# Asia-Pacific: The Impact of Escalating US Tariffs

- Link: https://www.thailand-business-news.com/trade/191478-asia-pacific-the-impact-of-escalating-us-tariffs
- Published: 2025-01-25T17:45:07+07:00
- Author: Daniel Lorenzzo

With Trump’s return to the White House, the likelihood of US tariffs has increased.
Here, we explore three scenarios where the Trump administration imposes stronger
trade restrictions on China, the rest of Asia, and the world, including higher blanket
tariffs.

In addition to tariffs on China, our current baseline assumes that **Vietnam and
South Korea will face targeted tariffs, given their large goods trade surpluses 
with the US.**

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Higher tariffs on China would significantly impact the entire region, as reduced
US demand for Chinese goods would create ripple effects on other Asian producers.
Vietnam would likely bear the brunt of these effects outside mainland China, whereas
India, with its more domestically focused economy, would remain the least affected.

India, Thailand, and Malaysia are at risk, but political considerations and the 
need for alternate suppliers until US reshoring has progressed more, leave us sceptical
that they will be key targets for higher tariffs.

Sharper currency depreciation would likely delay monetary policy easing in the region
in the short run, but rate cuts would eventually be deeper as growth concerns rise.

Over the longer term, US trade reorientation away from Canada, Mexico, and China
has the potential to offset some or even all of the damage caused by tariffs.

After Donald Trump’s inauguration, no immediate tariffs were introduced. However,
preparations have been made for potential additional duties on trading partners.
Under our current baseline scenario, we anticipate a gradual increase in blanket
tariffs on Chinese exports, rising from approximately 19% to 30%. Meanwhile, Vietnam,
South Korea, and Japan face targeted tariffs, while other Asian economies remain
unaffected. Utilizing our Global Economic Model, we explore three alternative scenarios
involving stricter trade restrictions, though we assign a relatively low likelihood
to these outcomes.

Two main criteria will determine which other Asian economies will become a target
of higher US tariffs, in addition to mainland China: the size of the US trade deficit
with the country, and the difference between the average tariff between it and the
US. In this regard, Vietnam and South Korea appear the most exposed, although we
note that the Most Favoured Nation (MFN) tariff may not in all cases correspond 
to the effectively applied tariff.

**Vietnam’s substantial trade surplus**—the third largest among all U.S. trading
partners after China and Mexico—prompted us to include in our baseline scenario 
a targeted 10% tariff on autos, metals, and solar cells. This adjustment would increase
the average import tariff on Vietnamese goods from 4.6% to 5.4% by 2027.

**South Korea’s trade surplus in 2023** positioned it among the top five countries
the US regards as a “trade loser.” Under our baseline scenario, we project a 10%
targeted tariff on the automotive and base metals sectors.

India, Thailand, and Malaysia are also at risk given their sizeable trade surpluses
combined with their high import tariffs on US goods. Nonetheless, tariff hikes are
not currently part of our baseline for these countries.

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In the case of India, Trump might view it as a key ally in countering Chinese influence,
potentially offering it greater flexibility. Furthermore, the cordial personal relationship
between Trump and Prime Minister Narendra Modi could result in negotiations where
tariff threats serve mainly as a strategic tool to secure concessions on India’s
high import duties.

Thailand and Malaysia play a crucial role as major suppliers of electronic products,
each contributing approximately 5% to total US electronics imports. As the US continues
to distance itself from China’s electronics sector, it is unlikely to jeopardize
the supply of certain products by imposing higher tariffs.

### Three other plausible tariff scenarios

Given that uncertainty remains high, we present the implications of three alternative
tariff scenarios based on Trump’s past comments and the limits of presidential powers
to unilaterally impose tariffs (**Table 1**).

Table 1: Baseline and scenario tariff assumptions

|   | China | Rest of Asia and world | Implementation | 
| Baseline | 30% blanket tariffs | Targeted tariffs on JAP, KOR, VNM, the EU, CAN, MEX | Phased in over 2026 and 2027 | 
| Scenario 1 | 30% blanket tariffs | 10% blanket tariffs + retaliation | From early 2026 | 
| Scenario 2 | 60% blanket tariffs | 10% blanket tariffs + retaliation | Phased in over 2026 and 2027 | 
| Scenario 3 | 45% blanket tariffs | 15% blanket tariffs + retaliation | All at once in late 2025 |

Source: Oxford Economics

Our three scenarios are simplified compared to our Global Scenario Service’s global‘
trade war’ scenario in that they don’t layer on the Global Trade Analysis Project
model to capture potential longer-term shifts in trade patterns.

### Second-round effects from higher tariffs on China cause significant damage

Regional trade linkages with China are stronger for many Asian economies than those
with the US. In particular, China relies on the rest of Asia for inputs, so lower
US demand for Chinese goods has second-round effects on Asian producers.

By country, we find that **Vietnam would be the hardest-hit **economy under all 
scenarios due to a combination of factors. The country is heavily integrated in 
Chinese supply chains, especially for electronics, which are, in turn, China’s biggest
export group to the US. In 2023, out of all Vietnamese exports to China, more than
a third were intermediate electronic goods such as display modules and chips. Adding
to this, with 28% of its total goods exports shipped to the US, the US is Vietnam’s
largest export destination. More broadly, Vietnam’s economy is heavily trade reliant–
goods exports to the US alone account for more than a quarter of GDP .

South Korea and Taiwan are the next most affected under all scenarios for similar
reasons. In Taiwan’s case, its tech-reliant economy will likely suffer severely 
due to trade links with mainland China, which accounts for around 38% of Taiwan’s
total goods exports. For the computer and electronics sector specifically, nearly
a quarter is consumed by Chinese industry alone. In Vietnam’s case, a still-sizeable
15% of all electronics output is used by Chinese producers. It also has a strong
export reliance on the US, combined with its generally large degree of trade openness.

In South Korea, export reliance on the US is still high, at around 18% of all exports,
although this is lower than some of its regional peers. But exports and export prospects
are crucial to the performance of the overall economy and in determining business
investment, especially in the large electronics and auto sectors.

India seems to be the least vulnerable, as its economy is largely domestically driven,
with exports to both the US and China together comprising only about 2.6% of its
GDP.

### Greater trade reorientation could bring benefits to some, especially longer term

Largely disregarding possible shifts in trade patterns, our analyses suggest the
GDP impact will be negative across all Asian economies through at least 2029. However,
some of the tariff damage may be offset by the US switching to other import suppliers
over the longer term. Incorporating the Global Trade Analysis Project model suggests
that if Trump follows through with higher tariffs on the US’s biggest regional trading
partners, Canada and Mexico, regional North American trade could halve from its 
current levels. While greater domestic production may displace some imports, US 
trade would likely reorient towards Europe, Asia ex China, and other emerging economies.

If Trump follows through with his threats on China similar to scenario 2 (see the
Global Scenario Service’s ‘global trade war’ scenario), Thailand and the Philippines
could see net benefits thanks to trade rerouting.

### Monetary policy easing could face delays, but deeper cuts would ensue

Since markets began pricing in a Trump election victory around September last year,
many Asian currencies have notably depreciated – mostly by more than what our tariff
scenario 3 would suggest. We note, though, that it is difficult to distinguish between
tariffs and other causes – fiscal worries in Indonesia, political instability in
South Korea, and FX interventions in India. Risks have therefore tilted in favour
of higher policy rates for longer; for instance, the Reserve Bank of India’s upcoming
decision stands on a knife-edge. Our strategy team’s simplified calculations on 
how much depreciation would be needed to offset the full impact of a blanket US 
tariff on total exports suggest depreciation risks are sizeable. What’s more, weaker
currencies may push up the cost of worldwide imports, raising inflationary pressures
in the near term.

Although, given China’s primary defence to higher US tariffs will likely be to moderately
weaken its currency, this should alleviate some of the price pressures. China supplies
25% of the rest of Asia’s imports, on average. Any upward pressure on inflation 
due to retaliatory tariffs should remain limited, given the small importance of 
the US as a source of imports, an average of around 7% of goods imports. The average
inflation in Asia may end up the same or even lower in the case of higher tariffs,
as suggested by our modelling.

Growth concerns have started coming into greater focus and would rise in the case
of more severe trade restrictions, prompting deeper cuts than we expect in our baseline.
Policy rates could fall in Taiwan to 0.7% and in South Korea to 1.3% in 2027 under
the most extreme tariff scenario, a sizeable 70bps-90bps lower than in our base 
case. Vietnam’s policy rate could fall as much as 200bps below our current baseline
in 2027-2029. Rates would only reverse from 2028 onwards.