It has been an unprecedented week for the global economy.
On 2 April, President Trump announced the introduction of what he termed “reciprocal tariffs” on imports, surpassing the standard 10% across-the-board tax applied to all United States (US) imports. These measures target 57 economies and are justified as necessary to address the US trade deficit with these nations. Among the affected economies are several in Asia, with tariffs ranging from 10% on imports from Singapore to a steep 49% on imports from Cambodia. The region’s two largest economies are not exempt, with the People’s Republic of China (PRC) given an initial 34% tariff and India facing a 26% tariff.
The US reciprocal tariffs have heightened uncertainty and dampened expectations for global and regional economic growth. Stock markets worldwide reacted sharply, with major indexes in the US and Europe seeing steep declines on the initial announcement. In Asia, fears of inflation and a potential US recession—key to Asian exports—intensified. Even if Asian stock market losses recover from their initial losses—Japan’s Nikkei 225 fell 7.8%, Australia’s ASX 200 dropped 4.2%, the Republic of Korea’s Kospi declined 5.6%, and the Shanghai Composite plunged 7.3%—disruption and uncertainty will likely continue.
The initial economic impact of the tariffs could stem from two primary sources: a reduction in exports to the US, which may trigger a cascade of slowed domestic economic activity, and a decline in confidence driven by uncertainty. The latter, illustrated by the stock market’s sharp reaction to the tariff announcement, could significantly disrupt the domestic financial sector. Without timely and effective intervention from authorities to stabilize markets, these disruptions may deepen and persist.
The reduction in exports, however, poses an even greater concern. Preliminary assessments indicate that economies heavily reliant on exports to the US, such as Viet Nam and Thailand, may face substantial GDP losses. In contrast, others like the PRC, where exports to the US play a smaller role in overall economic activity, may be less affected. Nonetheless, the direct loss from this export market could escalate into a larger economic shock. Ripple effects in other markets and reduced investment may further compound the impact, potentially pushing affected economies into recession.
The Asian Development Outlook, published by the Asian Development Bank in April 2025, cautioned that the implementation of US tariffs could significantly reduce economic growth in the US, the PRC, and other regional economies. Retaliatory measures from trading partners may escalate tensions, increasing market fragmentation, and disrupting global supply chains. The PRC’s 34% counter-tariff on US goods escalated the trade conflict, prompting an escalating cycle of trade measures between the US and the PRC. Additional levies were placed on the PRC, raising total tariffs to 125%, after the PRC had responded with 84% levies on the US. Such conflict risks driving the global economy into a downward spiral, potentially pushing nations toward autarky and undermining international trade.
Other economies, including the European Union, Israel, Japan, and the Republic of Korea, are seeking to negotiate tariff deals with the US. Just a week after the initial announcement, the US paused the implementation of new tariffs for 90 days for countries that are willing to negotiate a reduction to a 10% tariff. Though the Trump administration has expressed openness to such negotiations, as indicated by the pause announcement, the timeline and conditions remain uncertain.
The initial US reciprocal tariffs were calculated based on the trade deficit with each partner economy, with the theoretical goal of eliminating those deficits. This was achieved by applying uniform coefficients for the elasticity of import demand and the passthrough rate from tariffs to import prices across all trading partners. In this context, any negotiation is unlikely to succeed unless it includes measures to eliminate trade surpluses with the US.
What can Asia negotiate? Some economies might consider increasing imports from the US to eliminate their trade surpluses. However, assuming those imports were already optimized to meet domestic needs, this approach would be irrational and could actually be welfare-reducing.
Alternatively, economies could impose taxes on exports to the US to reduce their bilateral trade surplus. While this approach may seem unpopular due to its potential impact on local exporters, it is important to note that these exporters would be affected by the US’s reciprocal tariffs regardless. The export taxes could help counterbalance US claims of unfair trade practices, offering a concrete basis for tariff negotiations while also generating revenue for the exporting country. This revenue could be used to partially compensate affected exporters and fund efforts to explore alternative markets, mitigating losses due to US tariffs. In the longer term, these measures might also support the strategic selection of more efficient exporters, fostering a more resilient and competitive export sector.
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