Asia could be the region most affected by new U.S. tariffs, which are likely to lead to a sharp and synchronized economic slowdown as corporate spending and trade suffer from uncertainty around U.S. trade policy. Morgan Stanley Research has reduced its forecast for economic growth in Asia across the board, calling for growth in the region’s gross domestic product (GDP) at 4% in 2025, down from a previous estimate of 4.4% versus 4.6% growth in 2024.
“While we have some clarity on where tariffs are right now, we don’t have certainty about where tariffs are headed,” says Morgan Stanley Chief Asia Economist Chetan Ahya. "Corporations’ reluctance to invest could lead to weaker job creation and lower income growth, ultimately suppressing consumption.”
The recent volatility in financial markets has tightened financial conditions, and this could lead to a period of risk aversion, including in the banking system because of the threat of a rise in non-performing loans.
“As long as tariff noise persists, it will be a drag on business activity,” Ahya says, adding that one possible upside in the outlook could come from quick and successful talks with the U.S., especially with China.
Negotiations Will Be Complex and Lengthy
Many Asian countries have reached out to the White House to try to negotiate tariffs. Some are likely to face more difficulties than others.
“The bar to getting to a deal is likely to be the highest with China,” Ahya says. “But what has been made clear in the past weeks is that the current level of U.S. tariffs on China, with an effective rate of 123% before electronics exemptions, is evidently too prohibitive for any trade to be done between the two economies.”
Ahya says both the U.S. and China probably want a comprehensive deal, but the discussions are likely to be complex and lengthy.
Other countries, including Vietnam, Taiwan and Thailand may also face complicated paths to successful negotiations because of their large trade surplus with the U.S. Talks could be easier for such economies as Japan, Korea and India, which have a positive but smaller trade balance with the U.S.
Even in the case of successful negotiations, other factors would still weigh negatively on the economic outlook for Asian nations, including:
- Tariffs may not revert to pre-reciprocal levels after the conclusion of talks.
- The 90-day pause in tariff implementation could expire before some governments are able to secure a deal.
- The Trump administration is contemplating new sector-specific tariffs -- a plan that’s still unclear and prolongs uncertainty.
What to Expect
Some countries are better positioned than others to perform amid tariff uncertainty. Here’s an overview of current outlooks from Morgan Stanley Research economists.
China: With tariff shocks from both trade and a secondary hit on domestic demand, China’s growth forecast in 2025 is now 4.2%, from a prior forecast of 4.5%, and a 5% expansion in 2024. Those impacts could be partly offset by government stimulus, export rerouting and the shipment of electronics products to the U.S.
India: The nation is best positioned to withstand the current uncertainties, given its monetary and fiscal easing and its low ratio of goods exports to GDP. Still, the spillovers from a weaker global cycle led to a reduction in the estimate for India’s expansion in 2025 to 6.1%, from a previous forecast of 6.5%, and growth of 6.7% last year.
Australia: Like India, Australia is also less exposed to tariff developments, but it should see modestly slower growth than previously expected as a result of global developments. GDP should increase 2.1% this year, down from a prior estimate of 2.3%, but higher than the 1.1% expansion in 2024.
Elsewhere in Asia: The greater damage to growth is likely be felt in more trade-oriented economies in Asia, such as Korea, Taiwan, Malaysia, Thailand, Singapore and Hong Kong. Moreover, for sectoral tariffs – notably on electronics – Korea and Taiwan would be amongst the most exposed economies in the region.
