US election may be lose-lose for Asia

William Pesek

As the U.S. election approaches, many in Asia are viewing the outcome in binary terms. A Kamala Harris win on Nov. 5 means policy continuity; a Donald Trump 2.0 White House would upend the global economy with supersized trade wars.

If only it were that simple. In reality, whether former President Trump wins or loses, South Korea and the rest of this region’s economies could find themselves in harm’s way.

With the election too close to call, it is worth gaming things out.

A Trump victory would be less a black swan event for Asia than a grey one. Unlike the former, the latter is a predictable but unlikely outcome. A grey swan, though, can have its own severe impacts.

The 60 percent tariffs on China that Trump telegraphed would be just the beginning. Trump is threatening 200 percent taxes on cars and trucks imported from Mexico. It does not require great imagination to think Trump would pull Korea, Japan and Europe into that same tariff zone.

President Yoon Suk Yeol would have to worry about Trump reviving his odd bromance with Kim Jong-un. Anyone who thinks Trump would not dare invite the North Korean dictator to the White House has not been paying attention.

Yoon’s government also would find itself facing new bilateral trade talks. It would confront fresh demands that Seoul pay Washington billions of dollars in protection money to maintain U.S. troop levels in Korea. And Yoon can forget the trilateral summit framework with Tokyo and Washington.

But even if Trump’s Republican ticket comes up short versus Harris’ Democrats, there is a zero percent chance he goes away quietly. After losing to Joe Biden in 2020, Trump made an unprecedented run at overturning the election.

Trump will do it again. He is already ramping up his “rigged” election rhetoric, while his allies have filed dozens of lawsuits to set the stage for a new election challenge. Expect another Capitol Hill insurrection of the kind Trump fomented on Jan. 6, 2021.

Only this time, expect a more effective and elaborately-planned assault. Sure, the U.S. Capitol will ramp up security. But Jan. 6, 2025, is coming and global markets will be watching.

Moody’s Investors Service, too. The ratings company is the keeper of America’s last AAA rating. A Moody’s downgrade amid fresh political chaos in Washington would slam Korea’s export-reliant economy. China’s, too, sending additional feedback effects Korea’s way.

America’s fiscal realities are colliding with political dysfunction. It was this latter problem that prompted Standard & Poor’s to pull the trigger 13 years ago. In August 2011, S&P downgraded the U.S. one notch to AA+ amid Republican-versus-Democrat bickering over fiscal matters.

In August 2023, it was Fitch’s turn to shock global markets. Its move to downgrade Washington was a “reflection of the deterioration in governance” and polarization behind the January 2021 Capitol Hill riot.

Moody’s yanking away America’s last AAA rating next could devastate the dollar. Asia has made progress since the 1997 Asian financial crisis to reduce the role of exports. Yet the global system’s functioning remains wedded to the dollar’s value.

In recent years, the dollar’s runaway strength was a headwind as a critical mass of global capital zoomed toward U.S. assets. Now it is the dollar’s vulnerabilities that worry Asia.

In 2011, the U.S. national debt was just $14 trillion, less than half of today’s $35 trillion. Congress then, prior to Trump’s chaotic 2017-2021 presidency, was significantly less discordant. Nor were trade tensions between the U.S. and Asia this bad.

One big risk is Asia’s vast holdings of US Treasury securities, of which Korea owns about $122 billion. Despite Asia’s efforts to hoard fewer dollars, the region’s holdings still effectively make it America’s top banker. The U.S. may have built a huge, innovative economy, but Asia holds the deed.

If Japan, the biggest dollar holder, senses fresh U.S. downgrades are coming, its government might decide to reduce its $1.1 trillion of exposure to U.S. Treasuries. In Beijing, President Xi Jinping’s Communist Party might sell large chunks of its $770 billion pile of U.S. Treasuries.

What if other top bankers like Taiwan, India, Singapore, Hong Kong or South Korea sought to front-run a big dollar drop, destabilizing markets? The resulting surge in U.S. yields and dollar volatility would create a buckle-your-seatbelts moment the likes of which the global system has never seen. And narrow Yoon’s window of opportunity to raise Korea’s competitive game.

Not surprisingly, most Asian governments would prefer to be dealing with a Harris White House come January. Love her policies or not, a Harris presidency seems, to many, far more survivable than a Trump 2.0 era. But either way, the next few months in the biggest economy are sure to be unhinged as Trump, win or lose, makes systemic risk great again.

William Pesek is a longtime Asia opinion writer, based in Tokyo. He is a former columnist for Bloomberg and Barron’s and author of "Japanization: What the World Can Learn from Japan’s Lost Decades."