also can they actually do what Trump wants them to do. Can a country like Vietnam, for example, fully rebalance this trade surplus they have with the US because the economy is much smaller.
Yeah, that's a tough question. The first thing I would say, I think you're right, there's going to be a lot of door knocking during the IMF Will Bank meetings in Washington, d C. Because of course these delegations come in from Asia, and that's going to be opportunity to maybe meet somebody at the White House or the USTR US Trade Representatives Office or Commerce Department, because often I think many officials and smaller economists also don't know exactly how to go about,
you know, negotiating what does the US want? So you establishing that contact will be very, very important, and so probably this is one of the key opportunities to do that. And so I'd imagine a lot of delegations, even larger delegations in previous years, will be heading to d C.
What can they offer That's a tricky one. You know, you can say we're buying more goods from the US, we can buy more energy, we can buy more agriculture goods in some countries to talk about defense goods, for example, but it's hard to see that being the sole solution to everything. And so if the goal is to completely eliminate the trade imbalance with every single country in the world,
that's going to be tall order. So the hope is that maybe the US administration relaxes a little bit on the goal of just eliminating the trade deficits, where maybe these countries can convince the US and say, look, we understand we want to work towards more balanced straight but we can't do it overnight. This will have to be a goal over many, many years, and let's work towards this adjustment together, and we'll be willing to buy more
of your goods. We'll be willing to reduce our import barriers for your companies to sell us more goods to invest here. But a quick elimination of these trade deficits it's going to be, I think, very very hard to do.
So, Fred, is there a world in which any of these countries, be at Vietnam or India actually benefit fit from these negotiations with Trump?
So one big benefit would be just a certainty, the certainty that if so, if you have a trade deal between say US and Vietnam on the back of this, then this would be a big benefit to Vietnam, even if the terrors don't go to zero, but there'd be certainty, there'd be certainty that we have this deal. Terrors are going to be ten percent or twenty percent of what it is, but this is it, this is we all agree on it, and that certainty is very important and
incentivize investment to come back. So I think that's one main thing. But I think there's something else which is worth looking at, which is that the terrorists by the US were essentially a wake up call to Asia as well, because you know, we've gotten accustomed to this idea of this we could always export to the United States and this is how we grow our economies. And now there's a realization, oh, that's not a given. And so what you see now is policy makers think more about other
growth drivers, and these include domestic growth drivers. And so you had in Indonesia, for example, the president already indicating that or maybe we should work more on simplifying red tape, bring more investment in how can we strike maybe free
trade agreements in India? You have the same thing. How do we maybe liberalize trade with other countries like New Zealand or European Union, How do we just get industry to invest more domestically and so in some ways it could be a catalyst for some domestic reforms which ultimately will be beneficial.
Yeah. I mean, we saw China, South Korea, Japanese officials meeting and China signaling that I wanted to speed up the process to getting an FTA. I mean that would be huge.
And as we speak, Chinese presidents in Southeast Asia visiting different countries there, Vietnam, Cambodia, Malaysia, and let's see it. Maybe something comes out of that as well, you know, let's work together. And so that could be tighter relations with China, that could be bilateral agreements on investment for example. So there's this catalyst for that part as well. But don't underestimate also the catalyst for domestic reform, which is important.
Often Asian economies are very successful at exporting, but they're less successful at essentially unleashing domestic growth drivers. And that's often because there's lack of competition domestically, lack of infrastructure, too much regulation, domestically. So often the domestic economy is much more distorted than the external economy in these countries.
And so if you could then start to unleash some of the domestic potential, that go a long way to offset any uncertainty from trade, and ultimately that's an opportunity.
And that would be things like changing the rules around automatic payments or like, I guess what are some of the changes that could really help unleash that. Are there certain regulations in place or would be an example.
So on examples, if you have large countries, often they have internal barriers. Great India, for example, if you go from one state to another, it's sometimes harder to trade within India than trade between Indian and other countries, even though it's one point four billion people. It's the same in China. Actually there's a lot of different levees and charges, and it is difficult to move goods across borders within the country itself. So you could think of internal trade
liberalization in many ways. You could also simplify through technology, tax payments, tariff payments. You could what the Indians have done very successfully, introduce sort of electronic payments into the government. Right you pay your taxes and everything electronically, that is a huge potential for just unburdening the economy. You can think of hard infrastructure, you know, particularly rural areas for example.
You can think about more money going to education, for example mass education training programs, so that there's a lot these countries can do. Still on the domestic side, and one key thing is competition very often. So what we find is that actually many Asian countries that the domestic market is less competitive because there are large conglomerates that
kind of have a fairly strong position. Then the external economies external economy is very very competitive, often because these companies have to compete in the global market where there's a lot of competitors. But then you go to the domestic economy and you find you to see that retail
is dominated by one or two companies. You see that, you know, domestic car manufacturing is dominated by certain local companies, and so there's a lot to be done to deregulating it so there is more internal competition and that ultimately would drive innovation, investment, bring prices down, more consumption.
It seems like a good thing for these economies to do, but it also paints this picture of a world where the US is just less relevant.
Yeah, I think that's fair. I mean, what we really have here is probably the US signaling it wants to rely less on imports, and how they go about that that remains to be seen. But I think it's clear that the US has decided to some extent that it wants to bring more manufacturing home rely less on imports.
And so that's a broad journey we're going down. And so the rest of the world and has sort of an existential question it's facing, and that is how do we then kind of grow without purely relying on the US market. And that's particularly relevant for Asia because Asia is so externally driven, so dependent on the US much more than say economies in Latin America or Eastern Europe, for example. So it's a particularly existential issue for economies in Asia. You could say could be sort of the
end of the Asian growth miracle. That's one way to put it. But the other one is to say, actually, this is just a retooling of the Asian growth miracle. And there's over three and a half billion consumers in this region. Surely if you find a trick to kind of get them to spend. There's a lot of growth on the table that these economies could capture, but getting there that's going to be the key part.
Yeah, So you as an economist, you look across the entire region. So if we're looking at specific countries that if these tariffs do come in, if there's a more protectionist kind of world, relying less on demand from the US, which countries in the Asia region do you think would be hardest hit and which ones might potentially benefit or get away kind of unscathed.
So probably in the next year or so, you could say that these economies that are highly highly dependent on trade are going to struggle bit more than the ones that have less dependent on trade, have more domestic kind of economies to fall back on. You could start with, you know, New Zealand, Australia probably not that affected by this. I don't export that much to the United States to begin with, they are fairly domestically driven. Or when they trade a trade with other countries not with the US,
you could say India probably less affected than others. Most of the exports the US are actually services which are not being tariffed. There's a bit of a question mark or pharmaceuticals currently exempt, but in the exports pharmaceuticals to the US, there could be some tariffs come in there. But by in large India as a large domestic economy, you could talk about the Philippines. I even think Indonesia
not as impacted. So that's that's sort of on the positive side, right, economies that are more domestically oriented, and then you have once they are traditionally just driven by exports, the global cycle matters and so forth, and so to the extent that we get disruptions here, think about Korea, think about Vietnam, think about Thailand, think about Japan for example, who are all more vulnerable in terms of any disruptions to trade, and so it doesn't mean that they can't
pull through. Doesn't mean that, you know, Vietnam will always be a very very competitive economy, but the adjustment challenge is quite quite significant. So those this out of the economies to line up, But the big one is China, and China you could say at the moment is probably in the case that would probably struggle a bit more, but it has a potential to shift in the camp of the other economies that wouldn't struggle as much. Because
it has a large domestic potential. And so if CHINAUS can taple this, it can switch from being very vulnerable to being actually least vulnerable in Asia. But it requires that domestic adjustment, particularly stimulus at the moment, fiscal stimulus giving households to consume again. You could do this through spending vouchers. You can do this through expanded social security. You can try to help the real estate market to get it back on his feet. You know, if you
get that going, then actually China is less vulnerable. So China's kind of a is in between and where it falls it really depends on how aggressive domestically they'll be on stimulus.
How optimistic are you for this year on a scale of one to ten, You.
Know, I'm probably more optimistic than a lot of the commentary you see out there. And how markets behave I mean, markets really had a bit of a topsy turvy time is at least the last couple of weeks.
You know.
The first thing I think is that there's still room for winding some of this.
Back in terms of the terroriffs A terrorists.
Yeah, so it might get some deals come through. We might see also more interest rate cuts by plentral banks come through. We might see more fiscal stimulus come through, might see more reforms come through. I don't think this is a moment. There's a seminal moment, because the US is somewhat withdrawing from global trade, and something else will have fulfill this. But I don't think it'd be quite as painful as sort of the darkest scenarios currently suggest.
Now I'm an economists. You know that means by definition of a pessimist realist.
People might call that.
Well realist. Yeah, but I think in this one, I almost think that actually pragmatism will prevail, and so we will muddle through this. It's a growth shop making, no mistake, but we'll get through this. I mean, Aga is very, very resilient, lots of resources, and so I still think the outlook for this region is bright. Maybe a little bit dimmed the next twelve months, but certainly I can see the sun shining through those clouds on the other.
Side, and maybe on that positive note, we'll wrap that up. Thanks so much for joining me.
Yeah, thank you. It's a real pleasure. It's an honor to be here. As I said, I listened to this religiously every week and so, you know, being in your wonderful studio in Hong Kong, it's quite an honor.
Thank you, Yeah, thanks so much for being here. You've been listening to Asia Centric from Bloomberg Intelligence. I'm Katidmitrieva in Hong Kong. You can find us on Apple Podcasts, Spotify, or wherever you listen. You could also find us on the Bloomberg Terminal if you have one. This podcast is produced and edited by Clara Chen. To see you next time,