[SINGAPORE] Asian exporters are absorbing about one-fifth of US tariffs and passing on the remaining costs, indicated Nomura’s Asia Economic Monthly report released on Friday (Sep 5).
Advanced manufacturers such as Singapore have absorbed more than 20 per cent of tariff costs; other Asean nations absorbed none. China, Japan and South Korea have absorbed less than 10 per cent of costs.
“This divergence reflects a greater capacity to absorb costs by advanced manufacturers in high-value exports versus lack of margin flexibility in labour-intensive exports for Asean,” said Nomura analysts Sonal Varma and Toh Si Ying.
Looking ahead, Nomura said Asia faces a “double whammy” – it will need to keep lower export prices in order to remain competitive in the United States while local currencies appreciate. Asian exporters also face the difficult choice of passing on higher costs, risking a loss of US market share, or absorbing the costs while reducing profitability.
US President Donald Trump’s global tariff rates went into effect after midnight on Aug 7, with Singapore hit by the minimum figure of 10 per cent. Malaysia, Thailand and Cambodia were hit by 19 per cent levies, while Taiwan had a 20 per cent rate on its US exports.
Asia’s export prices have fallen for automotive, electronics, cutlery, chemicals and aluminium articles, but have increased for textiles, pharmaceuticals, electrical equipment and motor vehicle parts, Nomura found.
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US tariff effects may be understated, could affect ‘real economy’
Nomura said it examined monthly data for the US import price index and Asian export price indices from January to July for its analysis. Its analysts also assumed an exchange rate pass-through of 25 per cent. That is, if the US import price rose by 2 per cent for a particular country while the US dollar depreciated by 6 per cent against the local currency, then it was assumed that the country’s export price increase was about 0.5 per cent.
However, it cautioned that the effect of US-specific tariffs may be understated due to the limitation of Asian export price indices being available only at the aggregate level.
Its analysis found that exporters are bearing nearly 25 per cent of the tariff burden at a global level, with three “distinct tiers of absorption” in Asian countries.
Singapore, which has advanced manufacturing and high-value exports, had a greater capacity to absorb costs, with more than 20 per cent borne by exporters there. China, Japan and South Korea absorbed less than 10 per cent of costs due to “stronger market positioning”, with China’s rate of 7.6 per cent noted for suggesting a “limited margin flexibility for firms” after years of deflation.
On the other hand, the other Asean countries’ zero tariff absorption rate indicates complete pass-through of tariff costs due to lack of margin flexibility in labour-intensive exports, said Nomura.
Export prices for vehicles in Japan (whose vehicle levy was reduced to 15 per cent on Thursday) and South Korea fell, as did semiconductor and electronics prices in Singapore and fabricated metals in China.
At the same time, prices for pharmaceuticals rose in Singapore, as did textile prices in other Asean nations, electrical equipment in Thailand, China, Japan and South Korea, and motor vehicle parts in Japan and South Korea.
The tariffs have also caused competition within sectors to intensify across countries. In the textile industry, export prices in China fell but rose in Asean countries, boosting China’s competitiveness, while South Korean chemical exporters slashed their prices “far more aggressively” than rivals. In electronics, Japan and China lowered prices, while South Korea raised them.
The dual-impact of appreciating currency and export price cuts to remain competitive in the US is least pronounced in China, with a margin hit of 4.3 per cent (mainly driven by price cuts instead of currency effects). Meanwhile, Asean exporters “appear largely neutral” as export price increases seem to have offset local currencies’ appreciation.
Nomura noted that the August tariff hike for most Asian markets implies a likelihood of further margin compression.
“So far, some Asian exporters have relied on temporary measures – cutting costs, boosting efficiency, running down inventories – to delay passing on costs fully to their US customers,” said the report. “But as tariffs sustain at higher levels, this raises the risk of both greater pass-through to US prices and deeper margin compression in Asia.”
Nomura also highlighted a similar trend in second-quarter earnings across the region, where it said businesses warned of further margin hits as cost-saving measures reached their limits.
It also warned that if Asia’s profit margin squeeze worsens, it could spill over into the “real economy”. Exporters facing sustained margin pressure may cut back on capital expenditure, slow hiring or limit wage growth in export-dependent economies, raising the risk of a negative feedback loop between trade shocks and domestic demand.
To remedy this, Asian policymakers would have to respond through targeted subsidies, tax relief or even currency intervention, which come with their own risks.
