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Under the Banyan Tree - What does 'Liberation Day' mean for Asia?
1.1k Plays15 days ago
Fred Neumann and Herald van der Linde discuss the impact of President Trump's sweeping tariff announcements on trade and growth across Asian economies.
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Transcript
Introduction to HSBC Global Viewpoint
00:00:07
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:19
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening. And now onto today's show.
00:00:30
Speaker
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Impact of Trump's Tariffs on Asian Markets
00:00:51
Speaker
Hello and welcome to Under the Banyan Tree where we put Asian markets and economics in context. I'm Fred Newman, HSBC's Chief Asia Economist. And I'm Harold van der Linde, Head of Asian Equity Strategy. Well, there's really only one story to tell today.
00:01:04
Speaker
We're here to bring you the view from Asia as President Trump's so-called Liberation Day tariffs are announced. Several Asian economies are high on the list with big implications for trade and growth. Let's take a look at what it all means from HSBC Global Research you're listening to Under the Banyan Tree.
00:01:40
Speaker
Let's start with a few headline numbers. There's a baseline 10% tariff on all US imports starting on the 5th of April. But for many Asian economies, that number is going to be a lot higher.
00:01:51
Speaker
Mainland China, 34%. On top of 20% already announced by the Trump administration. India, Japan and South Korea, all around 25%. It's quite significant.
00:02:02
Speaker
Vietnam and Cambodia, both almost 50%. And the list goes on. So Fred, it's fair to say President Trump is taking aim at Asia in this latest wave of
Challenges from Increased Tariffs
00:02:11
Speaker
tariffs. What, you as an economist, what does it all mean here? What's going on?
00:02:14
Speaker
Look, this is big. And, ah you know, economists don't like to exaggerate too much. But here it's it's difficult to ex exaggerate. These are very significant tariffs and particularly for a region that is really where the economies are built on exports, right? If you think about the shift of global manufacturing over the last few decades into Asia,
00:02:34
Speaker
A lot of these goods produced here and then shipped back to the United States. It was obviously of benefit for Asian producers. But now these tariffs come in and this entire model is now coming under pressure.
00:02:47
Speaker
Basically producing in Asia and shipping into United States is very difficult if you have these high tariffs. So, um I got a question on that, but before I go there, just just getting some of the basics right here.
00:02:58
Speaker
If you're a US consumer, suddenly it makes sense to buy more stuff domestically than imported because that's of course now 20, 30, 40% more expensive. So you do that, but that means that domestic demand in the US would get stronger and that could lead to inflation, higher interest rates, ah these sort of things, right? There are all sorts of other second round effects that come from it.
00:03:20
Speaker
That's important for me as a strategist. of The dollar might move. What are some of these implications that might come from it, just broadly speaking? So in many ways, you can think of this as essentially the U.S. consumer no longer having access to cheap Asian goods and has to rely on goods produced locally in the U.S. But you might not actually have the production capacity.
00:03:44
Speaker
So prices will go up as consumers try to, you know, buy these goods of which are fewer available in the US. So certainly we know that inflation will go up in the United States and because of the so ah disruption to supply chains also production in the US at least initially will sort of struggle because there's not enough components that we really need to import into the United States. So both higher inflation but also lower growth. Now the Trump administration probably would say that this is short-term adjustment that really over time and that would just mean there's more investment in the US and therefore jobs are being created and so after the adjustment period things will rebound. We'll have to see about that but certainly if we look for the rest of the year it does appear that there's risk of higher prices and lower growth coming through as a result of these tariffs in the US and that of course has an implications for the equity market for example in the US it has implications for interest rates
00:04:46
Speaker
in the US and the US dollar. Now nobody can exactly say what the implications are but what we know is it's very uncertain and the uncertainty in itself means that potentially we're going to see more volatility.
00:05:00
Speaker
and and And also if you are a company that wants to make investments uncertainty is typically something you're not looking for, right? So now I'm going to come back to the question that I initially had.
Sustainability of Asia's Export-Based Growth Model
00:05:10
Speaker
um The growth engine of Asia was to a large extent in the past an export model So is this going to put Asia kind of on its back feet?
00:05:19
Speaker
Is the growth model over? To some extent, yes, ah because the US was a very important market, not the only market for Asian producers, but certainly one of the key, key markets. And if you assume that these tariffs are permanent, we might still get some adjustment the next few weeks, lower perhaps.
00:05:36
Speaker
ah If you assume that the U.S. is permanently reducing its purchases from Asia, which seems to be the goal of some of these tariffs, then of course there is a question over the Asian growth model to the extent that for decades now it was exports that really built Asian economies. Prosperity was built around expanded exports to Western markets, that no longer really works in this environment. And so there is really a ah broader long-term question. It's not just about surviving the next few quarters and cutting interest rates and having more fiscal stimulus.
00:06:12
Speaker
But really there has to be a re-evaluation of what this long-term model should look like. And I mean, we've talked about this in the past. We've already seen this, right? I mean, in China, exports are a significant part of GDP, but net exports much less so.
00:06:27
Speaker
And actually, the trade component of the overall economy is now a much smaller part of the overall one. Is that fair to say? It is. It is true that. So if you look at China's exports as a share of China's GDP, that used to be around 30 percent. So back in 2005, 2006, we hit about 30 percent of exports as a share of GDP. That's down to 15 percent. and You could say, well, of course, they're becoming less reliant on exports. That's true.
00:06:55
Speaker
But there's still – exports are a significant part, certainly at the margin – And so what really needs to happen is ultimately we need to revive domestic demand in China so that the exporters in China, the manufacturers, no longer have to rely on selling to the US but can actually sell more goods domestically.
00:07:16
Speaker
And that is important for China's own growth, but it's also important for the rest of the world. And that's important because if China has excess production and it can't sell to the U.S. because of tariffs, it will ship these goods elsewhere to Europe, to Korea, etc.
00:07:33
Speaker
And then these economies might come under pressure to raise tariffs themselves because they get inundated by goods. and We call this a tariff cascade. So to avoid this ah broadening of tariffs outside of the US to other markets, you really need to see strengthening demand coming through in China. and And that's this idea of rebalancing, going away from investment and exports more towards domestic consumption.
00:07:59
Speaker
But it's easier said than done. But lo and behold, over the last couple of weeks, actually, they've been talking about this, right, to ah stimulate consumption in China. Certain announcements were being made to support that.
00:08:11
Speaker
So you would expect that, I guess, to gradually unfold this
China's Shift to Domestic Demand
00:08:15
Speaker
year? Yeah, that's right. So there are some signs that the Chinese leadership is clearly thinking about this. So what you saw in recent policy statements, for example, with a big meeting in early March, they hinted at this idea of strengthening consumer spending, raising incomes, um strengthening domestic demand because they do acknowledge that there are challenges to exports going forward given what's going on in the world economy.
00:08:42
Speaker
um So, the intention is there. There's been some money put behind this but the task remains monumental. ah It means remains monumental in economic terms because you have to shift a lot of economic activity.
00:08:55
Speaker
It's monumental in political terms because um you develop a lot of vested interest in the current model. you know It requires redistribution, if you will, um and that's always hard for any economy to do. So, there's a political element there as well.
00:09:09
Speaker
And then there's an ideological element as well. What we mean by this is that the whole system had been focused on investment and exports and you have to kind of ingrain in officials' thinking and business leaders' thinking this idea that actually it's about developing the domestic economy. So have to almost kind of have leap of faith here, change your view on what would lead to long-term prosperity.
00:09:37
Speaker
And that's a challenge as well. It's starting to happen, but it's not going to happen overnight. These things probably take time and policymakers kind of rethinking the model. um But you would expect, therefore, a more intra-Asia trade. But I guess Europe is also being hit with tariffs. So they'll they'll look at China, for example, as well.
00:09:54
Speaker
So you get maybe Europe-China trade also further intensifying from here on. Well, of course, the Europeans um now face tariffs as well. That means they have a harder time selling into the US and they'll be looking to China. But then again, the Chinese will be looking to Europe to buy their goods. So we're kind of stuck outside of the US where everybody can't sell to the US s anymore and then they want to sell to each other. and But there's not enough demand to go around. and And this kind of brings back a broader issue. So if you looked at the global economy –
00:10:27
Speaker
um over the last really 20 years, you have a very imbalanced global economy. You have one large economy which is the US which is buying goods and you get the rest of the world producing goods and selling them to the United States. Now, there's some nuances around this. There are some economies, particularly Anglo-Saxon economies, we would call them, Canada for example, Australia, UK, who also have bought goods. But really, it's about the US.
00:10:53
Speaker
And the US bought and the rest of the world sold. Now, if the US says, well, we no longer but want to buy as much, we're going to cut back our purchases, then the rest of the world has surplus goods. and and So who are they going to sell to? Well, they need to generate that demand. and They need to generate that demand to absorb these goods.
00:11:11
Speaker
and So we have the problem that there's what we call surplus economies like China and Europe now looking for customers for their goods because the US says no. So how
Global Trade Imbalances and Economic Reforms
00:11:20
Speaker
do you generate this? and And that will require not just in China, but China is very important. It's a rethinking of the economic model. You need to unleash consumer spending, maybe reduce your investment, shift resources towards consumers so they can actually buy more. But you have to do the same in Europe.
00:11:36
Speaker
You probably have to do that same in other Asian economies. And so it is really about a comprehensive shift in how these economies kind of set themselves up for future success.
00:11:49
Speaker
And I guess even if there would be a change in the tariffs that have been announced now, ah let's say they've been reduced to whatever in the near term, we have to work on the assumption that they might always come back. So this is after the announcement, this somewhat permanent to a certain extent, right? Yeah. This is permanent and and you know in some ways this outcome was in some ways always inevitable.
00:12:12
Speaker
um The world could never rely internally for the US to just buy its goods. There was always a limit to which the US could be the one that buys all our products. we We knew this and we've talked about this in economics and – Policy banks have written papers and academics have written papers about this for years. But what today's announcement does really on tariffs, it provides – it brings forward the date where this adjustment needs to happen. It accelerates the process.
00:12:41
Speaker
And from that perspective, it's not all negative actually in the sense that we then can think harder, we're forced harder to think about reforms that will retreat, rebalance these economies. The process should have happened anyways, but now it's just being accelerated.
00:12:57
Speaker
And you know one thing to say is that Asia has you know some three billion consumers um you know and they're under-consuming in many ways on many measures. And so it's not as if it's impossible.
00:13:11
Speaker
On the contrary, they're sitting on piles of cash and savings rates are very high. So you need to be able to lower those savings rates so that people can consume more. The question is, do people feel comfortable to do that? Save less, spend more.
00:13:25
Speaker
And so how do you get people to really do that? um that's that's That's been also debated. I mean, there has been a lot of discussions about strengthening social security, pension systems to induce people – to feel – to save less, to feel safer about the future knowing that they will be you know supported in some way or the other by a government.
00:13:47
Speaker
um and that that But that that only works slowly because people are you know creatures of habit. They will not immediately you know go out on a spending splurge just because there is announcement by the government that they increase social security payments.
00:14:04
Speaker
so So that process takes time. So how do you get there in the meantime? What what about what about currencies? If, for example, the currencies in Asia would strengthen – we just mentioned that it might not take place. but But if the currencies would strengthen significantly, um it would make it much cheaper for them to buy somewhere else in the world, right? Then you have an incentive to go and travel or to buy stuff from – but So currency adjustment could play into this. um you know Ultimately, currency adjustments will be part of that rebalancing globally. um
00:14:35
Speaker
But you can't just rely on the currency alone. the current You can't just move currency as you want them to be and then and then expect that the economies follow. Usually it's the other way around. You have economic reality the currencies reflect that. So it is true to say that the currencies help in rebalancing process but they can't you can't just move the currency to to bring this about.
00:14:54
Speaker
And so that's why it's really about domestic reforms ultimately. And if these are successful, well, then we can talk about currencies. That would be social security networks and and these sort of things that people people have a lot of precautionary savings at the moment because they're not quite sure if – pensions and education is expensive and these sort of things.
00:15:15
Speaker
So if if there would be improvements on that front, that might actually then … That is one case. But just one last point to make. It's not just about reducing saving rates.
00:15:26
Speaker
It's also about raising incomes. And that's very important because we do the math and you just say in China for example, you just reduce the saving rate. That doesn't unleash enough consumption power to ultimately get full rebalancing.
00:15:42
Speaker
You also need to raise incomes, particularly relative to national income. And so at the heart of this lies an income redistribution question.
00:15:53
Speaker
A redistribution not just between households from the rich to the poor which certainly helps but a redistribution from the government sector, from the from the private sector, from the business sector to households. two households and Then there's of course how do you do this? There are very disruptive ways to doing this and there are very organic ways to do this. We want to see this organically.
00:16:14
Speaker
ah We want to see this through rising labor demand um and so forth. We don't want to legislate higher wages. We want to see it organically come through with a higher labor demand. So um that this is sort of the debate that economists have. But I think just the bottom line here is this is a big shock to the system. I think it's fair to say, um particularly challenging for export-dependent Asian economies, but um because there was always a need to rebalance away from a dependence on the US as a market, there is actually a silver lining here that we might see accelerated reforms that unleash the true potential of Asia
00:16:56
Speaker
which was never to dominate export markets but to unleash the domestic consumer to carry the day. And that, Harold, is where we count ultimately on ah the golden future of Asia and certainly that would be welcome for any equity investor, wouldn't it? So that's right. So there's there's a lot of moving parts here. So always take a step back if we think about it stock markets because stock markets are not the economy.
00:17:24
Speaker
um So what happens in the economy doesn't have to happen in stock markets. Stock markets is basically a group of listed companies and sometimes the makeup of these companies is very different than the economy. So we have to take that into account.
00:17:37
Speaker
um And the stock market deto is but determined by broadly speaking the profits of these companies and the alternative profits. that you have. If interest rates are really high, why not keep it in the bank?
00:17:49
Speaker
You don't have to go into stock markets. interest is low, then, well, it's not good to have it in the bank. Hey, the stock market might look good, right? So you can think about it in that way. You just mentioned interest rates could go up. and But on the other hand, profits could go down for export companies in Asia, but could go up for the consumer companies, right?
00:18:07
Speaker
And to a large extent, for example, the china mainland Chinese stock market is determined by larger companies. consumer oriented companies. So actually the impact therefore on on on these companies is probably going to be quite small.
00:18:21
Speaker
If anything, maybe over the long run even a little bit more positive if the consumption comes through. So it's very difficult to say in the longer run, what what does this do? In the near term, we have just the uncertainty factor and therefore markets wobble at at the moment.
00:18:36
Speaker
But this shouldn't mean that this is going to be bad for stock markets over over a longer run. But then that depends on the response in Asia, the policies that come through, how that then translates into profit for these companies, and again, what happens, for example, with interest rates. And as you mentioned earlier, on that's there's a lot of uncertainty.
Conclusion: Tariffs as a New Chapter
00:18:55
Speaker
So really, i guess we can can draw a conclusion here that the tariffs today are not the end of the Asian growth story, nor the end of the Asian investment story, but it's rather a new chapter. And that's that's good news for you and I, because it means there will be equity markets to cover in the future and economies to analyze and we'll still be here, hopefully, under the banyan tree discussing, you know, a lot more episodes. Terrors, growth stories, consumers in the future to come, but absolutely.
00:19:26
Speaker
We're going to have to end it here, folks. No doubt the ripples of these tariffs will continue to be felt here in Asia and around the world. And we'll be sure to keep you up to date as things develop. In the meantime, you can listen to our sister podcast, The Macro Brief, for our latest views on the global economic landscape.
00:19:42
Speaker
Thanks again for joining us and talk to you again next week.
00:20:12
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.