Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss a question that’s drawing increasing attention – just how the U.S. presidential election would affect Asian economies and markets.
It’s Wednesday, July 24th, at 8 PM in Hong Kong.
As the US presidential race progresses, global markets are beginning to evaluate the possibility of a Trump win and maybe even a Republican sweep. Investors are wondering what this would mean for Asia in particular. We believe there are three channels through which the US election outcome will matter for Asia.
First, financial conditions – how the US dollar and rates will move ahead of and after the US elections. Second, tariffs. And third, US growth outcomes, which will affect global growth and end demand for Asian exports. Well, out of the three our top concern is the growth downside from higher tariffs.
The 2018 experience suggests that the direct effect of tariffs is not what plays the most dominant role in affecting the macro outcomes; but rather the transmission through corporate confidence, capital expenditure, global demand and financial conditions.
Let’s consider two scenarios.
First, in a potential Trump win with divided government, China would likely be more affected from tariffs than Asia ex China. We see potentially two outcomes in this scenario – one where the US imposes tariffs only on China, and another where it also imposes 10 percent tariffs on the rest of the world.
In the case of 60 percent tariffs on imports from China, there would be meaningful adverse effect on Asia's growth and it will be deflationary. China would remain most exposed compared to the rest of the region, which has reduced its export exposure to China over time and could see a positive offset from diversification of the supply chain away from China.
In the case where the US also imposes 10 percent tariffs on imports from the rest of the world, we expect a bigger downside for China and the region. We believe that in this instance – in addition to the direct effect of tariffs on exports – the growth downside will be amplified by significant negative impact on corporate confidence, capex and trade. Corporate confidence will see bigger damage in this instance as compared to the one where tariffs are imposed only on China as corporate sector will have to think about on-shoring rather than continuing with friend-shoring.
In the second scenario, in a potential Trump win with Republican sweep, in addition to the implications from tariffs, we would also be watching the possible fiscal policy outcomes and how they would shift the US yields and the dollar. This means that the tightening of financial conditions would pose further growth downside to Asia, over and above the effects of tariffs.
How would Asia’s policymakers respond to these scenarios? As tariffs are imposed, we would expect Asian currencies to most likely come under depreciation pressure in the near term. While this helps to partly offset the negative implications of tariffs, it will constraint the ability of the central banks to cut rates. In this context, we expect fiscal easing to lead the first part of the policy response before rate cuts follow once currencies stabilize. It’s worth noting that in this cycle, the monetary policy space in Asia is much more limited than in the previous cycles because nominal rates in Asia for the most part are lower than in the US at the starting point.
Of course, this is an evolving situation in the remaining months before the US elections, and we’ll continue to keep you updated on any significant developments.
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