In brief
- Recent proposals of reciprocal tariffs and tariffs on certain strategic sectors could have an uneven impact on Asian markets, although potential room for negotiations could balance out expectations.
- U.S. tariffs have now shifted from being a primary source of federal revenue in the 1900s to a trade policy tool.
- The evolving role and potential expansion of tariffs could significantly impact fiscal policy and international trade relations.
- Investors should be mindful of these risks, remain active and maintain a diversified portfolio allocation.
Our previous trade publications explored the implications of U.S. President Trump’s campaign proposals on China and Asia trade. In this piece, we hope to provide and update on the impact of recent tariff announcements on key Asian markets and their underlying motivations.
What’s next and who’s next?
U.S. President Trump announced two upcoming tariff announcements in mid-February: reciprocal tariffs and tariffs on three strategic product categories (Exhibit 1).
Exhibit 1: U.S. trade policy timeline
Source: Various news sources, J.P. Morgan Asset Management. Tariff announcement subject to real-time changes. Data reflect most recently available as of 24/02/25.
Reciprocal tariffs
On February 13, U.S. President Trump proposed reciprocal tariffs, aiming to match U.S. tariff rates with those imposed by trading partners. He also hinted at considering non-tariff barriers, such as value-added taxes (VATs, levied on value added to both domestically-produced and imported goods), potentially broadening the tariff scope, resulting in an even larger tariff hike.
Exhibit 2 examines the vulnerability of select markets to a reciprocal tariffs in terms of the tariff gap above the U.S. In terms of tariff differentials, China is unlikely to be targeted as the tariff gap has closed significantly compared to pre-2018. However, India and South Korea stand out as likely targets, as they have a relatively smaller U.S. trade exposure compared to Vietnam (vulnerable as it has a sizeable trade deficit against the U.S.). Having said that, several Asian markets such as Australia, Singapore, South Korea and Vietnam have trade agreements with the U.S., which could leave more room for negotiation.
Exhibit 2: Vulnerability to reciprocal tariffs
Source: FactSet, HSBC, IMF Direction of Trade Statistics, Peterson Institute for International Economics, World Bank, World Integrated Trade Solution, J.P. Morgan Asset Management. *Tariff differentials are based on MFN weighted average tariffs between U.S. and its specific trading partner on each other’s imports, latest data available as of 2022. Data reflect most recently available as of 24/02/25.
On a positive note, India has recently outlined steps to lower tariffs in its FY26 budget, while South Korean tariffs are mainly on agricultural goods, which only accounts for 0.3% of total exports. In fact, it is quite common for markets to place tariffs on agricultural imports to protect domestic agriculture from foreign competition. For example, while Exhibit 2 includes all product categories, South Korea’s free trade agreement with U.S. results in a much lower near 0% tariff on U.S. imports if solely looking at manufactured goods. Thus, the key uncertainty remains whether reciprocal tariffs will target specific product categories (e.g. food products) or on all exports from that market with a high tariff differential, as the latter creates much greater economic risks.
Semiconductors, pharmaceuticals & automobiles
On February 18, U.S. President Trump hinted at tariffs of 25% or more on semiconductors, pharmaceuticals and automobiles, with further details expected on April 2. Out of these categories, we see auto tariffs as a likely priority, given U.S. President Trump’s frequent comments on automobiles since his first administration, followed by semiconductors which are strategic in nature. Pharmaceutical tariffs will likely face pushbacks from the many U.S. pharmaceutical companies that manufacture overseas.
In terms of impacted Asian markets:
- Semiconductors: Malaysia stands out, with chip exports to the U.S. comprising nearly 2% of its gross domestic product (GDP), while Taiwan and South Korea are also vulnerable.
- Pharmaceuticals: India and Singapore are quite exposed. In fact, India supplies nearly half of the U.S.’s generic drugs.
- Automobiles: Japan and South Korea are most at risk. In fact, nearly one-third of Japan’s exports to the U.S. are autos and auto parts, with the auto industry employing 8.3% of Japan’s workforce.
Uncertainties ahead
The scope of U.S. President Trump’s recent tariff announcements is much broader than his more China-focused trade policy in 2018-2019, although tariff levels on Chinese goods could increase further after the April 1 deadline for trade agencies to provide tariff recommendations. However, Asian markets that benefited as bystanders in 2018-2019 could be at risk this time if current tariff proposals are fully implemented.
Optimistically, the limited specific details provided so far on these tariff announcements suggest potential room for negotiations, as markets such as the European Union, India, Japan and Korea have reported leaders engaging in talks with the U.S., possibly negotiating for exemptions. While there is a wide range of potential outcomes, the most encouraging would be the lowering of trade barriers after these tariff signals similar to what was seen after the Reciprocal Trade Agreements Act of 1934, where the U.S. and trading partners negotiated lower tariffs on each other's goods.
Demystifying the motivation behind tariffs
The pursuit of tariffs by the current administration could be driven by a couple of factors. First, tariffs can be used as a source to extract concessions from trading partners through changing trade practices that are deemed “unfair”. Second, tariffs could be used to negotiate other policy goals such as defense spending and national security (semiconductors and electric vehicles). Third, as U.S. President Trump has suggested, to generate fiscal revenues for financing his proposed spending plans.
Recent actions, such as the postponement of tariffs on Canada and Mexico and the reduced tariff rate on China (an additional 10% versus the campaign proposal of 60%), supports the first two factors. However, the proposed additional tax cuts by the administration in due course suggest that tariff rates could rise and expand in scope, given current federal revenues collected from excise taxes is modest. It could also be a combination of both, suggesting that tariffs will continue to evolve and have a prolonged impact on business sentiment, potentially leading to a pullback in global capital expenditures.
U.S. tariffs: then and now
Tariffs, a levy or duty placed on imported goods, have been part of U.S. policy since the early 1800s. Initially, they served as a major source of federal revenue before the introduction of the federal income tax. The 1947 General Agreement on Tariffs and Trade (GATT), aimed at promoting international trade, was the start of a more liberalized trade regime through the reduction of the average tariff rates among member countries.
However, the role of tariffs evolved from revenue generation to a trade policy tool used to protect domestic industries and influence foreign trade practices, evident in the first Trump administration. It marked a turning point when tariffs on a range of Chinese goods valued at approximately USD 370billion were imposed in 2018, leading to a realignment of global supply chains. The series of actions since January this year on trade policy has raised uncertainties, with the proposed tariffs potentially threatening to return tariff rates to post-WWII levels.
Tariff revenues: a changing landscape
While tariffs in the early 1900s were primarily aimed at generating federal revenue, accounting for more than 50%-80% of revenues at the time, they now constitute a modest portion of the federal income. The shift towards trade liberalization through the proliferation of free trade agreements since WWII has lowered trade barriers and tariff rates. Even at the peak of the trade tensions in 2018, tariff revenues in the fiscal year 2018 were USD 105billion, or 3.2% of total federal revenues (Exhibit 3). According to estimates from the Committee for a Responsible Federal Budget (CRFB), the combined impact of tariffs on Canada, China and Mexico will generate additional revenues of USD 120billion in the fiscal year 2025, adjusted for a reduction of import levels consistent with trade elasticities. Meanwhile, estimates suggest that the 25% tariff rate on steel and aluminum is expected to generate around USD 11billion annually. This suggests that revenues from tariffs could increase by 24% from USD 106billion in 2024. Overall, this implies that for this fiscal year, tariff revenues will contribute to 4.7% of total revenues, a far cry from their share in the early to mid-1900s.
Moreover, if the provisions of the personal income and estate tax code, part of the 2017 Tax Cuts and Jobs Act (TCJA), are extended, the cumulative increase in debt over the next 10 years will be an estimated USD 4trillion, or USD 400billion annually. Including the impact of campaign promises, such as eliminating taxes on tips or overtime pay, could lead to a further increase of between USD 1trillion and USD 5trillion over the same period, according to the CRFB. On the fiscal revenue side, CRFB estimates that in the extreme scenario of a 20% universal tariff, this would generate USD 3trillion in federal revenues over ten years. While substantial in the context of higher spending needs and potentially lower tax rates, we should expect a broadening scope of tariffs applied to U.S. trading partners on a more permanent basis.
Exhibit 3: U.S. sources of federal revenue
Source: Office of Management & Budget (OMB), J.P. Morgan Asset Management. Data reflect most recently available as of 24/02/25.
Investment implications
In the environment of continued political uncertainties surrounding tariffs, sectors with globally integrated supply chains and reliance on U.S. exports are more at risk, while markets that are more domestically oriented (e.g. real estate, utilities) or service sectors are likely more insulated. Thus, investors should have a diversified portfolio allocation, maintaining geographical diversification and considering private assets, which could serve as a hedge amid the rising risk of stagflation.
U.S. President Trump’s recent tariff proposals have been specific to certain products or markets, meaning challenges for some could be opportunities for others. This resulting divergence in sector and market performances creates opportunities for active managers to pick the beneficiaries and avoid those at risk as trade patterns continue to evolve.
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