- After changing our baseline to assume a second Donald Trump presidency in the US, we have lowered our GDP growth forecasts for Asia by about 0.1 percentage points in 2025 and 0.3 percentage points in 2026.
- Weaker goods exports, as tariffs rise and US growth slows, will be the main impact, although this is unlikely to become a significant drag until the second half of 2025.
- Pressure on currencies will re-emerge, forcing some central banks to slow their easing cycles.
- Other policymakers will also react. This will be most obvious in China, where fiscal stimulus and a controlled, gradual depreciation of the currency will help to cushion the blow of US protectionism.
- The geopolitical risk will rise, but not enough for us to adjust our baseline assumption of tense (but ultimately stable) regional relations.
The result of the US election remains highly uncertain, with Kamala Harris gaining momentum after replacing the incumbent president, Joe Biden, at the top of the Democratic party ticket. For now, however, EIU retains its baseline view that Donald Trump will clinch a second presidency. That assumption shifted in mid-July from one in which Mr Biden won a second term, and we have recently altered our forecasts accordingly.
Changes to the US view
A number of Mr Trump’s key policies are inflationary, including the raising of import tariffs, the curbing of migration and the cutting of taxes. This will keep consumer price inflation higher and cause the Federal Reserve (Fed, the US central bank) to take a more cautious approach to monetary easing. We expect that by end-2026 the policy rate will be cut by 75 basis points less than previously expected. That, alongside higher global uncertainty, will see a stronger US dollar than we had earlier assumed. US GDP growth will be weaker, falling to 1.4% in 2025, which, alongside the rise in tariffs barriers, will weigh on US import demand.
US-China economic links will disentangle at a faster pace. The search for a “China alternative” will continue to present opportunities for well-placed regional rivals, although tighter US scrutiny over trade linkages to Chinese value chains will increasingly make the adaptation of supply chains more difficult. Otherwise, the US administration under Mr Trump will pursue a more transactional, isolationist foreign policy and more aggressively seek to rebalance defence relations with allies.
How that affects Asia
Lower export growth, but not initially
The biggest avenue through which a second Mr Trump presidency affects Asia is through goods trade. Mr Trump has said that he would place a 60% tariff on US imports from China and a 10% tariff on goods from all other countries. Pushback and exemptions mean that such an extreme move will be difficult. A fairer assumption is that the average weighted tariff will rise to about 30% on imports from China and 5‑10% on those from elsewhere. Currently, the level is about 20% and 1.5% respectively.
The timing of tariffs is important. Given potential legal challenges, which will include pushback by the US business community, we do not expect US tariffs to rise meaningfully until the second half of 2025. Initially after Mr Trump’s election in late 2024, goods trade will actually receive some boost as US importers respond by frontloading their orders and building up inventories. We expect this to provide a mild boost to Asian export values over the first half of 2025. Trade will be hit more severely in 2026 as tariffs and high inventory levels bite. A slowdown in the US and global economy will also weigh on demand.
Firms will also respond by reorganising supply chains. This will accelerate from late 2024, benefiting the likes of Vietnam, Thailand and Malaysia, which, since 2016, have increasingly served as connector countries, interposing themselves economically between the US and China. However, we believe that this type of adaptation will become increasingly difficult, as links to China come under the microscope and the US takes a harsher line with third countries. Furthermore, while US tariffs will be higher, the relative adjustment we expect to those on China vis-à-vis the rest of the world will be less than in 2018, so on its own will likely be less potent in pushing activity out of China. We do not believe that by 2026 trade diversion will be enough to fully offset the impact on export growth from frontloaded inventories and weaker global growth anywhere.
Downgrades to currency forecasts, with some central banks constrained in how much they can ease
After three rate cuts in late 2024, starting from September, we expect the US Fed to slow its easing cycle as Mr Trump’s policies reignite inflationary pressures. We expect one less rate cut in 2025 and two fewer in 2026, leaving the US Fed funds rate close to 4% by end-2026.
A repricing in the outlook for US rates—markets currently expect the Fed policy rate to be just over 3% by end-2026—will put pressure on most Asian currencies, as will heightened risk aversion as Mr Trump’s approach raises uncertainty around global trade and security agreements. The Japanese yen, Indonesian rupiah and Philippine peso are most exposed to a “higher for longer” Fed.
The Chinese renminbi will also come under pressure, with China at the centre of trade disruption. Chinese policymakers are likely to allow the currency to slide, in order to offset some of the impact of heightened tariffs. Although this is likely to be in a controlled manner, we estimate that US$1:Rmb7.3 will be the limit for officials.
Some Asian central banks will have to react. Even under our adjusted assumptions, inflation will be at much more manageable levels in 2025-26 than in recent years, lessening the concern around weaker currencies driving up import prices. Policymakers will also be focused on weaker growth prospects as global trade slows. Nonetheless, those particularly sensitive to currency movements—such as Bank Indonesia—are likely to pare back the pace of their easing cycles in order to absorb some of the pressure from still-elevated US rates.
More fiscal stimulus in China, higher defence spending in major US security partners
The likelihood of a Trump presidency has moved our fiscal forecasts the most in China. We expect Chinese policymakers to draw up fresh stimulus plans in 2025 as the direction of travel of tariffs becomes clearer. That will drive up government-led infrastructure investment and help to cushion the fall in private consumption.
North Asian economies with security agreements with the US, Japan and South Korea, as well as those who tacitly depend on it for security, including Taiwan, will face pressure to share costs with the US and increase self-reliance. This will be challenging for regional governments. South Korea and Taiwan both traditionally have a very conservative fiscal inclination, while Japan faces rising interest repayment costs as its interest rates rise. For all three, any increase in defence spending will have to be diverted from elsewhere in the budget, away from more productive uses.
Geopolitical risk will rise under Trump, but we will not adjust our baseline yet
Broadly, geopolitical risks will rise under Mr Trump for two reasons. First, his more isolationist leanings risk degrading the integrity of US security commitments and lowering their deterrence effect, thereby raising the risk of US adversaries actions becoming less restrained. Second, his erratic diplomacy means a higher likelihood of accidental escalation.
Still, we do not believe that Mr Trump’s second presidency will shift the risks sufficiently to undermine our baseline assumptions of tense (but ultimately stable) regional relations. That stands in contrast to Europe, where we believe his lack of support for Ukraine will influence the outcome of the war there.
We do not expect a significant decline in US support on the question of Taiwan. The bipartisan pro-Taiwan stance in the US Congress (legislature), alongside legal safeguards in the form of the US’s Taiwan Relations Act and the stance of key Trump team members on this issue, suggests more continuity than change.
The situation is more volatile in the South China Sea, where the US has an explicit security arrangement with the Philippines. Mr Trump is likely to initially be sceptical of US defence commitments, and may try to skirt responsibilities in a potential (but unlikely) conflict scenario. However, we view that the deep-seated institutional desire among Mr Trump’s cabinet—and his Republican party—in maintaining a credible defence commitment in the region will ultimately force him to honour the US’s security obligations to the Philippines.
We would not completely rule out another attempt at détente with North Korea. However, it remains outside our baseline assumption, given that it would risk hurting the US-South Korea relationship and would not resolve the fundamental issue of dismantling North Korea’s nuclear weapon programme.
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