What Trump’s trade war and tariff threats mean for Asia: Capital Economics

World currencies

U.S. President Trump may be threatening a trade war in an increasingly shrill series of Twitter comments, but Asia may not necessarily feel much of a pinch.

“The imposition of U.S. tariffs on steel and aluminium would have little direct impact on Asian economies,” Krystal Tan, Asia economist at Capital Economics, said in a note on Friday. “The bigger risk is that they represent the latest steps towards a damaging trade war.”

While Trump’s announcements so far have been targeted and likely won’t affect Asia’s growth prospects much, “the threat of more wide-ranging action on trade that invites retaliation and potentially leads to a damaging trade war has clearly increased,” she said.

If the protectionist moves become wider-ranging, the region’s most trade-dependent economies, including Singapore, Taiwan and Vietnam, would take a hit, she said.

South Korea could also take a hit if the U.S. withdraws from the Korea-U.S. Free Trade Agreement (KORUS), she said.

Trump on Thursday said he would formally announce plans for an across-the-board 25 percent tariff on steel and 10 percent on aluminium. The announcement, which reportedly came against the advice and wishes of many of his own advisers and political party, sent stock markets reeling globally.

‘Trade wars are good’

On Friday, Trump stepped up his already inflammatory rhetoric a notch by declaring on Twitter that “trade wars are good, and easy to win.”

The European Union said that in reaction to Trump’s threatened tariffs on steel and aluminium, it would consider retaliatory tariffs on a range of U.S.-made goods. Trump then threatened to tax Europe’s auto exports to the U.S. It’s unclear how this would affect Italian-American carmaker Fiat Chrysler.

If China was Trump’s intended target, Trump’s threat may swing wide of the mark. Tan noted that while China is “by far” the world’s largest steel producer, existing trade barriers mean it only accounts for around 2 percent of U.S. direct steel imports. She noted the actual figure may be slightly higher as sometimes Chinese producers ship to a third country before sending it to the U.S.

Asia may cut steel prices

Tan noted that total U.S. steel imports account for less than 0.3 percent of China’s GDP, and China’s total steel exports are under 0.5 percent of its own GDP. South Korea may be harder hit as the third largest direct supplier of steel to the U.S., but even then its steel exports to the U.S. clocked in at just 0.2 percent of its GDP, she said.

”What’s more, in previous instances when the U.S. has imposed steel import tariffs, Asian economies have been able to maintain market share by cutting their prices,” Tan said. “U.S. prices have increased sharply over the past week, which should make it relatively easy for Asian producers to maintain market share.”