She is now betting markets’ favourite. But a win for Donald Trump would have the biggest impact on the rest of the world, especially for China and Japan.
A win for Trump would have more direct impacts for many economies and could start a chain of events that could lead to many indirect effects. In particular, we consider the impact of Trump’s proposed tariff policy. These policies are likely to drive US interest rates and the dollar higher – despite Trump’s protestations to the contrary. This would impact the global economy, particularly emerging markets.
We also consider the implications of Trump’s statements on security. His antipathy to the North Atlantic Treaty Organization (NATO) and suggestion of a settlement in Ukraine could signal a period of security withdrawal from Europe. In the face of persistent Russian aggression, Europe could revert defence spending to levels that prevailed before the post-Soviet Union “peace dividend” – which is something few European economies are well placed to fund. In Asia, Trump has also threatened less security provision, or a more transactional relationship. This could also see a reduction in US security presence here, with implications for many nations in Southeast Asia.
More broadly, we examine Trump’s likely environmental stand. Reneging on the Paris Agreement in his first term, we expect Trump to weaken climate change avoidance policies. While we have argued that Trump is unlikely to reverse Biden’s signature spending bills completely, he is likely to oversee deregulation of oil and gas production, boosting output for both. In the short term, this is likely to lower energy costs, softening inflation outlooks globally. However, over the medium to long term, this is likely to keep US greenhouse gas emissions high.
Possible impacts on China and Japan
The upcoming US election could significantly affect China’s economy, primarily through trade fragmentation. Both presidential candidates have discussed tariffs, though Donald Trump has threatened much larger increases than Kamala Harris – up to 60 per cent. Exports have been a crucial driver of China’s economic growth, especially considering its several domestic challenges. The possible increase in US tariffs on Chinese goods could exert considerable pressure on China, subsequently dampening overall economic growth. Moreover, further disruptions in US–China trade relations could erode investor confidence.
In recent years, China has become less attractive to foreign investors due to increased government intervention. Additional tariff hikes would heighten uncertainties, threatening to further reduce foreign investment in China. If a blanket tariff of 60 per cent on Chinese goods were imposed, based on 2023 export values, Chinese exporters would face over US$200 billion additional tariffs annually, equating to 1.2 per cent of China’s GDP. As in the previous trade dispute, such a tariff increase would likely lead to a natural appreciation of the US dollar (depreciation of the yuan), which could mitigate some pressures. Nevertheless, the impact could still be significant and poses two major challenges.
A persistent negative output gap in China’s economy has led to a low-inflation environment, increasing the risk of entering a debt-deflation loop. A decline in external demand due to higher tariffs would slow growth, exacerbate this output gap and reinforce disinflationary pressures, including an increase in unemployment, particularly in export-dependent sectors, further weakening the labour market and dampening consumer confidence further.
Higher US tariffs could also trigger capital flight from China. The yuan is already weak due to a strong US dollar and China’s economic slowdown. Further tariff hikes could push the currency to new lows with significant yuan depreciation possibly triggering capital flight, particularly if combined with slower economic growth, stock market declines and worsening risk perceptions. Both domestic and international investors may seek more stable/profitable opportunities elsewhere, particularly if they anticipate prolonged economic challenges.
Despite these challenges, the impact of tariff increases could be less pronounced than in 2018. China has increasingly diversified its exports away from the US and strategically enhanced a deeper integration into key global supply chains – such as semiconductors, batteries and solar panels – which may offer some protection against future trade disruptions. However, these new supply connections could be more vulnerable to sanctions, with third parties encouraged to observe – which US Democrats have made more use of – than pure tariffs, which Trump favours. The US election therefore poses a risk to the fragile outlook for China’s economy whatever the outcome. However, the suggested scale of tariff increases proposed by Trump pose the biggest risks. Proactive and adaptive policy responses will likely be crucial in navigating these uncertainties as well as delicacy in handling other geopolitical developments.
As elsewhere, if the US election outcome is a Harris win, we see a broadly neutral impact for Japanese growth and the Bank of Japan (BoJ). But we would expect greater cooperation on trade and defence. We expect a Trump presidency, by contrast, to weigh on Japan’s growth as any new tariffs would hit exports. Japan has two bilateral trade agreements with the US and recently agreed to remove the previous Trump-era steel tariffs on around 1.25 million metric tonnes per year. But only around 5 per cent of Japanese goods are covered by this agreement, with notable sectors untouched, particularly autos, which would be vulnerable to broader tariffs.
Japan would also probably benefit less than other Asian countries from the substitution of production of certain electronics away from China due to differences in the manufacturing basis. Japanese exports are also heavily exposed to potential China and US economic slowdowns, which account just under 40 per cent of total exports. We thus expect to see export growth slow materially in 2025. A Trump presidency may also increase Japanese defence spending. During his last presidency, Trump required Japan to quadruple payments for the some 54,000 US soldiers stationed there, a cost to Japanese taxpayers, with no benefit to growth. Given recent rhetoric, further sacrifices will be likely needed if it wants to maintain this presence.
And while Trump's demand for increased independent security across the rest of the region may boost defence spending elsewhere, Japan is already prioritising this area, so a similar boost to growth looks unlikely. Further, if a Trump victory leads to a more hawkish Federal Reserve (Fed), this would support the BoJ monetary policy increase towards neutral in the near term. Yet weaker domestic growth and a more dovish Fed amid a US slowdown for 2026 would likely put pressure on such a move and may even require some loosening.
David Page, head of macro research, AXA IM
