If Donald Trump were open to learning new economic tricks, the US president might look to Asia.
In recent days, three economies posted weaker-than-expected inflation. In Japan, consumer prices fell to a 3.7% year-on-year rate in February from 4%.
In Hong Kong, prices dropped to 1.4% in February from 2%. Singapore’s core inflation fell to 0.6% in February, a near four-year low. In Malaysia, costs eased to 1.5% from 1.7%. And China, of course, is contending with deflationary pressures.
Asia’s experience contrasts significantly with America, where inflation is running hotter than feared at nearly 3%. So much so that the Federal Reserve is risking Trump’s wrath by not cutting interest rates.
Yet all that is about to change as Trump’s multiple, overlapping trade wars lift prices everywhere – particularly inside the US as consumer prices are set to rise and rise. And, perhaps, bond yields for trading nations big and small.
Consider this the calm before the Trumpian inflation storm to come. At the moment, a tariff-closed US is far more prone to inflation risks than trade-geared Asia. But that’s about to change as Trump does his worst to the global financial and trade systems.
“Tariffs are simply inflationary, despite what Donald Trump may tell people,” says Bradley Saunders, an economist at Capital Economics.
Economist Lydia Cox at the University of Wisconsin-Madison says that by “trying to protect certain industries, you can actually make other industries more vulnerable.”
Or, in Trump’s case, make that the entire US economy, seemingly. Even economists who are positive on America’s prospects worry Trump’s tariffs will create both growth headwinds and inflation.
“We continue to bet on the resilience of the consumer, the economy and corporate earnings, but we reckon that heightened recession fears will weigh on valuation multiples,” says Ed Yardeni, president of Yardeni Research.
Yardeni adds that “we acknowledge that the risks of a recession and a bear market might continue to increase. It all depends on the often-unpredictable president, who frequently, and proudly, has referred to himself as ‘Tariff Man,’ reflecting his strong support for protectionist trade policies.”
Some worry the US is veering toward a scenario where growth craters and inflation surges. Recently, Fed officials predicted US gross domestic product (GDP) will expand at an annual rate of just 1.7% versus an earlier forecast of 2.1%. As JPMorgan economist Michael Feroli sees it, the figures “were revised in a stagflationary direction.”
Faris Mourad, an analyst at Goldman Sachs, says, “we like our stagflation long/short pair basket for investors looking to reposition their portfolios and hedge against rising possibilities around stagflation.”
The downshift in US growth is rapidly changing the calculus for top Asian economies, including China.
“US trade policy under President Donald Trump stands to soften global business confidence, posing a headache for China,” says Shannon Nicoll, an economist at Moody’s Analytics. “Domestic ambitions are high. China has set its growth target at around 5%, but it won’t get there without cuts.”
Recent data show that a “rate cut in China is warranted,” Nicoll says. “An influx of sovereign bonds will hit the system thanks to unprecedented deficit-funded spending. This supply of new bonds will push up bond yields and push down bond prices.”
The People’s Bank of China, Nicoll says, “has been sounding the alarm about a possible Silicon Valley Bank-style crisis, with local financial institutions buying too many bonds at high prices. If these were to rapidly lose value, it would threaten capital adequacy ratios. A rate cut would help keep bond yields reasonable.”
Khoon Goh, head of Asia research at ANZ Group Holdings, notes that “there could always be some unexpected development, or President Trump could mention something this week that suggests a harder line. So it’s hard for markets to adequately price in the risk at this stage.”
Part of the problem is how poorly the inflation-is-transitory trade worked out for investors. Or for voters and world leaders who thought the Trump 2.0 administration would be more about deal-making than economic mischief-making.
Nor have things worked out well for those unready for the giant trade war to come, one that appears driven more by vengeance than economic strategy.
Not least of which are the fireworks sure to come as Trump’s policy priorities collide with a China poised to push back and Washington’s fiscal troubles. The latter concerns have government bond yields drifting higher from Washington to Tokyo.
On January 20, Trump inherited a national debt exceeding $36 trillion. And, depending on which pundit you follow, Trump is either about to explode the debt in wildly disruptive ways via massive tax cuts. Or, given the giant chainsaw that Trump handed Elon Musk, slash it aggressively.
Either outcome could pose huge risks for global markets. The first could see the US debt careening toward $40 trillion and credit rating companies pouncing.
Washington could quickly lose its last AAA rating from Moody’s Investors Service. Asia, of course, is directly on the frontlines of the chaos that this shock would unleash in bond, stock and currency markets everywhere.
The second outcome could see Trump’s Tesla billionaire benefactor continue to rampage through government institutions that protect the sanctity of the dollar and US Treasury securities.
Along with firing government workers indiscriminately — including some who maintain America’s nuclear arsenal — Team Musk is setting his sights on the Internal Revenue Service. That could have credit rating companies doubting Trump Nation’s ability to pull in sufficient tax receipts to keep pace with surging public debt issuance.
The Washington Post reports that the US government is bracing for a 10%-plus plunge in revenues by the April 15 tax filing date compared with last year. The shortfall could top $500 billion.
Adding to these risks is Trump’s mistaken belief that tariffs are revenue-raising tools. “The problem isn’t really uncertainty about tariffs,” says Robert Fry, an independent economist who’s an expert on US budget matters.
“It’s the growing likelihood that President Trump intends to keep tariffs in effect long-term, to raise revenue and to shift manufacturing back to the United States, rather than using them as leverage to get other countries to reduce their trade barriers.”
The Trump 1.0 tariffs from 2017-2021 didn’t pull a statistically notable number of jobs back to the US. Instead, most jobs that left China moved to Vietnam. Economists say there’s no reason to think Trump 2.0 will succeed where his first White House failed.
Asian central banks, meanwhile, have reason to worry about what Trump’s scattershot economic vision means for roughly $3 trillion of regional savings invested in US Treasuries.
Case in point: Musk and his associates being given access to highly sensitive US Treasury Department data, including the federal payments system.
In a recent New York Times op-ed, former Treasury Secretaries Robert Rubin, Lawrence Summers, Timothy Geithner, Jacob Lew and Janet Yellen warned that “no Treasury secretary in his or her first weeks in office should be put in the position where it is necessary to reassure the nation and the world of the integrity of our payments system or our commitment to make good on our financial obligations.”
They argue that “any hint of the selective suspension of congressionally authorized payments will be a breach of trust and, ultimately, a form of default. And our credibility, once lost, will prove difficult to regain.”
Trump also has made no mystery of his dislike of Federal Reserve officials setting US rates independent from political input. Last week, Trump slammed the Fed’s failure to ease rates, demanding that Chairman Jerome Powell “do the right thing” and do the White House’s bidding.
With US inflation running well above the Fed’s preferred 2%, looser monetary conditions could hit faith in dollar assets. It also might fuel a bubble in stocks and other speculative assets — and real estate.
Given these risks, the US might have far more success focusing on deregulation and runaway subsidies on industries like those on which Musk’s private companies rely.
It was a lack of investment in productivity-enhancing sectors and technologies that left the US so susceptible to inflation.
In the meantime, Asia is doing its best to stay off Trump’s radar screen. Andrew Tilton, an economist at Goldman Sachs, says that now “with Trump and some likely appointees focused on reducing bilateral deficits, there is a risk that — in a sort of ‘whack-a-mole’ manner — burgeoning bilateral deficits could eventually prompt US tariffs on other Asian economies.”
Tilton adds that “Korea, Taiwan and especially Vietnam have seen large trade gains versus the US,” something Trump 2.0 isn’t likely to let slide. As such, Asia’s top trading nations may try to narrow surpluses to “deflect attention” from Team Trump.
Barclays Bank economist Brian Tan adds that “trade policy is where Trump is likely to be most consequential for emerging Asia in his second term as US president,” inflicting “greater pain” on more open economies.
Suffice to say, America’s debt excesses will also challenge the US government in ways the president doesn’t seem to realize. So might the inflationary fallout from his beloved tariffs.
Follow William Pesek on X at @WilliamPesek
