Economic Letter From Asia: Talking Trump

In this week’s letter, we explore the potential impacts of President-elect Trump’s recent electoral victory on Asia. One key implication is that Trump’s policies could limit the room for policy easing by Asian central banks, particularly if his policies prove inflationary and prompt the US Fed to enact a tighter-for-longer monetary policy. As a result, market expectations for yield differentials between the US and other Asian economies may turn less favourable for the latter, potentially putting downward pressure on Asian currencies.

Beyond this, the most significant effect of Trump’s win could be on trade. Proposed tariffs of up to 60% on US imports from China and up to 20% on imports from other countries create a substantial risk of trade disruption. These measures could provoke retaliatory actions from affected economies or, alternatively, lead to the US negotiating bilateral agreements to reduce the impact, as we saw during Trump’s first term.

Additionally, Trump’s trade policies might prompt a fundamental shift in business strategies, both in the US and abroad. Companies could reconsider their global supply chains, potentially accelerating reshoring or onshoring efforts, while investments in overseas operations could be discouraged. Finally, while Trump’s “drill, baby, drill” stance may be initially expected to lower energy prices, the overall impact on global oil prices may not be so straightforward. This is due to the role of other major producers, such as OPEC+, as well as the potential for renewed geopolitical tensions and changes in global demand dynamics.

Monetary policy The impact of the recent US election – resulting in President-elect Trump’s victory – is set to reverberate globally. Governments, businesses, and market observers alike are now likely scrambling to assess the potential policy implications. One key area of focus is the future direction of US monetary policy, which, in turn, may lead to reassessments of monetary policies across Asian economies. Specifically, the US Fed may not need to cut interest rates as aggressively as previously expected, thanks to the potentially reflationary effects of some of Trump’s proposed fiscal measures. This could result in a higher terminal rate for the Fed in its current easing cycle. Such a shift may, in turn, influence the policy paths of central banks in Asia. If yield differentials become a factor in their decision-making, these banks could face more limited room for easing should they need to adjust rates (see Chart 1). However, several Asian central banks have yet to begin easing cycles due to country-specific factors. These include high household indebtedness, persistent inflation, or simply the absence of a compelling reason to ease, as growth remains strong in some economies.

The US election had a notable impact on currency markets, as expectations for economic outcomes, yields, and monetary policy became deeply intertwined. The US dollar strengthened in response to Trump’s likely victory, causing Asian currencies to weaken relative to the greenback. That said, Asian currencies remain generally stronger against the dollar on average so far this year (see Chart 2), with the Malaysian ringgit standing out as the best-performing Asian currency. In contrast, the Japanese yen has continued to underperform. However, the ringgit has, in recent months, given back much of the gains it made since mid-July. Meanwhile, initial hopes for a swift policy normalization by the Bank of Japan (BoJ) have stalled. Observers now expect the BoJ may raise rates in January, rather than in December as previously anticipated.

Trade A more direct impact of the US elections on Asia likely relates to trade, which could be particularly concerning for Asian governments if Trump follows through with his plan to raise tariffs on all foreign imports—a move he repeatedly mentioned during his campaign. There is a specific risk of renewed actions against China, especially with Trump having floated the idea of raising tariffs on Chinese imports up to 60%. Beyond the obvious harm to Chinese exports to the US given existing exposures (Chart 3), this could also lead to retaliation from China, and might yield tit-for-tat measures. These proposed US tariff actions align with Trump’s broader intent of further decoupling the US from China and curbing its advances in key technologies. However, whether these actions will effectively slow China's progress or, ironically, accelerate its push toward self-sufficiency remains an open question.

Trade-related concerns are likely to extend beyond China, affecting the rest of Asia and the world, especially if Trump moves forward with his plan to impose blanket tariffs of up to 20% on exports to the US. The initial impact, however, may vary across Asian economies, depending on their direct export exposure to the US, as shown in Chart 4. Additionally, we could see a resurgence of bilateral trade agreements between the US and individual economies—a strategy Trump favoured during his first term. These bilateral deals could help mitigate the overall impact of the tariffs. Beyond export exposure to the US, overall vulnerability to reduced growth from exports varies across economies, as we discussed in last week’s letter. Advanced Asian economies like South Korea and Taiwan are more exposed, as their growth is heavily reliant on exports, with weaker contributions from other sources like private consumption. In contrast, some emerging Asian economies, particularly in Southeast Asia, still benefit from strong domestic demand, providing a buffer against potential export slowdowns.

Supply chains The imminent threat of tariffs on imports to the US is likely to prompt multinational American companies to reassess their overseas operations. Some may be incentivized to reshore certain functions to avoid additional costs. At the same time, foreign companies might increasingly consider allocating operations to the US, rather than relying on exports, to avoid tariffs and potentially benefit from tax incentives. Beyond the potential reduction in outbound FDI from the US, another impact could be delays or cancellations of new direct investment initiatives, or even the unwinding of existing FDI positions. As with export exposures, the extent of US involvement through FDI varies widely across economies, as shown in Chart 5.

Inflation A final angle concerns how Trump’s election victory might affect inflation in Asia, particularly through energy prices. His “drill, baby, drill” policy for the US crude oil industry is expected to significantly boost global oil supply. While this could naturally put downward pressure on oil prices, the reality is that oil prices are influenced by a range of factors. For one, actions by other major producers, such as OPEC+, could offset the increased supply, particularly if they opt for greater production cuts. Additionally, geopolitical risks—such as flare-ups or escalations in oil-producing regions like the Middle East—pose potential upside risks to prices. Finally, any rebound in demand from major oil importers, particularly China, could further balance or even outpace supply-side increases, depending on its economic recovery. That said, the energy impact on inflation represents just one of the potential channels through which Trump’s win could influence inflation in Asia.