Categories: EconomyNews

Trump’s return likely to bring tariffs, trade frictions

China’s ongoing economic slowdown can be seen in a positive light for ASEAN economies, reinforcing and intensifying global FDI inflows into the region 

by UOB GLOBAL ECONOMICS & MARKETS RESEARCH TEAM 

THE outlook for 2025 will be heavily shaped by President Donald Trump’s return and his myriad of policies and their implications for the US and the rest of the world. Bottom-line, Trump’s various policies are likely to have an inflationary impact with a mixed effect on growth. 

And of great interest and potentially the most impactful to the rest of the world is Trump’s trade tariff policies, which we assume staggered implementation of tariffs from as early as the second quarter of 2025 (2Q25) and fully completed by the first half of 2026 (1H26). 

After four years of absence, Trump is back in the hot seat as the president of the most powerful nation in the world. And with the Republican clean sweep of the control of the US Senate and House of Representatives, this means it will be easier to implement policies for Trump. 

Our economic outlook for 2025 will now need to put a heavy dose of consideration for the myriad of policies that Trump has planned for the US and their implications for the rest of the world. We admit a lot of the Trump policy measures (announcements, threats and/or projections) are highly speculative and unpredictable at this juncture, which will subject to significant changes once Trump officially comes into office on his Jan 20 inauguration. 

We broadly highlight a few categories of policy measures Trump campaigned for during the run-up to the presidential election which, in our view, will have a material macro-economic impact on the US and globally, including tax cuts, deregulation, tariffs, immigration (with mass deportation of undocumented migrants & border security), the independence of the US Federal Reserve (Fed), green policy (rollbacks) and foreign policy. Hence, the impact of Trump’s various policies is likely to be inflationary with mixed effects on growth. 

Extending Tax Cuts 

The extension of current tax cuts and introduction of new cuts, coupled with the deregulation drive will likely reignite animal spirits, boost business confidence and investment sentiment for the US economy and therefore positive for US growth and productivity, but is likely to add to inflationary pressures and worsen the federal fiscal deficit. 

That said, fiscal policy issues are likely to take some time and probably be debated in the US Congress only in 2H25. 

Trump’s tough immigration policy proposals are another area of concern and may come sooner than fiscal policy issues with the expected negative implications for the US GDP growth. 

The inflationary impact is less clear, as large-scale deportation may lower the workforce numbers and drive demand for the remaining workers, leading to higher wages and inflation. However, the reduced workforce could also lead to lower domestic consumption in the US and create deflationary effects. 

On green policies, it is expected that Trump will follow his past actions, such as withdrawing from the Paris Agreement, repealing the Inflation Reduction Act supporting clean energy projects and electric vehicles, relaxing environmental regulations and enacting policies that favour conventional fossil fuel extraction. 

This will potentially see higher US output for crude oil and gas while missing its carbon-neutral pledges. On foreign policy, if Trump does see through his promise to end all wars, then one of the impacts could well be lower prices of commodities (excluding gold) for 2025. 

Tariff Threats 

Here comes the tariff man (again). To be fair, the Biden administration did not shy away from tariffs as it kept the tariffs imposed during the first Trump administration and added a few targeted tariffs of their own. The stark difference is perhaps Trump’s sensational way of delivering news/threats of trade tariffs. 

Trump brandished his tariff man credentials again on Nov 26 when he pledged to impose a 25% tariff on all imports from Canada and Mexico, and 10% tariffs (on top of additional tariffs) on all imports from China in an executive order on his first day in office (Jan 20) for drugs (fentanyl) and border security issues. 

Using Section 232 or the International Emergency Powers Act (signed into law in 1977), Trump can exercise executive power to impose these tariffs based on an “unusual and extraordinary threat” to national security, foreign policy or the US economy. And he did use this power and threatened countries (including Mexico) during his first term in office. But equally important, he never invoked that power to enact tariffs once countries acceded to his terms. 

Trade Policy 

So, what can we expect from the US trade policy in 2025? The short answer is more tariffs and frictions. 

That said, it is difficult to say at this point what tariffs will be enacted, to whom and what the amount will be. The reason is that Trump has floated various tariff proposals since he officially started his bid for the White House in September 2023, from baseline 10%-20% tariff rates on all imports, and as much as 60% on imports from China, to 25% or even as much as 100% on Mexican-made goods, to 100% tariffs on countries that want to shift away from using the US dollar. 

Trump has named credible nominees for his economic team (US Treasury secretary, National Economic Council director), which now included Jamieson Greer for the US Trade Representative (as of Nov 27, subject to Senate confirmation). Greer previously served as the chief of staff for Robert Lighthizer, who was Trump’s Trade Representative for the full four-year term and oversaw the imposition of billions in tariffs. 

Long seen as a protégé of Lighthizer, Greer will be tasked with “reining in the Country’s massive Trade Deficit, defending American manufacturing, agriculture and services, and opening up export markets everywhere.” 

We also believe that Trump will use tariff threats as a bargaining chip or negotiation ploy to eventually gain concessions from China and key trade partners, rather than being laid out as an immediate policy action. 

Regarding Trump’s tariff implementation, we foresee three scenarios based on the tariff proposals touted so far and our estimated implementation timelines. These will have their respective impact on the macroeconomic outlook for the US, China and the world’s economy and translate into different outlooks for the foreign exchange (forex) and interest rates spaces. 

Base Case Scenario 

Our base case scenario, which we ascribe a 55% probability, calls for more measured imposition of tariffs (an additional 25% tariff on China, instead of the claimed 60%, 10% tariffs on economies that recorded an increase in trade surplus with the US due to trade diversion from China, and no blanket tariff on all US imports), with a staggered implementation pace from as early as 2Q25 and fully completed by 1H26. 

We continue to hold the view that the Fed will reduce the Federal Funds Target Rate (FFTR) into 2025. We had earlier revised our 2025 rate cut trajectory lower to a total of 75 basis points (bps) of cuts (three 25bps cuts, one in each quarter of 1Q25, 2Q25 and 3Q25) from 100bps previously, and end the rate cycle to bring the terminal rate to 3.75% (upper bound of FFTR). 

The reduced number of cuts reflects higher inflation pressures from the projected tariff implementation during the latter part of 2025. We have highlighted the risk in 2025 is for fewer cuts due to the uncertainty of tariffs. Since we think it remains premature to shift our projections for now, we will hold on to the current three-cut view for 2025 until we get better clarity of President Trump’s policies in early 2025. 

ASEAN Response 

Relating to the incoming trade tariffs under Trump 2.0, there are increasing concerns as well for our region in ASEAN that trade tariffs may well be imposed on various economies that run significant trade surpluses against the US. 

As a baseline, ASEAN export outlook is likely to weaken across 2025 and potentially repeat the softening across the Trump 1.0 years of 2018 and 2019 when the trade tariffs were first imposed against China. 

Crossing into 2025, under various metrics, ASEAN economies such as Vietnam, Thailand and Malaysia appear to run elevated trade surpluses against the US and seem to have benefitted the most from the diversion of trade from China under the “China + 1” realignment of supply chains since the first Trump administration (Trump 1.0). 

Lest we worry too much about the negative impact on ASEAN trade and export from the incoming tariffs, there are many other positives for our region as well that bear highlighting. 

Firstly, China’s ongoing economic slowdown can be seen in a positive light for ASEAN economies. This will reinforce and intensify global foreign direct investment (FDI) inflows into our region. Chinese firms will also need to invest more in our region as they look for new growth opportunities away from China’s slowing domestic economy. 

Secondly, ASEAN is firmly a haven economic region amid a more uncertain world. ASEAN has strong substantial intra-regional trade that is growing in prominence compared to inter-regional trade outside of the region. 

It is also a key tourism hub and has robust domestic spending. Unlike the European Union’s limited options, ASEAN’s fiscal and monetary policy options are relatively more abundant should trade tariffs come in fast and hard and trigger an economic slowdown. 

Key countries in ASEAN, like Malaysia and Singapore, will also see positive spillovers into 2025 from the strong GDP growth trajectory in the 2H24. 

Finally, ASEAN’s forex reserves are now back to post-Covid highs as well, lending an important buffer to the risk of further domestic currency weakness in the face of slowing trade and the stronger US Dollar backdrop. 

(Abridged from Singapore-based United Overseas Bank Ltd’s report entitled ‘UOB House View 1Q25’ released on Jan 9, 2025). 

  • The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s owners and editorial board.

  • This article first appeared in The Malaysian Reserve weekly print edition
Dzul

Recent Posts

Dr Zaliha assures transparent process for Ramadan bazaar licences

THE issuance of licences for Ramadan bazaars in the federal capital this year will be…

3 mins ago

Mitoma gem inspires Brighton defeat of woeful Chelsea

ENZO Maresca admitted Chelsea's dismal 3-0 defeat at Brighton was the "worst performance" of his…

10 mins ago

FMM, ASEAN BAC Malaysia share 12 initiatives for Asean chair with over 40 businesses

THE Federation of Malaysian Manufacturers (FMM) today hosted the ASEAN Business Advisory Council (ASEAN-BAC) Malaysia…

30 mins ago