Trade tensions are escalating across the Asia-Pacific, with significant deal deadlines with the U.S. rapidly approaching. Despite ongoing negotiations, a research from Morgan Stanley highlights its core view that suggests this uncertainty is likely to persist, significantly impacting corporate confidence, capital expenditure (capex), and the broader trade cycle. This report offers a crucial update on regional trade talks, dissecting the implications of recent developments.
Morgan Stanley stated that so far, only Vietnam has secured a trade agreement, setting tariffs on Vietnamese imports at 20% (down from 46% reciprocal tariffs). Notably, goods deemed transshipments from other economies, particularly China, face a higher 40% rate, while Vietnam has committed to removing all tariffs on US goods.
For most other Asian economies, the outcomes of negotiations remain unclear. While some agreements may be finalised before the August 1 deadline, there’s a real possibility of tactical tariff increases or the US unilaterally setting rates if talks stall.
Negotiations reveal varied progress and sticking points:
China faces a current US tariff rate of 42%. While reciprocal tariffs are suspended until August 12th, and agreements have been made on rare earth exports and some US chip design software restrictions lifted, deep-seated issues persist. Key sticking points include national security concerns, China’s substantial trade surplus with the US, fentanyl control measures, and market access for US firms. China also strongly opposes any deals that compromise its interests.
India’s negotiations, with a current US tariff rate of 11%, are not “deadline-driven,” according to its Commerce Minister, prioritizing national interests. While an interim deal might cover industrial goods and some farm products, agricultural market access remains a primary hurdle, with India reportedly unwilling to compromise on domestic agricultural and dairy markets. India is seeking better market access for its labor-intensive sectors and tariff cuts.
Indonesia, currently facing a 15% US tariff rate, is confident of securing a “bold” trade deal encompassing critical minerals, energy, defense, and market access. They have offered near-zero tariffs on over 1,700 commodities and are preparing a US$34 billion trade and investment pact, though non-tariff barriers have been a point of contention.
Japan, with a 17% US tariff rate, continues negotiations, but key issues such as auto tariff elimination/reduction and agricultural market access remain unresolved. Upcoming Upper House elections further complicate concessions. Japan is keen on removing the 25% auto tariff, while the US pushes for access to Japan’s auto market and an increase in defense spending.
For Korea, at a 16% US tariff rate, the Trade Minister has sought an extension of the tariff pause. Critical issues include the removal or reduction of auto and steel tariffs. Korea has expressed willingness to address its trade surplus by increasing purchases of US goods like gas and defense equipment, but challenges remain in areas like shipbuilding co-operation and defense cost-sharing.
Malaysia, with an 8% US tariff rate, concluded two negotiation rounds, with the US aiming for a deal by July 9th. Concerns include potential AI chip rerouting to China, which the US plans to restrict, and Malaysia’s need to find ways to reduce its trade surplus with the US.
Taiwan, facing a 7% US tariff rate, has seen “constructive progress” in its talks, aiming for a zero-tariff deal modelled on USMCA. Taiwan has pledged to significantly boost purchases of US goods and increase investment in US semiconductor production, alongside discussions on increasing defense spending.
Thailand, at an 11% US tariff rate, recently offered to reduce its substantial $46 billion trade surplus with the US by 70% within five years and to zero in 7–8 years. A recurring challenge, and a focus for Thailand, is intensifying efforts to prevent third-country transshipments to circumvent US tariffs.
Vietnam stands out as the only economy that has secured an agreement, with tariffs on Vietnamese imports set at 20%, significantly down from 46% reciprocal tariffs. However, goods deemed transshipments from other economies, particularly China, face a higher 40% rate. Vietnam has committed to removing all tariffs on US goods, including preferential market access for large-engine cars.
Overall, the report from Morgan Stanley underscores that while some progress has been made, trade uncertainty is likely to persist for longer across Asia. The complex issue of transshipments, particularly given China’s central role in global value chains, will remain a significant source of contention, continuing to weigh on corporate confidence and investment in the region. The coming months will be critical as these intricate trade dynamics continue to evolve.
A major recurring challenge is the thorny issue of transshipments. The two-tiered tariff structure applied to Vietnam underscores the US’ focus on this problem. However, defining and measuring transshipments is complex, especially given China’s pivotal role, accounting for 41% of global value chains in manufacturing. This deep integration makes it exceedingly difficult for Asia ex-China economies to restrict trade with China, ensuring transshipment will remain a contentious issue and a source of potential further trade tensions. Additionally, new sectoral tariffs for pharmaceuticals and semiconductors are anticipated.
Economically, the prolonged trade uncertainty is expected to dampen growth. While recent hard data, such as capital goods imports and exports, showed some resilience—likely due to demand frontloading ahead of the July 9 deadline—high-frequency shipping indicators now signal a moderation in activity. This suggests damage to the growth cycle is likely to be reflected in hard data over the coming two to three months.
In summary, trade uncertainty is poised to prevail for longer, continuing to suppress corporate confidence and investment across the Asia-Pacific region. The period leading up to and beyond the August 1 deadline will be critical in shaping the immediate future of these intricate trade dynamics.
