India and Japan Least Exposed to Trade Tariff Shocks Due to Strong Domestic Demand: Morgan Stanley

In terms of the goods exports to GDP ratio following US trade tariffs, India and Japan are the least exposed economies due to the strength of domestic demand, according to a Morgan Stanley report on Friday. The goods exports to GDP ratio is the most significant measure; it defines the degree of trade orientation of the economies. This enables international research companies to gauge which economy will experience more negative pressures on growth.

"India and Japan these economies have strong tailwinds from the strength of domestic demand as an offset and comparatively lower goods exports to GDP ratios", the report said. The US has also imposed 25 percent tariffs on car imports. The report added that imposing 25 per cent tariffs on cars and auto parts would hit Japan and Korea most because exports of cars to US represent 7 per cent of their exports.

On April 2, the US administration is expected to put forward a plan to deal with reciprocity in trade relations. The US administration also continues to send the message that it will impose sectoral tariffs on energy, pharmaceuticals, semiconductors, agriculture, copper, and lumber. "The potential implementation will nearly impact all economies in Asia directly either through economy-specific tariffs or sectoral tariffs". But our key concern remains that elevated levels of policy uncertainty weigh on capex and trade – damaging the business cycle”, the Morgan Stanley report noted. At -US$245 billion, the US runs a reasonably large combined deficit in passenger vehicles, vehicles for goods transport, and auto parts (including EV batteries) – referred to as autos deficit below.

Of this deficit, Asia accounts for -US$115 billion or 47 percent. In Asia, Japan, Korea, and China are the three economies that constitute the majority of this deficit. The three economies also place second, third, and fourth in the top 10 economies with which the US has the largest autos deficits. "Much of Japan and Korea's deficit consists of vehicles and non-battery auto components. For China, most of the deficit is EV battery," the report added. Japan Chief Economist Takeshi Yamaguchi said that if the 25 per cent auto tariff continues for a lengthy period and auto exports to the US decline 15-30 per cent, it would negatively affect Japan's GDP growth by 0.2-0.3 percentage points.