Why US Tariffs Could Impact Asian Trade and Development
We look at the effect of tariff uncertainty on Asian markets and how this could accelerate the development of alternative trade agreements across the region.
At the beginning of April 2025, President Donald Trump introduced a raft of new tariffs on imports into the US. The final shape of these levies is unclear, but the impact on trade flows and manufacturer sentiment is already becoming apparent.1
On a market-by-market basis, the tariffs ranged widely. In some cases, such as China, the tolls were punitively high. In response, China introduced retaliatory tariffs on imports of certain US goods. At the time of writing, US levies on goods imported from China are 145%, while China will impose a tax on US imports of 125%. These exceptionally high rates amount to an effective trade embargo between the two nations. Talks on tariffs between the US and China will continue, and it remains to be seen if the final rates will be lower.2
The US Tariff Situation Remains Fluid
High levels of uncertainty and the potential damage to global trade have triggered equity and bond market volatility. Reacting to this challenging backdrop, President Trump announced a 90-day pause on implementing variable tariffs while retaining the 10% tariffs on all territories and most products.3 This pause and a series of exemptions for certain goods like semiconductor chips, smartphones, and other goods that are difficult to source from inside the US helped soothe investors' nerves and saw most equity markets partially recover.4
What Are the Tariff Implications for Asia?
While negative for most markets, the impact is not uniformly spread across the region. There may even be some unexpected benefits as supply chains change.5 Overall, though, the effect is likely to be negative. Reacting to the newly announced US levies, the International Monetary Fund (IMF) reduced this year's projected world output growth to 2.8% from the 3.3% predicted in January 2025. It has also reduced next year’s growth estimate to 3.0% from 3.3%.6 The estimated growth for ASEAN markets in 2025 was also trimmed by 0.7% from 4.6% to 3.9%.7 The IMF also said that a possible trade war would cause prices to rise and productivity to fall in the US and that its trading partners would see declining demand. Overall, the most significant downgrades to growth were for the US and China. If trade tensions eased, the IMF said an immediate improvement in growth prospects would occur.8 Indeed, we have already seen declining factory activity in China9, South Korea, Thailand, Malaysia, and Indonesia, while India managed to maintain a modest expansion.10
How Are Asian Governments Responding to the Uncertainty?
One clear outcome is an acceleration towards creating new trade blocs and greater regional cooperation. At the May 2025 annual meeting of the Asian Development Bank in Milan, the ASEAN+3 group, which includes Japan, China, and South Korea, agreed to robustly support the implementation of the Regional Comprehensive Economic Partnership (RCEP).11 The RCEP is a free-trade agreement among 15 Indo-Pacific territories, and participating markets account for more than half of the world’s population.12
The European Union has also intensified its efforts to secure new trade deals in Asia to help counteract the impact of US tariffs.13 New trade agreements typically take a long time to finalise and implement. Likewise, adapting and altering supply chains does not occur swiftly.14
The Uneven Impact of Levies
The ability of different markets to react to new tariffs is varied. China, for example, has several policy levers it can use to help dampen the potential impact.15 The authorities are focused on boosting domestic consumption and technology development to help soften the damage to the economy from declining exports.16 Smaller markets, like Vietnam and Cambodia, have fewer options and are attempting to negotiate directly with the US for lower tariffs.17
There has also been evidence of a rerouting or ‘washing’ of goods to mask their true origin and circumvent tariffs.18 Across the region, some manufacturers are seeking to develop new markets in Latin America and the Middle East for their products to help replace the tariff-affected US.19
Despite the Challenges, Asian Local-Currency Bonds Prove Resilient.
Despite initially succumbing to negative investor sentiment caused by the tariff announcements, Asian bonds have since recovered strongly as investors expect further reductions in regional interest rates.20 This makes bond issuance and investment more attractive in the shorter term. A potentially additional supportive factor is a weaker US dollar driven by concerns over US trade policies.21 A global trade system reset and how the tariff war ends will have differing impacts on markets throughout the Asian region.
Considering this uncertainty, a diversified portfolio of Asian local-currency bonds could appeal to investors who wish to gain exposure to the region's growth prospects while not being susceptible to specific credit or market risk.