The ripple effects of the US-led tariffs may be “severe” for Asia’s small, open economies, warns Edward Robinson, deputy managing director for economic policy and chief economist at the Monetary Authority of Singapore (MAS).
“With trade dependencies in the region sometimes exceeding 100% of GDP, the ripple effects may be severe: reduced production, and possibly, renewed capital outflows, raising the prospect of a destabilising loop between the real and financial sectors,” says Robinson in his opening remarks at the 12th Asian Monetary Policy Forum (AMPF) on May 23.
In response, these economies must remain “agile” and not give in to tit-for-tat retaliation. Rather than “throwing rocks into their own harbours” — a phrase originally used by Cambridge economist Joan Robinson to describe the self-destructive nature of protectionism — these countries should accelerate their efforts in regional trade integration, including in digital and services trade and investment.
“These efforts may serve as building blocks for future multilateralism when the tide shifts,” Robinson adds.
Full consequences of trade wars still unfolding
The global economy has yet to reckon with the damage from the trade wars, says Robinson.
Today, around two thirds of international trade now take place within global value chains, the highest proportion in the postwar era. This deep interconnection means any disruptions, such as tariffs, can amplify any potential damage stemming from the trade wars.
“Components cross borders multiple times before final assembly, so any tariff-induced disruptions to the production process can be material,” Robinson stresses. He also warns that prior investments made in cross-border production networks may face an “abrupt repricing” and potentially creating a wave of “stranded assets”.
A reset in fiscal and monetary policies is needed
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With trade disruptions already clouding what had been signs of a global economic recovery in 2024, Robinson sees that there is a need to reset fiscal and monetary policies.
He also expects demand shocks to be more prominent with Singapore’s export-oriented economy. On the other hand, countries that impose retaliatory tariffs may face negative supply shifts, which will worsen the trade-off in growth and inflation and complicate monetary policy settings, says Robinson. Countries with elevated public sector debt that’s been carried over since Covid-19 will have a more difficult time with this trade-off, he adds.
Robinson then suggests that governments will need to use the “right instruments” and with “purposeful planning” to meet an optimal path of adjustment for global imbalances. Any hasty moves inducing “fragmented impulses” to the global monetary system will risk severe financial ruptures and lead to a deep global recession, he warns.
Reversing trend decline for manufacturing through services and skills
Although the tariffs are seen as a way to reverse the declines of manufacturing in output and employment, the structural forces of technological change and shifting consumer spending habits that lead to the decline in the share of manufacturing employment cannot be reversed, says Robinson. He adds that this is the case for countries running trade deficits or surpluses in the manufacturing sector.
Instead, one way to mitigate this trend is to create “inclusive” and “high-quality” jobs within the services sector that are adapted to new technologies such as artificial intelligence (AI). To do so, structural policies, especially jobs skills training, will have to be made to ensure “inclusive job creation”.
A hopeful outlook
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Yet, Robinson remains somewhat positive path should nations resist imposing their own retaliatory tariffs.
In that scenario, the economist sees trade adapting to take on a more regional and services-intensive approach. The global economy may also slowly see a generally stable inflationary environment with some easing of interest rates. Growth may also slow slightly for a while.
This would require countries to work together. “Large current account surplus countries would expand public spending and accept some expenditure switching through real exchange rate appreciation. Deficit countries would adjust in the opposite direction,” suggests Robinson.
“Such deficit and surplus rebalancing takes place in a measured way and stable capital flows fund the compressed shortfalls. Resilient financial markets efficiently intermediate these shifts. International financial institutions continue in their oversight roles, while geopolitical tensions begin to dissipate,” he adds.
