Growing U.S. protectionism is a blessing in disguise for Asia. The U.S.-triggered deflationary shock, compounded by China’s industrial overcapacity, is forcing Asia and other emerging markets to trade and invest more among themselves, accelerate investment in advanced technology to become self-reliant and implement much-needed reforms to stimulate domestic consumption and reduce their dependence on the U.S.
U.S. immigration curbs, especially the latest barriers against the inflow of top technical talent from India and China, should benefit Canada and Europe in the near term as talent and investment move to alternative locations. Over the longer-term, though, this curb can only be good for the two Asian giants as they help slow decades of brain drain and keep their best-and-brightest at home to boost domestic technological development. A China-India economic alignment, while still far-fetched, would be a culmination of U.S. protectionist policies, if India is pushed too far.
What lies beneath latest trade data
The latest September trade data from China gave a glimpse of the emerging world order. Despite a surge in average U.S. import tariffs in August to the highest in almost a century, China’s global exports rose over 8% year-on-year in September, the fastest pace in six months, to USD 329bn. Exports to the U.S. predictably plunged 27%, registering the sixth month of double-digit declines, but this was more than offset by a 15% surge in shipments to non-U.S. markets. The latter included a 14-16% rise in exports to ASEAN, India, Latin America and European Union, and a 56% jump in exports to Africa.
The implications are far reaching. First, the trade data shows China is much better prepared against rising U.S. protectionism than previously thought. It has diversified and rerouted supply chains and developed new exports markets since President Trump’s first round of trade wars in his previous term.
Second, U.S. protectionism is helping accelerate trade among developing economies. The share of the so-called ‘South-South’ trade has risen from 6% of global trade at the turn of the century to 22% in 2024.
Lastly, ASEAN is emerging as a major beneficiary of the reorganisation of global supply chains – the region received 17% of global foreign direct investment in 2023 (based on last available UN data), despite accounting for only 7% of global GDP. U.S. policies are likely to accelerate this trend, with India joining ASEAN as a key beneficiary.
The Trump 2.0 shock, directly or indirectly, is also ushering in much-needed, wide-ranging reforms across Asia. In September, India simplified its goods and services tax (GST) structure, effectively cutting tax rates on a wide swathe of items from everyday necessities to cars, air conditioners, refrigerators and televisions. The GST cuts, and income tax cuts earlier, are likely to boost domestic consumption, partly offsetting the impact of U.S. tariffs. Even with an estimated 100bps hit to India’s annual GDP growth from the 50% U.S. import tariff, India’s economy is likely to grow at more than 6%, making it the fastest growing major global economy.
Meanwhile, as strategic competition with the U.S. intensifies, China’s top ruling party officials are meeting in October to finalise the next five-year plan (2026-30). The plan’s focus is likely to be on boosting economic productivity through scientific and technological innovation, to enable China to achieve self-reliance in advanced technology – from AI, semiconductors, robotics and quantum computing to defence, green technologies and biotech.
The aim is for China to avoid the middle-income trap and rise up the international value chain. This will involve China’s companies investing domestically in the most advanced technologies, while reshoring lower value-added manufacturing to other destinations with lower labour cost, such as ASEAN, India, Latin America and Africa. The reshoring of factories from China is likely to benefit Asia and other emerging markets, rather than the U.S.
Breaking the ice
Trump’s 50% tariffs against India could also lead to a geopolitical realignment in Asia. The punitive tariffs and public pressure on India to abandon its “three red lines” (opening up its agricultural sector, stopping oil imports from Russia and getting involved in India-Pakistan dispute) arguably steered India to break the ice with China.
India and China are now looking to resolve their border disputes, resume direct flights and normalise business ties. A potential breakthrough in their border dispute and a durable economic partnership would mark a turning point in Asia.
Although there are signs the U.S. is relaxing its tough stance against India, Trump’s tariffs have already goaded India to diversify its alliances, turbo-charging trade talks with other partners, including the European Union. In July, India signed a free-trade agreement with the UK after years of disappointing several UK prime ministers. In the Middle East, India has signed a trade deal with the UAE, while it negotiates deals with other Gulf Cooperation Council members.
For sure, the U.S. will remain the leading economic power for years to come, thanks to its military supremacy and unmatched consumer market, which is twice the size of the European Union and three times that of China. This explains why, barring the two regional giants, China and India, other Asian economies have acceded to President Trump’s trade terms. The AI revolution could help the U.S. maintain its technological supremacy for a while longer. Nevertheless, there are distinct signs that the U.S.-triggered shock is altering the decades-old global economic order.
The resulting developments are good news for economic productivity and investor returns in Asia. Not surprisingly, the valuation discount of Asia ex-Japan equity markets versus the U.S. has narrowed since the start of the year, despite Asia facing the brunt of the trade disruptions (current Asia ex-Japan equity market Price/Earnings multiple: 15x estimated 12-month forward earnings vs. U.S. P/E: 23x). This discount is likely to narrow further in the coming years. Long-term investors, particularly those over-exposed to U.S. markets, should look to reallocate towards Asia ex-Japan.
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