Will Trump's anxieties encourage Asian cash to flood back home?

[WORLD] Ever since the Trump administration’s sweeping tariff announcements in early April, Asia’s export-driven economies have found themselves at the epicenter of global trade anxiety. With seven of the top ten economies running large surpluses with the United States, the region’s vulnerability to protectionist shocks is undeniable. Yet, as the initial shock gave way to a 90-day tariff suspension, investor concerns have pivoted from trade volumes to the volatility of capital flows and currency markets. Beneath the headlines, Asia’s massive current account surpluses and deep foreign reserves—built as bulwarks after the 1997 crisis—are now being tested as never before.

Short-Term Pain: Trade Disruptions and Market Volatility

The immediate aftermath of Trump’s tariff threats has been a sharp contraction in business confidence and a synchronized slowdown across Asia. Morgan Stanley downgraded its 2025 growth forecast for the region to 4%, down from 4.4%, citing tariff uncertainty as a drag on corporate investment and trade. Export powerhouses like China, Japan, South Korea, and Vietnam—all of which run large surpluses with the US—face the steepest duties, with some tariffs exceeding 30% for key sectors. These measures threaten not only to reduce export volumes but also to disrupt intricate supply chains that underpin Asia’s manufacturing prowess.

Market reaction has been swift: Asian equities and currencies gyrated as investors recalibrated risk. The Thai baht, Malaysian ringgit, and South Korean won all weakened in the days following tariff announcements, though most have since recovered some ground as trade tensions appeared to ease and capital flows shifted. The MSCI Emerging Markets Index fell sharply in the immediate aftermath, but rebounded in May as investors piled into Asian assets, betting on a weaker dollar and potential policy support from regional central banks.

Adaptation and Diversification: Asia’s Countermeasures

Despite the turbulence, Asia is not standing still. Countries are accelerating efforts to diversify trade relationships, deepen regional integration, and strengthen domestic demand. ASEAN economies, in particular, have been quick to explore new markets and forge intra-regional trade links, reducing their reliance on US consumers. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a case in point, with Japan and Australia leading the charge to create a more resilient regional trading bloc.

Vietnam, Cambodia, and Malaysia are also attracting increased foreign investment as multinationals seek to hedge against US-China tensions by relocating production or expanding their footprint in Southeast Asia. This trend is further supported by the global tech upcycle and sustained demand for AI-related products, which have buoyed exports and helped some countries, like Malaysia, maintain robust current account surpluses even amid tariff threats.

At the same time, central banks across the region are prepared to deploy monetary and fiscal tools to cushion the blow. With strong balance sheets and ample foreign reserves, most Asian economies are better positioned than in previous crises to weather short-term shocks. However, the effectiveness of these measures will depend on the duration and intensity of US protectionism, as well as the ability of policymakers to maintain investor confidence.

Long-Term Implications: Shifting Alliances and the Future of Global Trade

The long-term consequences of Trump’s tariffs extend far beyond immediate economic pain. By targeting Asia’s surplus economies, the US risks accelerating a reconfiguration of global supply chains and trade alliances. Already, there are signs that ASEAN countries are drawing closer to China, both economically and politically, as they seek to counterbalance US protectionism. Initiatives like the Belt and Road Initiative (BRI) and the Regional Comprehensive Economic Partnership (RCEP) are gaining momentum, potentially shifting the center of economic gravity in Asia and reducing US influence in the region.

Moreover, the tariffs are forcing Asian governments to confront structural weaknesses, such as over-reliance on exports and underdeveloped domestic markets. Countries with large, diversified economies—like India and Indonesia—are relatively insulated, while smaller, export-dependent economies are more vulnerable. The challenge for policymakers is to use this moment as a catalyst for reform, fostering innovation, boosting productivity, and building more resilient economic models.

Looking ahead, the region’s ability to adapt will be critical. Asia’s deep reserves and robust policy frameworks provide a buffer, but they are not a panacea. The region must continue to invest in technology, infrastructure, and human capital to remain competitive in a rapidly changing global landscape.

What We Think

Asia’s response to the latest wave of US tariffs is a study in resilience and pragmatism. While the region’s export-driven model is under unprecedented pressure, its deep reserves, adaptive policy toolkit, and growing intra-regional ties offer a powerful counterweight to protectionist shocks. However, the real test will be whether Asia can turn this moment of disruption into an opportunity for structural reform and sustainable growth. The region’s long-term prosperity depends on its ability to diversify, innovate, and build more balanced economic ecosystems—less reliant on any single market or trading partner. For now, Asia is navigating the storm with skill, but the journey ahead is far from over.