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Morgan Stanley Asia Economics: US Tariff Policy Analysis (Jan 2025)

Key Developments

• Policy Direction: US President Trump has directed officials to review trade agreements and implement tariffs, with reports due by April 1, 2025.
• Base Case: Phased increase in tariffs on Chinese imports (10% to 26% by end-2025).

Risks & Scenarios

1. Selective Tariffs on Asia

• 7 of top 10 US trade surplus economies in Asia (China, Vietnam, Japan, Taiwan, Korea, India, Thailand) at risk.
• Could slow Asian investment and growth further.

2. Universal Tariffs

• Widespread tariffs on all imports could replicate or exceed the economic shock of 2018–2019.

Trade Impact Assessment

• Tariff Effects:
  • Base Case: China’s growth drag is projected at ~1-2% due to supply chain diversification.
  • Other Economies: Japan, India less exposed; Vietnam, Korea, Taiwan highly vulnerable.
• Indirect Effects: Broader corporate confidence slowdown and global capex decline.

Growth Outlook (Asia)

• External demand weakening: US import growth led in 2024, but risks recessionary pressure.
• Domestic Demand Pivot: India and Japan positioned to offset external headwinds.
• China’s Exposure: Net exports now ~30% of GDP growth, up from historical averages.

Historical Comparison (2018–2019 vs. 2024–2025)

• Growth decelerations less severe due to supply chain diversification and reduced US-China trade exposure.
• Corporate confidence impact smaller than 2018–2019 cycle.

Policy & Recommendations

• Asian policymakers should focus on domestic demand growth to mitigate external risks.
• Monitor escalation risks, especially selective or universal tariffs.