In brief

• U.S.-China trade tensions present challenges for Asia, affecting export demand, business confidence, domestic manufacturing and currency stability. In the long term, however, Asia could benefit from transshipments and supply chain relocations, thanks to its well-established manufacturing ecosystem.
• A universal tariff could significantly impact the region's growth, with effects varying based on each economy’s reliance on U.S. trade and the complexity of its exports. Investors should prioritize markets that are more insulated and companies with strong pricing power and margins. Despite trade uncertainties, Asia still offers many long-term investment opportunities.

Three forces have reshaped global trade in the past decade: rising protectionism, the need to diversify supply chains after the pandemic and the Russia-Ukraine War, and escalating U.S.-China tensions. These forces have led to a reconfiguration of global supply chains, posing risks to some economies while presenting opportunities to others.

President-elect Trump’s proposed tariffs will potentially accelerate some of these shifts, but the when, who and (on) what of these tariffs remain a major uncertainty to companies, economies and markets in 2025. Following our previous publication on China, this article examines the potential impact on Asia trade, specifically under two scenarios: China taking the brunt of the hit with no tariff hikes on Asia ex-China, and the implementation of universal tariffs.

Near term pains from U.S.-China bilateral trade tensions

Given the diverse nature of Asian economies, the impact could vary. However, the immediate impact is generally negative for Asia ex-China:

• China is a major export destination for many Asian economies, and as heavy tariffs on Chinese goods will drag on China’s growth, this will reduce demand for other Asian economies’ exports. This expected growth slowdown will drag on the region’s corporate confidence and thus reduce corporate spending.
• With high U.S. tariffs, Chinese exporters might redirect excess capacity to the rest of Asia, putting pressure on profit margins of domestic manufacturers. This prompted countries like Indonesia and Vietnam to impose anti-dumping tariffs on some Chinese goods and the Thai government to investigate imported deflation from China.
• Asian currencies could weaken in tandem with the Chinese yuan (CNY), as was the case during the 2018-2019 trade war, weighed by weaker business confidence and the Trump administration’s pro-growth policies. This could limit Asian central banks’ ability to further cut rates.

But Asia stands to gain in the long run

On one hand, during the 2018-2019 U.S.-China trade tensions, tariffs and the need to diversify supplier sources pushed China to replace U.S. imports with Asian imports, particularly agricultural goods and intermediate components from ASEAN, electronics and machinery from Japan, South Korea and Taiwan. Asia’s exports to China continued to increase despite the Phase I Deal.

A similar pattern was seen in terms of Asia’s exports to U.S. ASEAN’s share of U.S. imports increased from 7.3% in end-2017 to 12.3% in October 2024. Taiwan and South Korea’s combined share also increased from 4.9% to 7.8%.

Two structural trends support Asia's manufacturing growth:

• Transshipments: Countries like Vietnam saw an increase in both Chinese imports and U.S. exports at the same time, and thus, are likely beneficiaries of transshipments (Chinese goods re-routing through a third country for further processing to avoid U.S. tariffs). However, the risk is if the upcoming Trump administration scrutinizes and potentially penalizes such practices, impacting countries like Indonesia, Thailand and Vietnam.
• Supply chain relocation: To de-risk supply chains, corporates are pursuing a “China + N” supply chain strategy, investing in new production lines outside of China. Net foreign direct investment (FDI) flows into China was 3.5 times that of ASEAN prior to 2018 (2010-2017 average), but after the pandemic, that has become less than half of ASEAN’s (2021-2023 average), highlighting ASEAN’s growing attractiveness as a manufacturing base.

What makes ASEAN and India attractive?

• ASEAN boasts a well-established supply chain ecosystem, particularly in electronics, which has been developed since the 1960s. This entails an existing network of local suppliers, skilled labor and trade relationships, in addition to competitive land and labor costs. India also offers advantages with its proximity to large markets, robust infrastructure and a sizable domestic market.
• Asian governments are enhancing their appeal by implementing policies to boost manufacturing and attract FDI, such as fiscal incentives and tariff reductions.

The real fear: a universal tariff

As an export-oriented region, tariffs on Asian exports could severely impact the region’s growth. However, the effects vary:

• Exposure to U.S. trade: As seen in Exhibit 1, countries like Vietnam, with U.S. exports accounting for 23% of gross domestic product (GDP), are especially vulnerable. On the flip side, countries like India are much less reliant on U.S. goods exports. India exports a significant amount of back-office services to U.S., but with the U.S. already the world’s largest services exporter, a push to reshore services back to the U.S. is unlikely.
• Product complexity: Exports from Japan, South Korea and Taiwan are more complex (e.g. high-tech products), thus, under a universal tariff, these products are harder to be replaced by U.S. domestic producers and can pass on tariff costs to buyers more easily. Australian and Indonesian exports are low in complexity, but that is because of commodity exports, which are also hard to seek alternative sources. In contrast, manufacturers of low-to-mid complexity products in Malaysia, the Philippines, Thailand and Vietnam may see production more easily reshored to the U.S. if hit with direct tariffs. However, if tariffs are imposed solely on Chinese goods, these markets could gain an advantage by capturing the demand for Chinese products, since their goods are close substitutes.

Exhibit 1: Exposure to U.S. trade and product complexity/ease of substitution
2023 

Source: FactSet, J.P. Morgan Asset Management; Center for International Development at Harvard University (ATLAS), IMF Direction of Trade Statistics, World Bank. *Economic Complexity Index is a measure of the diversity and sophistication of a market’s exports. Products that are less complex are interpreted to be easily replaced by other countries. Data reflect most recently available as of October 31, 2024.

Investment implications

The incoming Trump administration presents a few challenges for Asia’s macro landscape in 2025, including potentially slower Federal Reserve easing, a strong U.S. dollar and tariff risks. Specifically, given the high correlation between Asia exports and earnings, tariffs could significantly impact Asian equities.

U.S. tariffs have varying impacts on different exporters depending on how easily replaceable their products are and how reliant they are to U.S. demand. Generally, companies with higher pricing power or margins can more easily pass on tariffs to consumers or absorb these costs. Such quality bias is also recommended due to heightened political uncertainty, potentially causing more equity volatility.

Regions and companies geared towards domestic growth can offer resilience, notwithstanding the indirect impact on business confidence . As seen in Exhibit 2, equity markets such as Indonesia and the Philippines are more domestically-exposed and thus less sensitive to export volatility or currency movements. Specifically, India is less exposed to goods trade, has a large domestic market, benefits from structural FDI and has ample foreign reserves to weather currency volatility.

Exhibit 2: Geographic revenue exposure
Revenue exposure of MSCI indices

Source: FactSet, J.P. Morgan Asset Management. Data reflect most recently available as of October 31, 2024.

Despite trade uncertainties, there are plenty of long-term drivers of Asian equities that deserve investors’ attention, such as tailwinds from China’s potential policy support, sustained artificial intelligence-related semiconductors and hardware demand, and corporate governance reforms gaining momentum.

09zh250601135328