Trade-dependent Asia-Pacific (APAC) economies are at great risk from the U.S. reciprocal tariff plan.  After a three-month deferral, a new series of letters from the White House suggests that the levies will go into force on August 1.  This will have a significant impact on the region’s economic fortunes.

Fourteen Asian nations are now facing similar tariff rates to those announced on “Liberation Day.”  Asia’s trade links with China are also under the microscope as transshipments will be subject to additional penalties.  The recently concluded trade deal with Vietnam and the threat to Japan suggest that the U.S. is not seeking complete free trade agreements; import duties are set to move up from their current levels.  

Asian economies are starting to feel the pain from higher tariffs. Exports have pulled back, following strong front-loading to start the year.  Unpredictable U.S. trade policy and heightened geopolitical tensions could end up rewriting Asia’s established export-driven growth model.  Looser fiscal and monetary policies are the best bets for the region’s leaders to provide a floor to growth.

Following are our views on how major APAC markets are poised to perform.

Japan

• Despite being a close U.S. ally, Japan is among the nations that are set to see a tariff rate increase on August 1.  Trade negotiations have reached an impasse; Japan is seeking concessions for its important auto industry, and it is disinclined to open its politically-sensitive rice market to more American imports.  Japanese exports are experiencing a decline, led by a drop in vehicle shipments to the U.S.   The loss of a majority of the ruling coalition in the Upper House election could add to concerns about Japan's fiscal health and hamper the outcome of trade negotiations with the U.S.
  
• The Bank of Japan (BoJ) is in wait-and-see mode.  The central bank kept its policy rate unchanged at 0.5% at its June meeting but announced its plan to slow down its reduction of Japanese government bond purchases in fiscal year 2026.  Amid heightened uncertainty, weakening economic momentum will exert downward pressure on price increases, though wage increases will provide some support to domestic demand.  We expect the BoJ to remain on the sidelines this year.

China

• Economic data was firm in the first half of the year, led by accelerated export orders and the continued boost from the consumer goods trade-in program.  Amid external headwinds, the momentum is about to wane.  Industrial production growth edged down in May, as the boost from front-loading faded.  Exports rebounded in June, led by the reciprocal tariff pause in May.  But continued decoupling and U.S. efforts to curb transshipments will spell trouble for China’s primary economic engine.
• Excess production capacity will add to deflationary pressures.  Signs of slack are evident in the intensifying price competition in the Chinese auto industry and deepening producer price declines.  Drag from the property market will persist, with recent data showing renewed weakness in the housing market.  Home prices declined 0.3% month-on-month in June, the most in eight months.
• Policies to stimulate consumption and stabilize the labor market have gained traction.  These have taken form of subsidies for durable goods, expansion of social safety nets and pension reforms.  The urgency to pursue major reforms or large-scale stimulus has waned, given the rollback of sky-high U.S. tariffs.  But further easing will be needed to beat deflation.

Singapore

• Economic momentum was fairly resilient in the first half of the year.  The new U.S. import duties were silent on Singapore, raising optimism that the tariff rate will not exceed 10%.  But for Singapore’s export-driven economy, even minor increases in global tariffs will have a significant bearing on its growth.  The American focus on transshipment activities will deliver a big blow to Singapore’s vital re-exporting sector, which accounts for about two-thirds of total trade.
  
• Disinflation has continued, with the core measure decelerating to 0.6% year over year in May, well below the Monetary Authority of Singapore’s (MAS) soft target of “around 2%.”  Most signs are pointing towards further disinflationary pressures, which would allow the MAS to loosen its policy settings again later this year.  Higher reciprocal global tariffs, however, could prompt the central bank to ease as early as July.

Hong Kong

• Economic activity was robust in the first quarter.  Growth was driven by notable upsurges in exports, as Hong Kong is a hub for rerouting goods between China and America.  Improving inbound tourism also underpinned growth.  That said, the outlook is bleak.  Domestic demand is weak.  Retail sales saw its first positive turn in May after 14 consecutive months of decline.  The housing market is undergoing a severe correction, with home prices hovering at their lowest in nine years.  Hong Kong is also paying the price for its ties to the Mainland economy.  The Asian financial hub is subject to the same high tariff rate that the U.S. has applied to Beijing.
• Financial conditions have tightened recently, after the Hong Kong Monetary Authority's intervention to prop up the Hong Kong dollar, which had hit the weaker end of its trading band.  Coupled with a patient U.S. Federal Reserve, this will hinder the recovery in domestic demand.  Hong Kong’s growth prospects will be heavily influenced by aggressive U.S. trade tactics and cautious monetary policy.

Australia

• Australia’s economy has been in the slow lane since the start of the year.  Government spending, the main engine of activity in 2024, was flat.  Consumers remain frugal, with the labor market starting to show signs of softening.  Sluggish productivity is impairing both income per capita and living standards.  Australia is less susceptible to U.S. trade policy than many of its peers, facing only the 10% across-the-board levy.  But the economy is far from untouched.  For a trade-reliant economy like Australia, weaker global growth will filter through to the domestic economy via weaker exports and stalled business investment.
  
• The Reserve Bank of Australia (RBA) held its policy rate steady at its July meeting.  The pause was more “about timing rather than direction” as the central bank decided to "wait for a little more information".  With monetary policy still in restrictive territory and progress on disinflation on track, we expect the RBA to gradually lower its policy rate to 3.10%.