U.S. Elections: What’s at Stake for Asian Economies?

In a new Citi Research report, a team led by Johanna Chua analyze four major issues where the outcome of U.S. elections will materially influence Asian economies and markets: tariffs, global financial conditions, energy prices, and foreign-policy and security alliances in the region.

The following is a freely accessible summary of a published Citi Research report.

Our Deep Dive assumes there will be no major economic and foreign policy divergences between President Biden and the presumptive Democratic nominee, Vice President Harris. Former President Trump, on the other hand, has made many public pronouncements, and some of his advisers have mapped out a provocative policy road map, known as Project 2025. The outcome of the election is uncertain, but the stakes are high for Asia.

The first issue is tariffs and their impact on trade, investment and growth. A Trump administration is likely to yield sharp asymmetry in tariff risks for China vs. rest of the world, with a 60% tariff against China likely alongside 10% tariffs for many other countries. (Some observers expect a 60% proposal would likely be negotiated and diluted.) We think a negative growth shock to China would likely have the greatest adverse impact on East Asia, led by Taiwan, Hong Kong, Korea, Vietnam and Singapore. While we’d expect legal challenges to tariffs, the Asian economies without the protection of free trade agreements that would be most affected by a potential 10% tariff are Vietnam, Taiwan, Thailand and Malaysia.

Substitution benefits from eroding Chinese competitiveness in the U.S. markets for other Asian exporters would likely be limited, and Chinese goods diverted to third markets would pose a challenge. The most likely sourcing alternatives to China would be India and Vietnam.

The second issue is tighter global financial conditions under a second Trump administration, due to the inflationary implications of possible tariffs, migration curbs and extended/expanded tax cuts. Such a scenario would likely prompt tighter global funding conditions, weaken capital flows to Emerging Markets/Asia, and undermine monetary-policy flexibility at a time when real rates vs. “neutral” rates are high in China, Philippines, Indonesia, Thailand and Korea. More fiscal activism in Indonesia could intensify pressures on risk assets.

The third issue is lower oil and gas prices under a Trump administration. Such lower prices at a time of heightened trade-related growth uncertainties could support more accommodative monetary policy, especially in economies where inflation is most sensitive to oil prices. Singapore, Thailand and Philippines stand out, with a stronger case in the latter two for imminence of easing. We should note that we don’t think a second Trump presidency would lead to a wholesale repeal of the Inflation Reduction Act, as it’s very hard to repeal a law once passed and the economic benefits of clean-energy investments and jobs have disproportionately gone to Republican-leaning districts.

The fourth issue is foreign policy and security alliances in the region, with the U.S. stance toward China and Taiwan of particular importance. A more transactional or isolationist foreign policy under Trump could lead Asian governments to increase their defense budgets and possibly encourage “hedging” by moving toward more cooperative stances with China, which would benefit China.