Trump Win Potential Puts Asia On A Tariff-Ied Edge

Capital Economics thinks that by mid-2026, Trump 2.0 policies could push inflation higher by two percentage points over current levels. At the same time, real GDP would be about 0.75% lower and the federal funds rate would be around 50 basis points higher.“Taken together,” Shearing says,“this would be negative for both US bonds
and
equities.”

The feedback effects would be felt globally. Shearing notes that“emerging markets with high levels of external debt or central banks that are particularly sensitive to movements in the exchange rate – notably Turkey, Indonesia and, given its recent inflation problems, Brazil – would probably dial back the pace of monetary easing .”

Shearing adds that“the threat of higher tariffs, if implemented, could also have a significant effect on countries that trade with the US – Mexico, Korea, Vietnam and, of course, China - particularly if Trump imposes a universal tariff, which would be much harder to avoid through trans-shipment.”

The indirect effects of Trump's policies could hit asset markets and investment in emerging economies.“Tariff concerns have been a drag on EU equities,” says Emmanuel Cau, a strategist at Barclays.

Emre Peker, an analyst at Eurasia Group, notes that
“Trump's threat of at least 60% tariffs on all Chinese goods and a 10% levy on US imports from the rest of the world, as well as his potential suspension of China's most-favored-nation trading status under World Trade Organization rules, would stoke EU-China
trade
tensions as more Chinese overcapacity flows to Europe. It would also risk exacerbating pressures on European industries from metals to automotive, green energy and tech – where EU companies are already struggling against US and Chinese rivals.”

This, Peker adds,“could put pressure on Brussels to be more forward-leaning on its own duty or tariff posture toward Beijing. Furthermore, a
Trump
administration would likely monitor third countries for possible trans-shipment of Chinese goods and/or circumvention of US tariffs against Chinese overcapacity, threatening additional duties on the EU and others to close any backdoors into the US market.”

One of the bigger wildcards about another Trump presidency is further gains in the US dollar, putting downward pressure on China's exchange rate.“Markets are watching if the Trump trade is heating up and pushing the yuan back to 7.15 against the dollar,” says Carie Li, global market strategist at DBS Bank.

Some think fears of the Trump trade are overdone.“The fixed income selloff accompanying rising odds of a Republican sweep could be overdone because Trumponomics is likely to be more rational than media conveys,” says Bilal Hafeez, CEO
and head of research at
Macro Hive.

Hafeez adds that“the impact of the tariffs on inflation has been greatly exaggerated. The US is a domestic-driven economy. Consumer goods imports, excluding cars, represent only about 5% of total consumer spending, with imports from China accounting for about 40%.”

“Assuming a worst-case scenario where all the tariff increase is passed to the final consumer, a 60% tariff hike on imports from China and a 10% hike on imports from other countries could increase consumer price indices by about 150 basis points,” Hafeez says.

Yet assets of all stripes are being affected by the specter of Trump's re-election – including crypto bets.“Elections remain hard to call, but if you are long crypto here, you are likely taking a Trump trade,” says Bernstein analyst Gautam Chhugani.

Most troubling about Trump 2.0 is what Asia doesn't know. Imponderables abound. Trump's first act as president in 2017, remember, was pulling out of the Trans-Pacific Partnership (TPP). A President Harris, by sharp contrast, will almost certainly attend next year's Asia Pacific Economic Cooperation (APEC) summit and as she did in Bangkok in 2022 declare the US a“Pacific nation.”

But it's easy to count the ways Trump might shake up Asia's 2025 and beyond. For example, he would surely move to weaken the dollar to give US manufacturers a competitive boost. That could add to the headwinds bearing down on China and damage trust in the dollar as a global reserve currency.

Trump is also sure to pounce on the Federal Reserve during a second term. In 2019, Trump browbeat Fed Chairman Jerome Powell into cutting rates. Along with attacking the Fed on social media, Trump also mulled firing Powell. So, Powell pumped liquidity into an economy that didn't need it.

Recently, Trump argued that
“the president should have at least a say in” Fed interest rate decisions. Meanwhile, the“Project 2025” scheme that the Heritage Foundation right-wing think tank devised for Trump 2.0 favors meddling with the Fed's mandate.

Then there's the default risk.
As a businessman in decades past, Trump was a serial bankruptcy filer. On the campaign trail in 2016, Trump spooked Wall Street by hinting at reneging on US debt.

“I would borrow, knowing that if the economy crashed, you could make a deal,” Trump told CNBC when asked about his fiscal plans.“And if the economy was good, it was good. So, therefore, you can't lose.”

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In 2020, the Washington Post reported that Trump officials, looking to punish China, mulled canceling debt held by Beijing. With the US national debt now twice the size of Chinese GDP , it's not hard to understand how much of a catastrophe that would be.

Yet even if Harris wins on November 5, Trump is not going away. There's only a slim chance Trump would graciously concede defeat and retire to his golf courses. Trump's legal team is already preparing to challenge the election results, raising fears of a 2021-like Capitol Hill insurrection staged at sites across the nation.

Political polarization in Washington could generate sudden risks that see the laws of financial gravity reasserting themselves. The last insurrection
Trump fomented dragged Washington's credit
rating
down with it. When
Fitch
Ratings
yanked away Washington's AAA status last year, it cited the insurrection as a key factor.

As
Fitch
put it, the chaos on
January
6, 2021, was a“reflection of the deterioration in governance” imperiling US finances. The US national debt is now twice the size of
China's GDP , threatening Washington's last remaining AAA
rating
from Moody's Investors Service.

Here, it's worth noting how a Trump 2.0 presidency would play into Beijing's hands. Surely, Team Xi isn't looking forward to Trump's coming onslaught of tariffs. But the ways in which economies like Japan and Korea risk becoming collateral damage could make China look more appealing as a trading partner.

At the same time, the more Trump 2.0 blocks Asia's access to US markets, the more governments in Bangkok, Jakarta, Manila, Putrajaya and Singapore might be incentivized to draw closer to Beijing.

Hence Asia's worries about a“red wave” 11 days from now that makes economic paranoia great again. As the odds of Trump's return rise, policymakers across the region are already weighing how hard their economies would be hit by tariff-sealed US markets – and how to respond.

Follow William Pesek on X at @WilliamPesek

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