- US: US consumers will bear a larger share of tariffs burden as trade diversion becomes less effective with across-the-board tariffs
- Japan: BOJ anticipated to raise interest rates by 25 bps to 0.50% due to strong wage and inflation data in Japan
- China: Initial signs of stabilisation shown throughout 4Q as ongoing stimulus measures took effect
- India: FY26 budget likely to focus on fiscal stability and consumption amid inflationary pressures
- ASEAN-6: Continued foreign investment attractiveness due to region’s political non-alignment and tailwinds from potential US-China tariffs
US: Higher tariffs loom with Trump 2.0. With Trump 2.0, higher tariffs are guaranteed. Beyond going after China, US trade and commerce officials will go after Mexico and Vietnam to restrict China’s attempts to divert trade. There may well be a 10% (some have even floated 20%) across-the-board tariff on all US imports. Beyond tariffs, restrictions on investments and market access are all likely to be ramped up further. Countries trading intensively with the US are about to step into unchartered waters. Over the last half a century, the average US tariff rate on all dutiable imports has been below 4%. Despite eight years of trade wars, the current average tariff is below 3%. A trebling of that rate would be a substantial shock.
Back in 2018, certain products, such as washing machines, saw their demand decline after tariffs were imposed by the Trump administration. The prices of these products jumped immediately. In response, South Korean manufacturers diverted some of their production to the US, creating some jobs, though at the expense of US consumers. As soon as these tariffs were allowed to expire by the Biden administration in 2023, washing machine prices began to decline in the US, demonstrating that shielding domestic industries from competition is a tax on consumers.
The last eight years have shown that once tariffs are imposed, a complex web of responses take place between producers, importers, and consumers, beyond the dynamics of the washing machine case. When pricing power is limited, as was likely the case pre-pandemic, a three-way split of burden sharing takes place. Additionally, over time, trade is diverted, some to the US, a lot to partner countries like Mexico and Vietnam.
We doubt a similar dynamic would prevail at the current juncture, given the experience of the pandemic and sustained strength of the US labour market. We think that much more of the tariff would be passed along to customers this time, especially as trade diversions would make less sense with across-the-board tariffs.
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