It is only two months after Trump’s inauguration as President of the United States and the only ones that are probably happy about Trump’s presidency are journalists and the Kremlin. Trump’s flurry of decisions on all kinds of fields are changing the world and, thereby, Asia directly or indirectly.
The guiding line of Trump 2.0 – which was already the case in his previous administration but in a much more violent way now, is his “Make America Great Again” mantra (MAGA). Since January 20, Trump has shown at every occasion that U.S. economic and security interests come first, even at the expense of the US traditional alliances and multilateralism. This is obvious bad news for South Korea and the rest of US allies. Canada and Mexico have been hit first with a 25% increase in tariffs across the board, which Trump suddenly decided to pause although they could come back any time. The European Union has been threatened with tariffs and humiliated after Trump’s sudden and decisive support to Putin against Ukraine. In Asia, China has been hit with 10% additional tariffs but Trump’s tone is much more conducive to cooperation than it was in his first administration. In turn, Trump’s recent bilateral meetings with Japan’s Prime Minister Ichiba and Prime Minister Modi are were both rather underwhelming as Trump did not rule out tariffs against any of its two major allies in the Indo-Pacific. Why such change is hard to tell. One potential reason might simply be the change in the political reality (from Abe’s strong personality to Ichiba and with Modi now in a coalition government) but there might be more strategic reasons which are yet hard to figure out.
Going back to China, Trump’s softer tone is clearly not in line with his narrative during the campaign trail and the question is why and what is means for the rest of Asia. Trump’s second administration seems to be much more focused on protecting and rebuilding the US than the first. This includes slashing tariffs on any country (even ally) for revenue or to get things done in US favour. Secondly, Trump wants the US to rebuild its manufacturing power and the reason might not necessarily be competitiveness but rather enabling isolation. This seems to align with Trump’s push to have a tighter hold of North America, from the Panama Canal to Canada and Greenland. Such hemispheric isolationism is very dangerous for Japan and South Korea and for Taiwan above all. Taiwan is received very mixed comments from the Trump administration which makes it impossible to guess whether military support will be there in the event of an invasion from the Mainland.
The above is radically different from Trump’s view of the world during his first mandate where the threat to the US was coming from China and Japan and India were key components of Trump’s containment through the Indo-Pacific alliance. In fact, the U.S.-China trade war was a defining feature of Trump 1.0, with high tariffs imposed on hundreds of billions of dollars of Chinese goods, which is no longer as clear in this second administration. In fact, rumours of a trade deal between the US and China continue to grow although the contours of such deal are difficult to determine at this juncture. On a more strategic front, Trump’s Faustian deal with Putin might have been motivated by two close a relation between China and Russia, which could create an unsurmountable challenge to the future of the US as global hegemon.
Another important angle to consider is how Trump’s policies affect the US economy and, thereby, Asian economies as well. Firstly, Trump’s tariffs are bad news for inflationary pressures in the US, which the Fed has clearly noted and reacted to, by delaying rate cuts which the market was initially expecting in early 2025 and will not happen. This is bad news for Asia since most economies are decelerating, such as South Korea but also India. While interest rates are needed and happening, their currencies are taking a hit. While this is also true for China, capital controls can help China keep its currency afloat and avoid outflows. This will be harder for other Asian economies. Another important way in which Trump will be hitting South Korea and Japan more than China is by dismantling Biden’s main industrial policy arm, the “Inflation Reduction Act” (IRA). For the past two-three years, IRA has been offered juicy subsidies to producers of renewables or electric batteries in the US, even foreigners such as South Korea or Europe, but not China. The reversion of this policy will be a relative win for China.
Beyond exports, South Korea could also be affected by Trump’s policy on North Korea. During his first administration, Trump pursued direct diplomacy with North Korea, including historic summits with Kim Jong Un, but failed to achieve concrete denuclearization agreements. How Trump will approach North Korea this time will be consequential and further complicated by North Korea’s military support to Russia in its war against Ukraine. More generally, Trump has put his focus on increasing defence expenditure by his allies, especially NATO members. South Korea should see this as a wake-up call as it comes to US military support.
All in all, Trump 2.0 seems to be changing the order of winners and losers and Asia with China doing much better than expected, at least when compared with Trump 1.0. policies but also with Trump’s claims during his campaign. At the same time, Japan and India are no longer Trump’s darlings. As it comes to South Korea, some of the benefits brought about by Biden will no longer be there and a potential trade deal between Trump and Xi could make things even worse, in terms of loss of external competitiveness. All in all, Trump’s 2.0 relative winner seems to be China and not the rest of Asia so far but it is still too early to tell.
Source: Natixis Research Asia