High US tariffs not only did not cripple export-oriented economies like South Korea, thanks to the AI boom, but they also pushed policymakers to embark on reforms
At the end of last year, Wall Street banks were rattling off reasons Asia’s economies were acutely vulnerable to the onslaught of protectionism that was about to be unleashed as then president-elect Donald Trump prepared to return to the White House.
In a report in November, Morgan Stanley noted that seven of the 10 economies running the largest trade surpluses with the US were in Asia. It also said the region, excluding China, had become more dependent on America as a source of end demand. Last year, the US accounted for between 16 and 24 per cent of Thai, South Korean, Japanese and Taiwanese exports.
Some parts of Asia have clearly suffered this year. A gauge of Southeast Asian stocks is up only 10 per cent – the broader emerging markets index has risen more than 30 per cent – as global investors continue to sell the region’s shares.
Japan, whose companies have benefited hugely from globalisation, was forced to accept a one-sided trade deal with the US. Even India, whose economy is driven by domestic consumption, was hit hard by Trump’s decision to raise tariffs on Indian goods sharply because of the country’s purchases of Russian oil.
Yet almost seven months after Trump announced his sweeping “Liberation Day” tariffs on most of America’s trading partners, Asia’s economies and markets have proved surprisingly resilient. “For all the headlines about ‘unprecedented’ tariffs and testy negotiations in recent months, trade, as well as growth more broadly, have held up remarkably well,” HSBC said in a report last month.
Several factors are at work, including Trump’s repeated climbdowns on his most extreme tariff threats and this year’s steep fall in the US dollar index, which made it easier for Asian central banks to ease monetary policy without endangering financial stability.
However, the most important reason, and by far the most unexpected, is trade. Technology has trumped tariffs. A cursory glance at South Korea’s exports – which rose more than 6 per cent in annualised terms in the third quarter following a 4.2 per cent increase in the second – shows how the boom in artificial intelligence (AI) has been a boon for Asia’s export-oriented economies, which also include Taiwan, Thailand and Malaysia.
Voracious demand for AI hardware – especially semiconductors and electronic components used in data centres and digital infrastructure – has powered Asian exports. A Barclays index tracking exports from the region’s developing economies has been in positive territory this year, while a Bloomberg gauge of Asia-Pacific semiconductor stocks is up 17 per cent this month, putting it on track for its biggest monthly gain in three years.
Trump’s trade aggression, moreover, revealed the strength of China’s grip on global supply chains. Beijing’s weaponisation of rare earths – which appear in almost every hi-tech product – showed China has the power to severely disrupt America’s economy. Furthermore, the scale of Chinese investment in Southeast Asia’s manufacturing sector in recent years has made it difficult to disentangle Chinese goods from Asian supply chains.
The chaos and uncertainty caused by Trump’s assault on the global trading system has also given fresh impetus to much-needed policy reforms in many Asian economies.
In China, which benefited greatly from the diversification of its exports away from the US and whose rich AI ecosystem is challenging America’s and driving a stock market boom, more forceful measures to dispel deflation appear to be paying dividends. The government’s campaign to crack down on oversupply and unproductive competition contributed to a 21.6 per cent rise in industrial profits last month, the sharpest increase since November 2023.
In South Korea, corporate governance reforms designed to address the underlying causes of the “Korea discount” – the term used to describe persistently low equity valuations stemming from poor governance at South Korea’s family-controlled conglomerates – contributed to the staggering 70 per cent rise in the country’s main stock market index this year, making the Kospi the world’s best-performing major equity market.
Furthermore, Asian governments have learned how to deal with Trump. A combination of flattery, attentiveness to Trump’s gripes about countries freeloading off the US, and a focus on shared interests has helped ease tensions.
Japan’s new prime minister Sanae Takaichi set the benchmark for Trump-friendly diplomacy when she met the US president in Tokyo on October 28, deftly using both leaders’ close bond with the late Japanese prime minister Shinzo Abe – a mentor to Takaichi and a close friend of Trump’s – to her advantage.
However, the biggest challenges confronting Asia’s economies have little to do with Trump. In Japan, Takaichi must contend with a cost-of-living crisis that has sapped household spending power and led to a backlash against her ruling Liberal Democratic Party.
In China, the anti-involution drive is not a panacea for China’s deep-seated economic and structural ills. Not only does a lot of the excess capacity lie in the private sector, “requiring a more nuanced … approach to supply-side consolidation”, but sustainable reflation also necessitates a more fundamental change in China’s growth model, in particular “fiscal redistribution and a pivot towards demand that the current system still resists”, said Morgan Stanley.
Still, the fact remains that Asian economies and asset prices have fared significantly better than investors anticipated at the start of this year. While there is no room for complacency, higher tariffs have proved less damaging than many feared. Whether Asian policymakers can overcome their domestic challenges is another matter.
