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Trade war in Asia

On ‘liberation day’, the US announced its most sweeping tariff increases in over a century. While this affected much of the world, Asia bore the brunt. From strategic rivals like China to long-standing allies like South Korea and Japan, countries across this region were hit with some of the steepest tariffs. This marks a clear shift from decades of trade liberalization and raises questions about what comes next for the global economy.

To understand how we got here, it’s worth recalling that the US has been a chief architect of globalization, leveraging its economic and military might to promote democratic ideals and free market principles. After World War II, it helped rebuild and develop countries, believing that stable, open economies would lead to a more peaceful and prosperous world. As part of this effort, the US supported the rise of Asia, including China and Vietnam, to become low-cost manufacturing hubs. This strategy delivered affordable goods to the world and lifted millions out of poverty. But it also led to persistent trade surpluses in Asia, driven not just by exports but also high savings rates. Now, under a renewed wave of economic nationalism, especially under the Trump administration, the US is forcefully challenging the very system it helped build.

This is not to say the approach is inherently right or wrong as every country has the right to reassess its economic strategy. However, shaking the long-established foundation of global trade order in such an abrupt manner is bound to trigger a sharp backlash. For the larger nations, besides negative economic implications, their self-perceived global image may also be at stake. China, as a case in point, has responded forcefully with tit-for-tat escalations and shows little willingness to back down from a fight. The greatest concern is that this could spiral beyond trade into broader conflict, with unintended and potentially catastrophic consequences.

That said, it’s hard to determine the staying power of these tariffs, especially given the unpredictability of the Trump administration. There are already some signs of de-escalation with conditional tariff pauses, even towards the unrelenting China. That is good news, for now. Nevertheless, the damage has already been done. Based on official data releases so far for April, South Korean exports with the US fell 7% YoY, while China’s manufacturing PMI (-1.5pt) and Japan’s manufacturing future output index (-3.3pt) fell significantly. On unofficial data, various sources have also indicated a plunge in China-US shipping volume in April. Beyond the trade weakness, we believe there may also potentially be negative spillover into investment and consumption activities in the near future.

Assessing the full impact of this ‘trade war’ is challenging partly due to the erratic policymaking. Moreover, the economic repercussions extend beyond direct exposure to US exports. A more significant concern, driven by the complex web of global supply chains, is the indirect impact stemming from a slowdown in global growth. As countries export less to the US, they will most certainly also import less from their trading partners, exacerbating the tariff impact on overall trade. Take Australia, for instance, its exports to the US accounted for only ~7% of its total exports or 1.7% of its GDP. The impact may seem minimal at first glance. However, given the sweeping coverage of the US tariffs, Australia is also vulnerable to any deceleration in China, its largest trading partner (contributing ~33%), and other countries.

Given the chain reaction and far-reaching scale, evaluating trade in totality would likely provide a more appropriate risk gauge (see Figure 1). In the event of a global trade downturn, the more open and trade-reliant economies are expected to see a larger hit to GDP. This includes Singapore, Hong Kong, Vietnam and South Korea. Meanwhile, domestic-oriented countries will likely see smaller impact. In the scenario of a more isolated trade dispute, i.e. the US lifting its tariff on the world and targeting solely on China, countries that have higher trade exposure to China may be more vulnerable. Of course, this is hardly the full picture. There will also be various other factors that will come into play for the eventual economic outcome, including, but not limited to, supply chain reconfiguration as well as fiscal and monetary responses.

Figure 1: Goods exports as % of GDP (2024)

Slowest growth outlook in decades

IMF recently downgraded the GDP growth projection in Asia by 0.5ppt in 2025 and 0.3ppt in 2026 (see Figure 2). In this new set of forecasts, most countries are expected to slow but avoid a recession. China is projected to slow from 5.0% in 2024 to 4.0% in 2025 and 2026. While this is not too dissimilar from consensus, China’s outlook is likely to be a contentious one given a big range of variables such as tariff re-/de-escalation, fiscal stimulus and other market forces. This is reflected in the unusually wide range of Bloomberg consensus forecasts of 3.1-5.0% for 2025 by 67 forecasters. ÃÛ¶¹ÊÓƵ Investment Bank estimated a GDP drag of over 2 percentage points (ppt) in the scenario of 145% US tariff but this was reduced to 1-1.5ppt based on the recent de-escalation to 30% tariff.

Outside China, IMF’s GDP downgrades broadly correlate with the respective nation’s exposure to external trade. Singapore, Hong Kong, Vietnam and South Korea are expected to see a larger hit to GDP to the tune of 1ppt or more. Australia and Japan would be more resilient at slightly more than half a percentage point damage. On the other end of the spectrum, India is forecasted to be among the least affected and grow the fastest among Asian peers at above 6% per annum.

Given the heightened uncertainty surrounding the US trade policies, we believe macro forecasts are likely to face more frequent revisions than usual in the near term. Therefore, a basic understanding of each country’s sensitivity to global trade is perhaps more crucial in this environment.

Figure 2: IMF GDP growth forecasts (April 2025)

More interest rate cuts could ensue

While the US tariffs are expected to be inflationary in the US itself (supply shocks), it will potentially be a disinflationary force for the rest of the world due to softer demand, in the absence of meaningful retaliatory measures. In APAC, the risk of goods dumping could also exacerbate price pressure. Before the US tariff, disinflation was already well in advance and within the desired range across most countries. Any further downward pressure on prices is likely to accelerate interest rate cuts, a silver lining for income-focused investors, particularly those in real estate and bonds. The key question, however, is: to what extent?

Several central banks, including India, Thailand and the Philippines have jumped on the opportunity with a 25bps cut recently. However, Oxford Economics thinks the window for Asian central banks to cut their policy rates is small. Much will also depend on the health of the USD, which has been weak since the ‘liberation day’. The market is currently pricing in 75bps rate cuts in the US this year. In the event of fewer cuts, a strong USD may pose a restraint to central bankers in this region.

So far, APAC forecasters have added only ~1 additional rate cut compared to pre-‘liberation day’ baseline. The trajectory of ‘high-for-longer’ is not expected to change materially, at least for now. It’s likely also a result of limited data guidance. This could evolve over the course of the year depending on the development of the trade and macro outlook.

South Korea stands out as one of the more dovish ones, having already delivered 75bps in cuts since peak. Oxford Economics expects another 75bps of easing to 2.0% by end-2025. Australia began its easing cycle late in February with the market now expecting 3-4 more cuts for the rest of the year. Meanwhile, in Japan, consensus has largely pushed back their rate hike expectations but is divided on when the next hike will be. ÃÛ¶¹ÊÓƵ Investment Bank is among the most dovish and forecast policy rates to stay flat at 0.5% until mid-2026 (mid-2027 before the US-China de-escalation announced on 12 May), while Bloomberg consensus is still expecting at least one hike in 2H25. In the past two years, we’ve been optimistic for Japan’s outlook of a renewed inflation era. We now believe the US tariffs could play spoilsport and potentially delay our thesis in the near term. To be clear, we think Japan’s economic normalization will continue, but take longer. We don’t think the shock is huge enough to bring back deflation.

So far in 2025

The real estate transaction market in APAC started 2025 on a positive note. Volumes grew 20% YoY to USD 36.3bn in 1Q25, according to JLL’s Capital Tracker (see Figure 3). Australia and South Korea continued to recover and grew 30% and 58% YoY, as investment yield spreads have improved meaningfully. Despite higher interest rates, Japan rose 20% led by foreign investors, indicating optimism on the inflation story. In China, activity remained muted
(-33%) despite the recent recovery in listed market sentiment.

Cap rates were mostly flat to lower in 1Q25, except for Melbourne office, China and Hong Kong. The rise in the US 10-year Treasury yield, after the tariff announcements, caused some concerns initially. However, the movements in APAC bond markets have so far been benign with 10-year yields largely flat to lower. Most notably, Japan’s government bond yield fell sharply by 30bps from the peak to 1.26% as of 5 May.

The occupier market was mixed in the first quarter. China and Hong Kong remained soft across almost all sectors. Outside these countries, leasing activity generally improved for the retail and office sectors with positive rental growth. Logistics picked up slightly after several quarters of softness. However, rental decline extended to more markets as new supply caught up. Leasing sentiment for this sector is also more vulnerable to global trade uncertainty.

Figure 3: APAC transaction volume (USD billion)

The road ahead

In our December 2024 publication, we noted a brighter path ahead for APAC real estate given a resilient macro backdrop, a favorable interest rate outlook and a bottoming out of capital values. This largely played out in 1Q25. Looking ahead, however, with the global trade order at risk, we think the increased uncertainty and market volatility are likely to temper investor confidence in the short term. Nevertheless, given massive repricing in the last two years (ex-Japan) and a potentially lower interest rate trajectory, we think any downside from here should be limited, barring an escalation in trade tensions or a severe economic recession. In our base case, we now expect a slower recovery in both transaction activity and investment returns.

Nevertheless, we think the recovery is less likely to be broad-based as the impact of a global trade slowdown varies across different sectors. Logistics is the most directly vulnerable to a trade slowdown, especially those assets located at port locations. This is followed by offices as an economic slowdown affects employment, space demand and corporate budgets. Retail is likely third in line as consumers curb spending with high-street and downtown assets underperforming neighborhood / suburban malls. Meanwhile, the residential sector would be the most defensive as historically demonstrated through the cycles. Geographically, Japan and Australia are likely better positioned economically, amidst the US tariffs, vis-a-vis other investible markets in Asia.

From an investment perspective, Japan offers stability, high yield spread and appealing cash-on-cash return. The potential delay in the BoJ’s rate hikes may also provide a relief to earlier cap rate concerns. Meanwhile, Australia also has its own allures – significantly repriced valuations, strong population growth and supply constraints.

Japan – a good shelter

For a country that has seen interest rates and bond yields surging to the highest in almost two decades, Japan’s real estate sure has held up exceptionally well. Despite the earlier expectations of further rate hikes, investors were still unfazed and continued deploying more capital each year. Capital values are still rising and cap rates remain steady as a rock. Its wide yield spread and cheap currency are compelling reasons. Fundamentally, its rental outlook has also been stronger than it has been in a long while.

Almost all sectors, excluding logistics, are delivering strong rental growth. Tokyo’s office demand is almost unrivalled in today’s world with 2023-24 demand trending at double the pace of its prior decade. Prime rents have rebounded 8% from its trough in 2023 and PMA forecasts further uplift of 7% p.a. over the next three years, bringing it close to the peak just before the Global Financial Crisis period.

Meanwhile, the rents for high-street retail and average daily rates for hotels are also soaring to new heights thanks to the tourism boom. Even in the residential sector, where low but steady growth profile was a norm for decades, rental growth in Tokyo shot up to 6.1% YoY in 4Q24.

This is a drastic shift for the country. Before the recent bout of inflation, many people in Japan had probably forgotten how an inflationary environment felt like three decades ago. One in four people that grew up in Japan, or those below 30 years old, had probably not even experienced noticeable price increases in their lifetime. The long-ingrained deflationary mindset and habit, of the people and businesses, will have to change to thrive in this new environment, for the better or worse. For investors, this means renewed dynamism for the economy and optimism on growth. Who knew the pandemic would herald such generational change?

For now, the potential global trade slowdown is not expected to terminate this normalization. Instead, it may slow the process – by how much is anybody’s guess and depends on how the external environment shapes up in the immediate future. We think the residential sector (multifamily) is the best positioned in this environment and has historically demonstrated low volatility in rents (see Figure 4) and occupancies through the economic cycles. There is also optionality on growth led by rising wages. Office has recently garnered more interests due to its early stage of upcycle but this sector has historically been more sensitive to economic cycles. Its lower cap rates may also make it more sensitive to interest-rate movements when the BoJ eventually resumes its policy normalization. While logistics holds promise for the long-term, its near-term fundamentals are dicey given the trade concerns and pockets of oversupply in Greater Tokyo.

Figure 4: Tokyo rental growth by sector (%, YoY)

Australia – emerging opportunities

Office ‘down under’ has probably been one of the most unloved sectors in the last few years given its sticky work-from-home trend. Its vacancy rates are also among the highest in this region excluding China. The potential economic slowdown ahead is not good news for this historically cyclical sector, but it could also trigger urgency for workers to return to office as job security comes into doubt. It remains to be seen which of these will be a bigger driving force for the leasing direction. Usually, it’s quite unlikely for bosses to sign off on space expansion when the outlook is uncertain, especially for larger companies.

Nevertheless, we think an investment case is emerging for this battered sector after a massive repricing in the last few years. That said, caution and selectiveness are still warranted – there is nowhere else in Asia that features a clearer bifurcation trend than Australia. So, focus on prime quality and central core locations with stronger supply-demand dynamics. Stay away from average quality, secondary locations and weak cities to avoid leasing headaches, as a broad-based recovery is not imminent. 

Sydney is still the key gateway city where businesses want to be located. This year, net absorption for prime space in core locations more than doubled both YoY and compared to 10-year average. Net effective rent has grown for 11 consecutive quarters and is almost back to its previous peak in 2019. In Brisbane, the outlook is even rosier with higher cap rates at ~7%. Internal migration elevated the appeal of this state and its future Olympics hosting in 2032 could also keep the city busy for the next few years. The vacancy rates for prime assets here is the lowest in the country at 8% and net effective rent is running at 19% above 2019 levels. For the next five years, PMA forecasts net effective rents to grow at 5-6% p.a. for both cities.

We remain positive on the residential sector in Australia given its persistent undersupply situation which is unlikely to see any quick fix. Rental growth is slowing but still expected to stay elevated at around mid-single digits in the next few years. However, the build-to-rent sector is still nascent with limited completed stocks and pricing discovery, making it less accessible for core strategies. For now, more investors are opting to acquire living exposure through an alternative route in student accommodation, which has seen several successes of late.

Strategic viewpoint

The sectors highlighted in this article are opportunities that we think are relatively well positioned but by no means exhaustive. Ultimately, we think a diversification strategy is still crucial and likely to show its true benefits in this increasingly uncertain macro environment. Being selective on sectors is important as an overarching filter but it does not mean ruling out deals that have attractive attributes at the asset-specific level – such as value-add and opportunistic angles in pricing, under-renting, plot ratio optimization and area rejuvenation.