U.S. Elections: The Outlook For Asia

Summary

In a recent episode of 'Thoughts on the Market,' Michael Zus and Chan discuss the potential impact of the upcoming U.S. election on Asia's economy, particularly through tariffs on China. A Trump victory could lead to substantial tariff increases, worsening China’s growth and deflationary pressures. In contrast, a Harris administration might maintain existing trade policies, reducing tariff risks and stabilizing Asia's economic outlook. The hosts explore China's possible responses, including currency depreciation and market diversification, while emphasizing the significance of these developments as the election approaches.

Takeaways

• 📅 The U.S. election is less than a month away, with potential significant implications for Asia's economy.
• 💰 A Trump victory could lead to a substantial increase in tariffs on China, impacting its economic growth.
• 📉 Historical context shows that previous tariff increases in 2018-2019 reduced China's growth by a full percentage point.
• 🔻 China is currently facing deflationary pressures, with its GDP deflator in deflation for seven consecutive quarters.
• 💱 To mitigate the impact of higher tariffs, China may depreciate its currency, which has previously offset tariff effects.
• 🔄 China could rewire trade flows, redirecting exports through countries like Vietnam and Mexico to bypass tariffs.
• 🌍 There is a possibility for China to focus on new markets and products to maintain its global market share.
• 🤝 A Harris administration would likely continue Biden's trade policies, emphasizing non-tariff barriers rather than higher tariffs.
• 📊 The stability of trade policies under a Harris White House could provide a more positive outlook for large Asian economies like India and Japan.
• 🛡️ Overall, the U.S. election results will significantly influence trade relations and economic strategies within Asia.

Q & A

What is the main focus of the discussion in the transcript?

The discussion primarily focuses on the potential impact of the upcoming U.S. election on Asia's economy, particularly regarding tariffs and trade policies.

How might a Trump victory affect tariffs on China?

A Trump victory could lead to significant tariff increases on China, potentially raising the current tariffs from 25% to as much as 60%, which could significantly affect China's economic growth.

What was the economic impact of tariffs during the 2018-2019 period?

During the 2018-2019 period, tariffs led to a slowdown in China's growth from 6.9% to 5.9% and exerted downward pressure on inflation.

What are the three measures China might take in response to higher tariffs?

China may respond by depreciating its currency, rewiring trade flows to other countries, and focusing on new export markets and products.

How does currency depreciation help mitigate tariff impacts?

Currency depreciation can offset some of the effects of tariff increases, as seen previously when the Chinese yuan depreciated by about 11% during the last round of tariff hikes.

What trade strategies did China employ during the previous tariff increases?

China adjusted its trade flows by increasing exports via countries like Vietnam and Mexico and focused on new products such as solar panels and lithium batteries.

What is expected from a Harris administration regarding trade policy with Asia?

A Harris administration is expected to maintain a continuity in trade policies similar to those of the Biden administration, focusing on non-tariff barriers and expanding economic relationships in Asia.

How would a Harris victory affect Asia's economic outlook?

If Harris wins, it would reduce risks related to significant tariff implementations, potentially leading to a stable outlook for major Asian economies, especially India and Japan.

What concerns remain for China's economic outlook, despite possible policy measures?

Concerns remain regarding China's ongoing debt deflation loop, although recent policy measures suggest that the risks to its macroeconomic outlook are becoming more balanced.

Why is the U.S. election considered a critical topic for the Asian economy?

The U.S. election is critical for the Asian economy because the outcome can significantly influence trade policies and tariff structures, which directly impact economic growth and stability in the region.