This article first appeared in Forum, The Edge Malaysia Weekly on March 24, 2025 - March 30, 2025

The startling changes brought in by the Trump administration have unnerved one and all. Financial markets, businesses, consumers and policymakers simply do not know what these moves mean for growth and inflation, nor do they have a good fix on how bad the downsides in geopolitics might be. In fact, uncertainty alone is proving corrosive for the world economy as firms defer capital spending and hiring until they can make sense of what is happening around them.

Unpredictability is all around us but some things are actually crystal clear. The US is no longer a stabilising anchor for the world. Rather, it will be a disruptor. Europe has realised this and is undertaking transformational changes. China is also making some course corrections. In the near term, emerging economies in Asia will have to endure higher risk aversion, making their currencies and asset values susceptible to big swings. They will also have to deal with a number of big structural shifts. It will be a rougher world in which emerging economies will have less room for error.

Enough is now known about what President Donald Trump’s team is doing to get a sense of their overall objective: It is to pull off a wholesale remaking of the American political and economic system. This involves reversing the decades-long trend of the government as a protector for the people against such ills as economic insecurity and mistreatment of minorities. They want to shift the balance of power away from the federal government to state governments and more in favour of big businesses. And some of the methods being used to achieve this are radical — undermining or even eviscerating liberal-leaning institutions such as consumer protection agencies, universities, mass media organisations, law firms that serve liberal causes and even cultural agencies such as the John F Kennedy Centre for the Performing Arts.

It is also likely that there will be shifts in fiscal policies. The House of Representatives has passed a budget bill that will allow for US$4.5 trillion (RM19.9 trillion) of tax cuts that will only be partially offset by US$2 trillion of spending cuts, many of which do not seem practicable. Trump’s allies probably believe that the best way to reduce the role of the US federal government is to “starve the beast”, that is, to so greatly reduce the revenue take that reluctant lawmakers will have no choice but to decisively cut spending.

Trump has been able to pull off such a root and branch overhaul of the American system with little opposition given his party’s control of both houses of Congress and the disarray among his Democrat opponents. However, this will not last. It may take a few months more but the sweeping changes are bound to instigate a strong backlash in the US, given the large number of people who will be the losers from Trump’s extreme moves. Opposition will grow and there will almost certainly be great social, political and legal dissension within the country.

The new administration is also keen to reset the US’ relations with the rest of the world. The immediate change has been the highly aggressive use of tariff hikes. Many observers had assumed that Trump would simply use the threat of such tariffs as a lever to secure trade deals for the US and that he would back away from those threats if financial markets rebelled or if an economic downturn or higher inflation became more likely. Well, this has not quite worked out in the way the optimists had hoped. Trump and his officials are now saying that Americans will have to tolerate some pain for the longer-term good. Trump is a true believer in tariffs and will pursue them zealously — trade frictions will only worsen as other countries will retaliate.

Trump’s team is also making it brutally clear to its allies and trading partners that they are expected to make concessions as demanded by the US. Trump’s treatment of Panama and Ukraine has shocked American allies. Military alliances such as the North Atlantic Treaty Organization (Nato) that were the bedrock of the US’ foreign policy have been shorn of their effectiveness by the administration’s diminished commitments to these partnerships. At the same time, the US is willing to be more sympathetic to previous rivals such as Russia. Moreover, the US is getting out of the aid-giving business with the effective shutdown of the US Agency for International Development (USAID). Neither is the US under Trump keen on projecting soft power through media organisations such as the Voice of America and Radio Free Asia.

There is little doubt that this is a sea change, a fundamental rewiring of the world system that will bring in its wake great dislocations. Not surprisingly, the rest of the world is reacting.

Within hours of winning the German election last month, the likely new Chancellor Friedrich Merz aligned himself with French President Emmanuel Macron’s long-standing call for Europe to develop strategic autonomy from the US. Within weeks, Merz has effected a groundbreaking constitutional change in Germany that did away with the country’s limit on public debt. This will pave the way for a massive trillion euro increase in defence spending and a huge infrastructure programme. France, Germany, Poland and other European Union countries are putting aside years of awkwardness with the UK so as to work on joint defence programmes and more assistance to Ukraine.

Trump’s aggressive trade policies against China will create headwinds to its growth. But, unlike other countries that have rushed to make concessions to the US, China is playing it cool. President Xi Jinping has been slow to respond to Trump’s desire for direct talks and has yet to agree to visit the US as Trump wants. China has also retaliated immediately against American tariffs and indicated that it will expand its armoury of responses over time.

Talk about some kind of “grand bargain” between the US and China will probably remain just that, talk. Eventually, there could be some kind of deal as we saw in the January 2020 trade deal that settled the first US-China trade war during Trump’s first term. But the clash of interests between the two big powers is probably too fundamental to allow for a game-changing deal.

China has also ramped up measures to boost consumer spending and make the country less reliant on exports to the US. Although some observers feel that these policy moves do not go far enough, the changes come after many years when the leadership resisted requests to do so and will be enough to move the needle on making consumer spending a bigger driver of Chinese growth.

In the long term, China’s leaders probably see recent developments as favouring it. The US’ alienation of its major security allies, its diminished soft power efforts and the likely deterioration in its fiscal condition will all play to China’s advantage in what it sees as a long period of contestation with the US for global power and influence. Xi will also take advantage of Trump’s less-than-enthusiastic support for Taiwan — probably by stepping up grey-zone tactics such as air and naval intrusions, cybersecurity attacks on Taiwan and influencing operations to destabilise Taiwan rather than by overt military aggression. It is also entirely possible that China might assert itself even more forcefully in the South China Sea.

Major institutions have been updating their forecasts in recent days — and they are all to the downside. For example, the Organisation for Economic Co-operation and Development (OECD) has downgraded its expectations for global growth as a result of the trade frictions caused by Trump’s aggressive tariff hikes. It also believes that global inflation may prove to be stickier, not falling as much as had been expected a few months ago. That means that the US Federal Reserve will not be cutting rates in a hurry and that large rate cuts are likely only if recession risks intensify.

This growing unease about the future is filtering through to consumers and businesses. In the US, consumer confidence as measured by the University of Michigan fell in March to levels not seen since the last stages of the pandemic in 2022. Moreover, expectations for inflation over the next five years spiked up to 3.9%, the highest level they have reached since 1998. The Global Economic Policy Uncertainty Index is at its highest level since the index began surveys in 1996. The rise in trade policy uncertainty is even sharper. Businesses are not immune to this uncertainty — surveys of purchasing managers across the world show that companies are issuing fewer new orders. That raises the chances of a slowdown in the coming months.

This despondent mood will hurt emerging Asian economies as well.

First, financial investors are becoming much more risk-averse and will not hesitate to pull money out of risky asset classes. At a time of greater uncertainty with plenty of things that can go wrong, they are not in a mood to excuse policy errors or other weaknesses in emerging market bonds or equities. The recent plunge in Indonesian stock prices is a warning of what could happen.

Second, such financial pressures could worsen in time. With the US, Europe and other countries stepping up defence spending, fiscal deficits are set to increase — there will be more debt issuance and competition for savings. That could result in higher borrowing costs for emerging economies.

Third, global businesses will react to uncertainty the way they always do — by postponing or downsizing investment. The foreign investment that is so crucial to developing Asian economies is likely to slow appreciably — or perhaps even fall if a full-scale trade war materialises. This will undercut one powerful driver of economic development in Southeast Asia that we had been banking on — supply chain reconfiguration involving the relocation of production out of China to other countries.

Fourth, it is not only Europe that needs to raise defence spending. With the US no longer willing to play its role as a security guarantor in Asia, Asian countries will have to strengthen their own defence efforts given the rising risks in hotspots in Asia. Hard choices will have to be made about what other spending may have to give way to allow this rise in defence commitments.

In short, Asean countries will face growing insecurity in their region while the globalisation and free trade that have enriched them in the past will be less helpful. No one should be complacent about the risks — they are all very much to the downside.

Individual countries will have to adapt to this through measures to ensure resilience — vulnerabilities in defence, economic competitiveness, financial sectors, lack of diversity in economic drivers … all have to be addressed through reforms. Governments will have to spend more to boost domestic demand and military preparedness. Money will have to be found for these spending increases.

But the dislocations that are likely will require not just individual actions but also collective action at the Asean level. The old “Asean Way” of polite but ineffective initiatives such as the Asean Economic Community has to give way to a more energetic and meaningful response. And if doing things in an all-Asean way turns out to be difficult, then smaller subgroups should form coalitions of the willing so that there is at least some strength in numbers.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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