Trump Trade Policies - Investment Implications for Emerging Markets
Update on Trump’s Trade Policies
During May the Trump administration continued to announce new tariffs as well as delay the implementation of previously announced tariffs. Since January there has been 57 different trade announcements from the Trump Administration. Over May these announcements included:
- further 25% tariff on imported auto parts (May 3)
- lowering of tariffs on imported British steel and autos (May 8)
- 90-day suspension of all country specific reciprocal tariffs (May 9)
- temporary lowering of Chinese tariffs to 30% (May 12) and
- 50% tariff on imported steel a 25% increase from the previously increased tariff (May 30).
Our discussions with North Asian manufacturing firms since Trump’s “Liberation Day” announcement on April 2 have highlighted that it is not just the actual tariffs impacting their business, but it’s the chaotic process of setting the Trump tariffs that is having a big negative impact.
Trump’s scattergun approach to trade policy is making it very difficult (likely impossible) for companies to determine the economics of operating and exporting to the US from any geography.
For example, a CEO of a major Taiwanese industrial company explained in a recent meeting that they are now assessing the feasibility of operating out of the UAE to supply their US customers. The UAE currently has a 10% tariff and access to low-cost labour from the subcontinent. This option is being assessed compared to investing further in their existing Vietnam plants (which have attracted a 46% tariff). However, if the Vietnam tariff is reduced to 30% the CEO indicated it will make more sense to expand in Vietnam (given the much higher productivity). So, what does the CEO do? The CEO said the company will wait and see what happens before deciding.
The result is likely to be an investment strike as we enter the 2nd half of 2025, not just in China or the US but globally given how connected the world economy is and how important the US is to virtually all export markets. This is evident in the PMI data seen in many exporting countries during April, which across the board experienced a decline over the past three months (as shown in Exhibit 1).
Exhibit 1: PMI Manufacturing Survey (< 50 indicates contraction)
The impact of the tariffs is also being felt in supply chains. On May 29 Gene Seroka, the executive director of the Port of Los Angeles (which accounts for 40% of all cargo imported into the USA), stated that May saw a 20% decline in ship arrivals in the port. This followed a very strong start to the year in container volumes as companies built inventories as concerns around potential tariffs grew. With high levels of inventory and a 90-day delay in reciprocal tariffs announced on May 9, US consumers will feel the effects of the tariffs via progressive price rises throughout the 2nd half of 2025. The magnitude of the negative impact on demand in the US is hard to determine, but we suspect US consumer confidence is likely to fall further (see Exhibit 2) as they start to feel the financial impact of the tariffs.
Exhibit 2: US Consumer Confidence
We also note that we are witnessing a breakdown in the usual correlation between US interest rates and the USD as shown in Exhibit 3. Despite bond yields increasing in the US, the USD has continued to fall this year, a sign that global investors are losing some confidence that the US government will act in good faith when it comes to protecting the integrity of US capital markets. In this regard the US potentially looks more like an emerging market than many of the actual countries designated as emerging markets!
Exhibit 3: US 10 Year Yield Versus US$ Index
Impact of Trade Policies on China
During May we have seen a further deterioration in China’s property market (see Exhibit 4) with housing starts falling by -20% YoY and are now back to where they were 20 years ago in 2005. We also saw continuing deflation in China with April CPI falling -0.1% YoY.
Exhibit 4: Chinese Housing Starts
Both observations are signs that China’s domestic economy has not emerged from the property driven slump that developed post-COVID. China’s GDP has however remained robust rising +5.4% in Q1 2025. China’s government has maintained a GDP target of 5% for 2025, despite the slowing domestic economy. The driver of this relatively strong economic performance has been the export sector.
As can be seen in Exhibit 5, we have seen China’s exports and trade surplus surge since mid-2024, as its producers of auto’s steel etc. look to utilise their excess domestic capacity in foreign markets. The reaction to this by foreign governments is to protect their domestic industries from this flood of cheap imports. It is not only Trump looking to protect domestic jobs. Our recent trip to Indonesia highlighted the pressure that cheap Chinese EVs is having on the domestic Indonesia auto manufacturing sector. The Indonesian government is looking to reinstate tariffs later this year on China’s EV imports to protect these auto jobs.
Exhibit 5: Chinese Monthly Trade Surplus (US$ b)
On top of tariffs, the potential downturn in the US consumer in the 2nd half of this year is also likely to be a major pressure point for China’s exporters, making it increasingly hard for these exporters to continue growing volumes. Hence our view that China’ overall growth is likely to further decelerate going forward.
Investment Implications
In this environment we continue to look for attractively priced companies with strong market positions, high returns and structural growth drivers. We particularly see opportunities in companies that are addressing local EM consumer markets. Low-margin companies driven by the global investment and export cycles, with weak balance sheets are likely to struggle going forward in our view.
We have also reduced our exposure to companies with a relatively large exposure to the US consumer. We perceive that the risks of a consumer slowdown in the US are underestimated.
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