The International Monetary Fund (IMF) has sounded a cautionary note about the growing risk of escalating tariffs in undermining Asia’s economic prospects. Speaking at a forum on systemic risk in Cebu, IMF Asia-Pacific Director Krishna Srinivasan highlighted the potential impact of retaliatory trade measures, warning of disruptions to global supply chains and rising costs that could impede the region’s growth trajectory. Despite these risks, Asia remains positioned as a key driver of global economic growth.
Srinivasan’s remarks come amid growing concerns over trade protectionism and its consequences for the global economy. Newly announced policies, including US President-elect Donald Trump’s proposed 60% tariff on Chinese imports and a 10% levy on all other imports, have intensified fears of a trade war. The European Union’s (EU) recent move to raise tariffs on Chinese electric vehicles (EVs) to as much as 45.3% has further escalated tensions, prompting swift retaliation from Beijing.
“The tit-for-tat retaliatory tariffs threaten to disrupt growth prospects across the region, leading to longer and less efficient supply chains,” Srinivasan stated, emphasizing that the fallout could ripple through economies dependent on trade. He added that these measures would not only hurt Asia’s exporters but could also raise inflationary pressures globally, especially in the United States.
The IMF’s latest World Economic Outlook underscores a challenging environment for global growth, forecasting a modest 3.2% growth rate for 2024 and 2025. While Asia is expected to outpace global growth with projected rates of 4.6% in 2024 and 4.4% in 2025, the region’s reliance on open trade and integrated supply chains makes it particularly vulnerable to disruptions.
“Asia is witnessing a period of important transition,” Srinivasan remarked. He described the current economic landscape as fraught with uncertainty, driven by shifting trade dynamics and evolving monetary policy in advanced economies.
Despite these challenges, Asia continues to be a crucial contributor to global economic momentum. Countries such as China, India, and the ASEAN bloc have emerged as resilient growth hubs, leveraging strong domestic consumption, technological innovation, and infrastructure development. However, escalating trade barriers threaten to derail this progress, creating obstacles for countries deeply embedded in global trade networks.
The IMF director highlighted the dual nature of the current transition in Asia: While the region grapples with risks from global economic headwinds, it also stands at the forefront of structural transformation, with opportunities in digitalization and green technologies.
One of the IMF’s primary concerns revolves around the disruption of supply chains. Asia is home to many of the world’s most interconnected supply networks, especially in technology, manufacturing, and automotive industries. The imposition of tariffs, Srinivasan warned, could lead to the fragmentation of these networks, reducing their efficiency and competitiveness.
For example, the US tariffs on Chinese goods could force manufacturers to relocate production, causing delays and increasing costs. In turn, this could have a cascading effect on smaller economies in Southeast Asia, which are integrated into these supply chains as suppliers of components and raw materials.
“The longer and less efficient supply chains resulting from these measures will undermine productivity and innovation, both of which are critical for sustaining growth in a competitive global environment,” Srinivasan said.
The IMF also flagged uncertainty around monetary policy in advanced economies as a critical risk factor. Srinivasan noted that rising inflation in the US, fueled in part by higher import prices due to tariffs, could prompt the Federal Reserve to tighten monetary policy. Such a move would increase borrowing costs globally and pose challenges for emerging markets, including those in Asia.
Tighter monetary policy in advanced economies could lead to capital outflows from Asia, pressuring local currencies and financial markets. This dynamic could further complicate the region’s economic management, especially for countries with high levels of external debt.
The trade rift between the EU and China has added another layer of complexity to Asia’s economic outlook. The EU’s decision to increase tariffs on Chinese-built EVs comes amid concerns about overcapacity and unfair competition. Beijing has responded by imposing its own trade restrictions, escalating tensions between two major trading blocs.
For Asia, the EU-China spat represents a double-edged sword. On the one hand, Southeast Asian countries could benefit if production shifts from China to alternative locations within the region. On the other hand, broader trade frictions could dampen demand for Asian exports and create an unpredictable business environment.
The IMF has urged policymakers in Asia to adopt proactive measures:
- Enhancing Resilience: Strengthening domestic demand and diversifying trade partners could help mitigate the impact of external shocks.
- Monetary Coordination: Central banks in the region should closely monitor developments in advanced economies and ensure that monetary policies are flexible enough to respond to sudden changes in capital flows or exchange rates.
- Regional Cooperation: Greater collaboration among Asian economies, including through trade agreements and infrastructure initiatives, could help build collective resilience against global disruptions.
- Investing in Innovation: Promoting investment in digital technologies and sustainable energy could unlock new growth avenues while reducing reliance on traditional trade routes.
