As global trade dynamics continue to evolve, the impact of US tariffs on Asia’s economies has become increasingly significant. With shifting supply chains, emerging trade alliances, and growing pressure on regional markets, it is a critical moment to examine how Asia is adapting to these changes.
Peiqian Liu, Asia economist at Fidelity International comments: “Since Liberation Day, tariff-related uncertainties have posed significant challenges to the global economic outlook. While it appears that we may be moving beyond the period of peak uncertainty - following several intensive rounds of bilateral negotiations resulting in trade truces and preliminary agreements - the impact of tariffs on global supply chains is likely to persist longer than anticipated, with effects expected to emerge over the coming quarters and years.
In the immediate to short term, corporates and countries have adjusted their trade practices in response to changing tariff rates globally. At the corporate level, companies sought methods to minimise additional tariff costs, such as frontloading before new tariffs were implemented. These practices were observed at both broad and sector-specific levels.
US imports data indicate that frontloading has been more common among Asian exporters, though some countries in Europe and North America have also increased exports in areas such as the automotive and pharmaceutical sectors. At the country level, certain economies are utilising free trade agreements and exemptions to minimise additional tariffs; for instance, Canada has exported more products under the USMCA agreement to benefit from lower or zero tariffs. As a result, the actual tariff implemented is only increasing gradually to catch up with the targeted tariff rates, with current estimates placing them at around 15 to 16 per cent.”
China’s rising competitiveness
“In addition to the impact of tariffs, a quiet evolution that is reshaping regional trade dynamics is the rise of cost-effective and competitive Chinese exports throughout the supply chain, spanning products from Christmas decorations and footwear to electric vehicles and shipbuilding. This deflationary trend continues to exert downward pressure on Asian supply chains, even in the wake of the revised tariff framework.
Contrary to the notion that as labour costs rise, countries will naturally move up the supply chain and shift most of its production to countries with lower cost, China remains competitive even in some low-cost manufacturing due to its rapid adoption of automation and industrial upgrading. In high-end manufacturing, China continues to make breakthroughs by increasing R&D investment and providing ongoing policy support for science, technology, and innovation, making it one of the most advanced economies in many areas of emerging and cutting-edge technologies. With a comprehensive and efficient supply chain, China has created a manufacturing ecosystem that many countries and corporates will lean on globally over the medium term.”
Asia’s trade outlook remains promising
“Despite ongoing uncertainties and external challenges, there remain valid reasons to expect resilience in Asia’s trade outlook. It is important to acknowledge that as frontloading subsides and the payback period commences, some downside risks may emerge for external demand within the cyclical framework. However, the region is actively adapting to the evolving environment of economic fragmentation.
In recent years, China has also expanded its reach into non-US markets, enhancing the stability and independence of its export sector from US economic fluctuations. We anticipate that more markets will pursue diversification strategies and build stronger ties with multiple major economies by promoting trade relations and engaging in free trade agreements across various economic blocs.
And while tariff rates may continue to fluctuate, some early signs show that Asian exporters with a competitive advantage in producing AI-related goods have experienced less impact than anticipated. Taiwan and South Korea have gained from increased AI demand, even with rising tariff challenges. These markets have focused on specialised exports and diversified their export markets to benefit from the global semiconductor cycle. We may see more economies in Asia adopting similar approaches, moving away from low-cost manufacturing towards high-tech exports to remain competitive as they face the dual headwinds of higher tariffs and stiffer competition in the global supply chain.
In addition to technology-related exports, we believe that tariff differentials with China will continue to provide certain regional advantages in exports, benefiting markets such as Singapore and Malaysia. While the benefits of transshipment may diminish over time, nations with higher domestic value-added production can still capitalize on these tariff differentials to export to the United States with a term of trade advantage.
The fact is, the implementation of US tariffs has acted as an external shock to global trade. We are now entering a new phase characterised by increased fragmentation in international trade and supply chains; however, this does not necessarily imply greater vulnerability. Both corporations and countries have demonstrated adaptability, reshaping trade flows in response to these changes. While the effects of tariff-induced disruptions are likely to persist, we remain cautiously optimistic and expect the region to demonstrate ongoing resilience.”
