US President Donald Trump’s tariffs has a negative impact on economic growth, particularly in export-oriented markets such as Thailand, South Korea and Vietnam. While negotiations and deals with the US will take place, the ease of these negotiations will vary between countries, says Stuart Rumble, head of investment directing, APAC, Fidelity International.
For instance, India may find it easier to navigate these challenges compared to China. US exports constitute a small portion of China’s overall economy, making the impact “less significant compared to a market like Vietnam, says Rumble, which faces a 46% tariff.
While the immediate impact of higher tariffs on China will be felt in exports, the structure of global trade has shifted since Trump’s first term, Rumble adds. “China has significantly reduced its export dependency on the US, and Chinese company revenues from the US are now in the low single digits.”
Still, China maintains a substantial trade surplus with the US and Rumble thinks a gradual depreciation of the Chinese yuan is a likely adjustment mechanism. “We expect authorities to manage the pace of depreciation to avoid excessive volatility. China appears to be adapting quickly to the trade war environment.”
Pivoting to domestic
China has the fiscal capacity to cushion the blow from tariffs and is pivoting toward domestic demand as a primary growth driver, says Rumble. Key policy adjustments include a structural shift toward domestic consumption, balancing external headwinds with internal support and a “moderately loose” monetary policy stance, he adds.
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However, the magnitude and coverage of tariffs has been worse than expected, as this now includes Southeast Asian companies. This will impact China, since it has diversified its supply chains southwards.
Chinese companies with “more flexible and diverse production footprints” or strong market positioning may weather the impact more effectively over time, says Rumble. “We expect further stimulus measures to restore consumer and business confidence to help offset the direct and indirect impact of this trade war.”
Meanwhile, India’s demand for IT services might be affected this year due to uncertainty and potential slowdown in the US, says Rumble. That said, the Indian economy is largely domestic with companies earning the majority of their revenues from consumption within the country.
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Asean impact
Trump’s tariff increases on Asean economies were higher and broader than anticipated, says Rumble. The garment industry, for instance, will be negatively affected, with manufacturing centres in China, Vietnam, Bangladesh and Cambodia facing higher tariffs.
These additional costs are likely to be absorbed by consumers, retailers, brands and original equipment manufacturers in the short term, weighing on earnings potentially unless tax cuts are introduced to mitigate the impact, he adds.
Relocating manufacturing operations could be slow as companies take time to reassess demand and adjust their manufacturing plans, says Rumble. Consequently, investment flows could decelerate, he adds.
Indonesia may fare relatively better. “It is not as industrialised as its Asian peers such as Vietnam, China, Taiwan and South Korea. Additionally, most of Indonesia’s exports now go to China and other parts of Asia, reducing the country’s dependency on the US,” says Rumble.
‘Eventual recession’
Looking further ahead, the second-order effects on US and global demand and inflation will be the most critical factors to monitor, says Rumble.
“For example, if stagflation and eventual recession in the US leads to interest rate cuts, this could be beneficial to Asian utilities, banks and higher dividend-yielding stocks,” he adds. “Market conditions are rapidly moving and will be complex to navigate… Volatility is inevitable and market corrections can always create attractive opportunities.”
