The latest round of sweeping tariffs from the U.S. is broader and more severe than we expected.  The impact spans economies, financial markets, supply chains, and geopolitics and will force governments, businesses, and households to retune their approach to trade relations, capital expenditure, and consumption.

We already consider trade tensions the primary risk for Asia-Pacific credit conditions.  We had incorporated additional tariffs into our assumptions before they came into effect. However, the U.S. tariffs on goods imports announced last week are more severe in scope and size than those included in our baseline scenario published last week. The U.S. has set a baseline tariff of 10% on goods from all countries, along with significant additional levies on more than 60 countries, raising the possibility of a global trade war.

Chart 1

We see an outsized effect on growth for smaller and relatively trade-dependent economies.  These U.S. tariffs, and possible responses by other economies, will likely lead to slower GDP growth globally--hitting trade-centric Asia-Pacific. There is also a potential for risk-off sentiment to take root, amplifying the economic effects through raising financing costs. The magnitude of economic and financial effects will ultimately depend on the duration of these tariffs, the countermeasures taken, and any economic stimulus that affected countries can implement.

We will revisit our recent macroeconomic forecasts.  S&P Global Ratings expects to share the implications in greater depth in one week's time as details emerge and as trading partners respond.

The U.S. Federal Reserve's monetary policy dilemma is set to become more complicated.  These tariffs will add to upward pressure on U.S. inflation in the next 12 months. The impact of the tariff regime on U.S. GDP depends on retaliation by its trading partners and how the U.S. uses the tariff revenues. Still, the impact will be negative.

In our view, the U.S. economy appears to be slowing and faces a higher probability of a recession in the next 12 months.  For now, we assume the Fed will conduct one rate cut of 25 basis points late in the year, as employment growth weakens enough for the central bank to look past tariff-led cost-push inflation. In a downside scenario where consumer spending and labor demand fall sharply, we would expect the Fed to cut rates aggressively. Similarly, we will update our latest view on U.S. monetary policy in one week's time.

The tariffs will meaningfully lift import levies for Asian countries, increasing by more than 40% in some cases.  Specifically, the weighted average tariffs imposed by the U.S. on Chinese goods will be about 68%. This may lead to a material escalation in trade tensions, compounding the risk of a broader trade war and exacerbating the squeeze on external demand growth. Indeed, on April 4, 2025, China announced a 34% increase on import tariffs on U.S. products and tighter controls on exports of medium and heavy rare earths to the U.S.

For Asia-Pacific growth, the hit is huge but uneven.  More open economies, where trade accounts for a larger proportion of economic activity, are likely to see larger adjustments to their growth rates, particularly if they export heavily to the U.S. and are subject to high tariffs (see chart 2). In Vietnam's case, exports to the U.S. are equal to 30% of its GDP, and the tariff levied by the Trump administration will rise to 46%. We expect Taiwan and Thailand to be among the worst hit as well. Comparatively, large and/or domestically oriented economies such as China, India, Japan, and Indonesia are likely to see smaller adjustments to their growth rates.

Chart 2

The Chinese economy is likely to slow further because of the cumulative tariffs the Trump administration has implemented since its return.  While fiscal and monetary support would mitigate the sting, downward pressures on growth could deepen. A slower China will likely spill over into Asia-Pacific, hurting countries that rely on Chinese demand and/or face greater competition from Chinese exports (seeking new markets outside the U.S.).

Investment in key emerging markets in Asia will be subdued.  Indeed, it could reverse until there is greater clarity on the effects of increased trade barriers on supply chains, economic growth, inflation, and interest rates. Policy, economic, and financial uncertainty is already weighing on investment in the region, and this effect will intensify.

Should U.S. inflation stay high, the Fed may need to maintain tight monetary policy; Asian central banks would be constrained in easing monetary policy.  Lowering interest rates in this environment could trigger abrupt capital outflows and weaken exchange rates. Asia-Pacific policymakers, except for China, have so far taken a muted response to the latest round of tariffs. There are likely attempts to unwind and/or reduce the tariffs through dialogue and negotiation. However, we envision these reciprocal tariff rates may be largely structural and unlikely to be easily negotiated down.

Low growth rates, high exchange rate volatility, and elevated economic uncertainty could erode economic support for ratings on Asia-Pacific governments.  Correspondingly, economies with higher external and fiscal buffers will have greater resilience to withstand the impact of tariffs.

If governments counter negative growth with increased spending, we may see worse fiscal and debt outcomes; however, not all Asia-Pacific governments will respond this way.  Some economies are relatively closed and face no material effect from a global slowdown (as seen with Indonesia and India during the global financial crisis). Moreover, other factors will prevent some governments from pushing their budget deficits further (e.g. in Indonesia, given investors' focus on fiscal discipline). On the other hand, China could implement larger fiscal stimulus in order to achieve its recently stated GDP growth target of "about 5%".

A recent decline in benchmark yields for key governments bonds could signal increasing expectations of policy rate cuts and possibly, flight to quality by investors.  Interest rate direction could affect fiscal outcomes, particularly for economies with higher local cost of funding or higher debt stocks.

The significance of country-linked ratings means sovereign-related rating actions could affect Asia-Pacific's outlook bias distribution.  As of March 20, 2025, our net rating outlook bias stands at negative 2%.

If trade tensions escalate, the hit to Asia's manufacturers and exporters will be far reaching.  Export-dependent sectors, such as capital goods, computer hardware, mobile phones, textile, automobiles and consumer products will feel the sharpest pain. The countries most reliant on such exports are Vietnam, China, Taiwan, and Thailand. About 84% of the rated corporates in Asia-Pacific are investment grade. However, this development will test the resilience of many firms. For the unrated corporates, we see small to midsized enterprises facing an outsized hit.

Businesses may delay or minimize capital expenditures and labor needs as they grapple with softening external demand and need to recalibrate supply chains.  In addition, a redirection of products into regional markets would further squeeze domestic markets or sectors with excess capacity--particularly in Indonesia, Vietnam, and India (sectors including chemicals, manufacturing, and steel). This could risk further escalation of protectionist measures within Asia-Pacific.

Second-order effects could weigh heavily on confidence, prompting households to adopt a more conservative spending approach.  For domestically focused corporates, this could lead to revenue and profit contraction. Such pain could also affect less trade-centric economies such as Australia or Indonesia.

For the banks, higher-than-expected credit losses would put pressure on profitability, particularly if the indirect effects of the higher trade tariffs worsen and weaken sentiment.  This coincides with potentially lower net interest margins, should central banks ease policy rates. Lenders may turn cautious and demand higher risk premia to offset uncertainty, leading to high-for-longer all-in financing costs. Because banks are the dominant financing provider for Asia-Pacific borrowers, a tightening of standards or higher market volatility would constrict capital raising and cash flow.

Falls in equity markets could lead to risk-off sentiment taking root and deepening.  Risk aversion could intensify as investors seek a flight to quality, exacerbating the credit strains among weaker credit cohorts (including the highly leveraged borrowers) (see chart 3). Similarly, steep falls in equity markets are likely to further undermine business and financial confidence, amplifying concerns around investment, employment, and growth. With large volumes of global debt maturing in 2025-2026, souring refinancing conditions raise the specter of more defaults.

Chart 3

There are more downsides to come from this tariff shock.  The region, which has significant manufacturing capacity, may face more disinflationary pressure. China's cheaper exports had already begun to squeeze some Asia-Pacific manufacturers. With the imposition of these broader tariffs, the region's exporters will need to seek other markets for their goods, intensifying price competition and leading to margin squeeze. In response, regional economies may adopt more protectionist measures to shield domestic industries.

Meanwhile, the shifting trade landscape could benefit some--such as economies facing relatively lower tariff rates and downstream manufacturers accessing cheaper inputs and components. However, the dynamics could quickly change. The looming risk of a global trade war could exacerbate recessionary pressures, leading businesses and households to adopt more caution, further stifling demand.

Chart 4

Editor: Lex Hall

Related Research

• CreditWeek: How Much Will Credit Conditions Deteriorate As Global Trade Tensions Heat Up?, April 3, 2025
• Global Credit Conditions Q2 2025: Puzzling Reshuffling, April 1, 2025
• Credit Conditions Asia-Pacific Q2 2025: Squeezed From Both Sides, March 26, 2025