Will Asian economies give in to Trump demands?

by Katia Dmitrieva

Economists are warning the next stage of Donald Trump’s trade war would open new fronts across Asia, with India and Thailand among the nations most exposed to risks from the US president’s vow to impose reciprocal tariffs on partners. 

The two Asian countries stand out because the tariffs they impose on the US are, on average, far above the rate charged on them by the US, according to a range of estimates from analysts who considered scenarios of like-for-like levies. The caveat is that Trump has yet to clarify the potential policy, including which countries would be targeted and on what basis.

“Emerging Asian economies have higher relative tariff rates on US exports and are thus at risk of higher reciprocal tariffs,” Nomura Holdings Inc. analysts led by Sonal Varma said in a note to clients. “We expect Asian economies to step up their negotiations with Trump.” 

Trump on Friday announced his plans for reciprocal tariffs to ensure the US is “treated evenly with other countries,” suggesting this approach may replace his previous threat of universal tariffs. He said additional details would be announced Tuesday or Wednesday, and that the tariffs would go into effect almost immediately or shortly after.

Back during his first term in the White House, Trump and his allies pushed for reciprocal trade measures by floating the US Reciprocal Trade Act. That would have given Trump broad powers to impose line-by-line tariffs across all trading partners.

And during his presidential campaign last year, Trump also vowed matching levies, saying that “if they charge US, we charge THEM — an eye for an eye, a tariff for a tariff, same exact amount.”

The renewed threat will heap more pressure on officials across Asia to appease Trump and make their export-dependent economies more immune to a possible escalation in trade tensions.

India’s top importers of liquefied natural gas are already negotiating purchases of more fuel from the US ahead of a summit between the two countries’ leaders this week. And Thailand is considering buying more American products, adding to its increased imports of ethane and agricultural goods planned for this year.

Bloomberg Economics’ Maeva Cousin and Deutsche Bank’s George Saravelos are among those who found that India’s wide tariff differential with the US left it at particular risk of retaliation.

The average rate that India charges US imports is more than 10 percentage points higher than US levies on Indian goods, according to Cousin’s analysis.

A broader interpretation of “reciprocity,” which could include considerations such as a country’s trade surplus with the US or its taxes on American firms, would have bigger consequences for all nations, Saravelos said in a report.  

India and Thailand are among Asian economies that may face a tariff hike of 4 to 6 percentage points, assuming the US imposes duties to reduce the differential, according to analysts at Morgan Stanley led by Chetan Ahya, who added there may be scope for India to boost its purchases of US defense equipment, energy and aircraft.

The level of impact depends on the details of the potential policy, including whether Trump’s administration targets national average tariffs, individual industries or products, or factors in other considerations, they wrote. 

Although in some cases a country’s overall tariff level on US goods is relatively low, it could be far higher for certain items such as autos or agriculture. 

“Tariff actions have already been far more aggressive” than during Trump’s first trade war in 2018-19, Morgan Stanley’s analysts said. Trade tensions could rise further, and “this week’s developments may have taken that risk up by yet another notch.”

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