What has been announced and implemented so far?

• Timing: April 2 is a key date for the proposed implementation of reciprocal tariffs, sectoral tariffs and tariffs on the EU. April 1 is also the deadline for federal agencies to provide recommendations on trade pacts with Canada, China and Mexico, paving the way for potentially higher tariffs on the three economies.
• Tariff rate: The below chart illustrates the implemented tariffs highlighted above. This would bring average tariff rates to a level unseen in six decades. If the exemption for USMCA goods expires on April 2, the average tariff rate could approach 10%.

What will be key?

Implementation details

While U.S. President Trump has provided hints of what he might target on future tariffs, the implementation details could lead to uncertain outcomes. Here are a few key questions that remain unknown, making it very difficult to forecast the economic impact.

On reciprocal tariffs:

• Will tariffs be placed on specific product categories with the largest tariff gap only, or will it be placed on a market level (i.e. on all products from that market)?
• Will there be any exemptions?
• Will differences in VAT be considered? For example, while the EU does not have a high tariff differential against the U.S., it has a high VAT.

Are the proposed tariffs going to be additive on top of existing tariffs?

• For context, steel and aluminum tariffs were imposed on top of existing tariffs on non-USMCA compliant goods. However, Bessent refused to confirm whether sectoral tariffs will be stacked on top of reciprocal tariffs in a Fox News interview on March 18.
• If tariffs are confirmed on April 2, will they be phased in or effective immediately? How much room for negotiations will there be?
• Will U.S. President Trump clamp down on transshipments through China? How will that be executed?
• Will U.S. President Trump be more lenient on economies that have a free trade agreement with the U.S.?

Potential retaliation

If other markets retaliate, resulting in a tit-for-tat trade dispute, the economic impact could be much broader (e.g. impacting more industries) and longer in duration.

• For tariffs implemented so far, China and Canada have retaliated, while the EU and Mexico have both delayed retaliation to pave way for negotiations.

As for smaller economies such as Malaysia, Thailand, and Vietnam, it remains to be seen whether the U.S. is willing to engage and negotiate individually given the size of their economies.

Who is vulnerable?

Reciprocal tariffs

On February 13, U.S. President Trump proposed reciprocal tariffs, aiming to match U.S. tariff rates with those imposed by its trading partners. He also hinted at considering non-tariff barriers, such as VATs (levied on value added to both domestically produced and imported goods), potentially broadening the tariff scope, and resulting in an even larger tariff hike.

The chart below examines the vulnerability of select markets to reciprocal tariffs in terms of the tariff gap above the U.S.

• The EU, India, Japan, Taiwan, and Thailand have a relatively high tariff gap, implying a higher probability of being scrutinized.
• China’s tariff gap has likely narrowed as a result of the recent 20% tariff hike from the U.S.
• South Korea has a free trade agreement (FTA) on manufactured goods with the U.S. (albeit high tariffs on agricultural imports from the U.S., which only accounts for 0.3% of Korean exports). Other markets such as Australia, Singapore and Vietnam also have trade agreements with the U.S., which could leave more room for negotiation.

Sectoral tariffs

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 vulnerable Asian markets:

• Semiconductors: Malaysia stands out as being a major testing and packing hub for semiconductors (chip exports to the U.S. comprise nearly 2% of its gross domestic product (GDP)). South Korea and Taiwan 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.

Trade deficit

Overall trade deficit is a result of an imbalance between a country’s savings and investment rates, which is difficult to reverse. In fact, the U.S. trade deficit ended 2017 at USD 568.4billion, but after the 2018-2019 trade tensions, the deficit actually widened to USD 616.8billion in 2019. Although the deficit against China has decreased slightly, the U.S.’s trade deficit expanded significantly against Mexico and Vietnam.

However, U.S. President Trump has repeatedly criticized the nation’s trade deficit, especially after it reached a record high in 2024 to USD 1.2trillion. He has also implied that trade deficits against individual economies will be a key consideration in deciding who to target with tariffs. A recent Bloomberg article also hinted that countries that the U.S. has a trade surplus against will likely be exempted from reciprocal tariffs.

If U.S. President Trump targets trade deficits:

• Apart from China, Vietnam is quite vulnerable, with the trade deficit hitting a record high in 2024. Part of the rise in this trade deficit since 2018 was due to transshipments of Chinese goods, as Vietnam took over from Japan as China’s third-largest export destination for the first time in 2024, which will likely draw attention from the U.S. if U.S. President Trump decides to clamp down on transshipments.

Taiwan, Japan and South Korea are also vulnerable, but could prove more resilient than Vietnam given their more complex and high-tech products, which are harder to be replace elsewhere, making the U.S. relatively more reliant on their imports.

Overall

• Even if a market gets targeted with tariffs, the economic impact will be relatively limited if they have low exposure to U.S. trade.
• For example, even though the U.S runs huge trade deficits against China and the EU, these two economies’ exposure to U.S. trade is only 3% of their GDP, which is significantly lower than Canada and Mexico’s 20% and 27%, respectively. This shows that for Canada and Mexico, a vast majority of their exports go to the U.S. For other economies, their export destinations are much more diversified.   

How about markets?

Quick recap on what happened:

• Since the presidential elections last November, U.S. equity markets were initially optimistic over expectations of lower taxes, deregulations, and other market-friendly Republican policies. This momentum carried on until mid-February, which saw a flurry of tariff announcements from the U.S. These heightened trade uncertainties have led to scrutiny around the soft-landing narrative, rising inflation expectations and worsening consumer sentiment, thereby driving market volatility and a risk-off rotation in financial markets.
• The rotation from U.S. mega-caps to the broader market also contributed to the index’s drawdown given high concentration, while positive developments outside of the U.S., such as anticipation for higher fiscal expansion in Europe and optimistic sentiment around China’s artificial intelligence advancement, also accelerated flows out of the U.S.

What to expect:

• The April 2 deadline for tariff announcements marks an important date for markets. The lack of details thus far suggests that markets remain largely uncertain about the amounts and targets of U.S. tariffs as well as potential retaliatory tariffs or escalations, leading to a wide range of possibilities beyond consensus estimates. This means that markets are likely to continue trading with heightened volatility through April 2.
• Beyond the announcement date, evolving developments around trade policies, whether negotiations or retaliations, could mean a prolonged period of uncertainty. The risk of unclear implementation of the U.S. trade policies also adds the potential possibility for continuous lack of clarity and measures for markets to quantify tariff impacts, keeping market volatility elevated.
• Risk and uncertainty should mean exploring opportunities deeper in the U.S. market and across asset classes. The observed resilience from the non-mega-cap names in the U.S. is expected to persist through the tariff-led volatility, as their less-demanding valuations should provide a cushion against de-rating risks. Additionally, maintaining a diversified exposure to other regional markets will continue help benefit from different market cycles and rotations.

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