Asia braces itself for historic test of export model from Trump’s reciprocal tariffs

HONG KONG – Asian leaders face tough decisions as US President Donald Trump’s reciprocal tariffs pose a generational challenge to a region whose economies are built around exports to America and a world of low trade barriers.

Mr Trump and his officials have long targeted China and already slapped a 20 per cent levy on imports from the world’s factory floor in a resumption of the trade war unleashed during his first presidency. This time round, he has also named Vietnam, South Korea, Japan and India as charging onerous tariffs or maintaining outsize trade surpluses – or both.

US Treasury Secretary Scott Bessent said in March that the reciprocal levies slated for April 2 will target the “dirty 15” that have substantial trade flows and barriers with the US. 

While Mr Bessent did not specify nations, there are exactly that many countries that make up more than three-quarters of the US trade deficit and nine are in Asia, according to a report from Bloomberg Economics. So it seems reciprocal levies – though cast globally – will hit the region’s US$41 trillion (S$55 trillion) economy particularly hard.

Along with Mexico, Canada and the European Union, Asia has been squarely in the sights of Mr Trump’s protectionist push since his Jan 20 return to the White House. His 25 per cent tariff on steel imports will hurt Asian producers, which make up six of the 10 biggest shippers of the alloy to the US, and last week’s imposition of a 25 per cent tariff on auto imports will dent profits for carmakers including South Korea’s Hyundai Motor and Japan’s Toyota Motor.

The lack of exemptions for US allies, along with tough talk from Mr Trump and his officials that signals a willingness to accept some near-term economic pain, has rattled markets across the globe. Mr Trump said in an interview with NBC News on March 30 that he “couldn’t care less” if foreign carmakers raise prices in response to last week’s tariffs. 

Now, the addition of reciprocal levies poses a serious threat to Asia’s post-war growth model of export-oriented development, according to Mr Roland Rajah, lead economist at the Lowy Institute think-tank.

He said that “this time will be very different” from the Asian financial crisis in 1998 or the global financial crisis a decade later.

“(Those) were cyclical or financial shocks, but this time, this is much more a structural shock,” he added.

Growth hit

Reciprocal tariffs, in addition to those already announced in 2025, could shave as much as 1.3 percentage points off economic growth in countries across the region, according to economists at Goldman Sachs, largely due to their reliance on direct and indirect US purchases. 

Given that dependence on trade with the US, policymakers across Asia are left with few good options. So far, they have largely aimed to placate Mr Trump, shuttling to Washington and promising purchases of goods and lauding the benefits of free trade. Companies have announced new investments in the US, including Hyundai Motor’s US$21 billion expansion plan.

“In every capital in Asia – around the world – they’re trying to game out what works with Trump. What works, what doesn’t and what can we offer,” said Ms Wendy Cutler, vice-president at the Asia Society Policy Institute in Washington. “Asian countries are loath to retaliate.”

Bloomberg’s chief Asia economist Chang Shu said: “Given Asia’s greater reliance on export-led growth compared with other regions, such levies could deliver a particularly sharp blow. Nevertheless, Asian governments are more inclined to pursue engagement than tit-for-tat retaliation against Washington. Trade negotiations and initiatives to pare back tariffs will likely take precedence.”

Besides the new US levies themselves, economists also point to fallout in the form of reduced investment in Asia as companies pause hiring and expansion. As a result, Asian central banks are likely to cut more aggressively than they did during the 2018 to 2019 trade war – but even that will not fully offset the hit to growth, according to Morgan Stanley economists. 

There are already some signs of a pullback. Manufacturing data shows new export orders dropped in February in countries including Indonesia and Vietnam – both nations that benefited from the US trade war with China in 2018 to 2019. Meanwhile, equity and debt flows to emerging market countries recorded the weakest start to the year since 2016, according to Bank of America. 

Asia’s leaders are also taking steps to reduce reliance on the US and bolster their domestic economies.

“If we play our cards right in a very deft and agile way, we can navigate this,” said former Indonesian foreign minister Marty Natalegawa. “It’s not in our interest to put all eggs in one basket – we must diversify.”

In China, there is a renewed emphasis on spurring consumption, and President Xi Jinping has pledged to open his economy to global companies and resist protectionism. Beijing’s recent pro-business pivot and optimism over advances in artificial intelligence have spurred a rally in Chinese stocks even as Mr Trump’s trade threats have magnified. 

“We should jointly safeguard the free trade system, uphold open regionalism, and firmly oppose trade and investment protectionism,” Chinese Vice-Premier Ding Xuexiang said during his keynote speech at the annual Boao Forum last week. 

Preferential trade agreements in Asia already make up nearly half of those globally, and include the Regional Comprehensive Economic Partnership, the world’s largest free trade agreement. 

‘Squeeze, not choke’

There are tentative signs that Mr Trump’s pressure may spur a deepening of commercial links within Asia. Japan and China held their first economic dialogue in six years in Tokyo on March 22, although prospects for a coordinated response to Mr Trump’s tariffs remain a long way off.

The increased focus on domestic demand and intra-Asian trade may help the region avoid the worst impacts of Mr Trump’s new levies, according to Mr Louis Kuijs, chief Asia-Pacific economist at S&P Global Ratings. In his second-quarter outlook report, Mr Kuijs said tariffs will “squeeze, not choke” growth across the region.

However, even if China can spur its economy, it cannot replace the US as a source of final demand. The value of Chinese imports from Asia fell 1 per cent in the first two months of 2025, after rising 3.7 per cent in 2024.

Dr Inu Manak, fellow for trade policy at the Council on Foreign Relations in Washington, said the most lasting impact of the tariffs might actually be felt in the US.

She said what worries her the most is “US pressure to decouple trade and investment links with China, which forces countries to choose” between the two, with China likely to come out on top. BLOOMBERG