US tariff shockwaves: What is the sectoral risk for Asian economies?

As US President Trump pushes further to reshape the global trade order, his baseline and reciprocal – but also some sectoral – tariffs have sent shockwaves to global supply chains. Given the critical role of manufacturing and the export-oriented economic structure, Asia will be hit hard. The only variable is how big the impact will be, factoring in the possibility and actual terms of a trade deal if any. In this note, we look beyond exports and analyze the impact of US tariffs on Asia from the value-added perspective. Understanding the nuances will be critical to assessing the consequences of shifting US trade policies on Asia’s pivotal sectors.Analysis by value-addedWhile export data is important and released timely, it does not necessarily reflect the full picture, especially with goods being rerouted to dodge tariffs in a world with rising protectionism. The value-added approach can avoid double counting (components can cross borders multiple times in the production process) and focuses not only on final products but also intermediate goods. This approach can better reflect an economy’s sectoral exposure to certain end-market, which provides a closer glimpse of impact on domestic production and employment.Vietnam most exposed to US imports in goodsAsia’s reliance on US demand has grown compared to 2017, when the trade war first started, even for China. Considering the direct exposure of goods exported to the US, Vietnam and Taiwan are the most exposed, but the latter is better positioned as semiconductors, a bulk of Taiwan’s exports to US, are exempted for now. With imminent risk of US and global economic stagnation, if not recession, there might also be second-order effect and spillover to other industries, broadening the demand shock to services-oriented economies like Singapore and Hong Kong.Transport equipment to take the blunt if tariffs go up furtherFrom a sectoral perspective, transport equipment is by far the most exposed in Asia with 25% of value-added exported to the US. Machinery, rubber and plastics, and electrical and optical equipment are also at risk with substantial market cap as well as sizeable exposures, albeit to a lesser extent. While the reciprocal tariff comes with exemptions for autos, semiconductors and pharmaceuticals (autos already facing 25%), there is no guarantee that no more tariffs will come after them in the future.Sectoral shocks vary across marketsIn developed Asia, Japan, South Korea, and Taiwan are particularly exposed to the US demand for electronics and industrial goods, such as automobile and parts, and to a lesser extent metals and materials. For the rest of Asia, the risk focuses on the exports of commodities. Vietnam and India are special cases with even broader exposure due to the influx of US investment over the past years thanks to US-China decoupling and production friend-shoring, but India may be more shielded by its massive domestic demand and reliance on service exports.ConclusionTherefore, Asia is vulnerable to US tariffs due to high direct exposure and the knock-on effects of weaker global growth. If the tariffs are fully implemented (no deals) or even further hiked, the region may face great shocks as substituting for US demand will be hard. Corporate earnings may also be reduced due to higher production costs even if firms manage to invest and produce in the US. All in all, the sectoral impact on Asia will be widespread, and we may expect significant underperformance of Asian companies in the foreseeable future.