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Crisis or Opportunity? How Asian Economies are Responding to the US-China Trade War

November 8, 2018

 

“No one wins from a trade war” is a common saying among economists. Recently, with the onset of the current US-China trade tensions, this phrase has become a common observation among many analysts, especially those observing the Asia-Pacific region. As the US-China trade war continues to heat up, as both governments implement tariffs on major trading products, there has been major concern among regional observers about how the escalating Sino-American trade dispute will impact other Asian economies that are economically reliant on trade with both US and China. Earlier this year, the US government implemented 10% tariffs on nearly $200 billion goods being exported from China into the US. The Chinese government retaliated with implementing 5-10% tariffs on $60 billion dollars of American exports. These current measures, as well as the possibility of more trade protectionism being pursued by both nations, has made many analysts concerned about how the negative fallout from this trade war will hurt the economic growth and trade of other Asian countries such as Taiwan and Vietnam.

 

Firms such as the rating agency Moody’s have stated that US-Chinese trade tensions will experience further escalation this year. The agency argues that existing conflict and further escalation of the trade war will hurt national economies in the region due to the Asian economies' vulnerability to the Sino-American integration of regional supply chains. In August, a significant issue discussed by Asian diplomats at the Association of Southeast Asian Nations (ASEAN) forum was the spread of economic losses related to the trade war to other regional economies. Furthermore, this concern has been reflected in investment indices that measure Asian equity markets. The FTSE Southeast Asia ETF is down 3% so far this year and there is a nearly 8% decline in the MSCI Emerging Markets index.

 

However, while the main economic trends in the short term have been showing negative consequences arising from the escalating trade dispute, the fundamental characteristics of the Asian regional economy indicate that overall losses from the trade war would be limited for many nations in the Asia-Pacific region. One major trend that is expected to continue, despite US-China tensions, is that many Asian nations have increased their trade links with other regional economies. According to the World Trade Organization, Asia had the fastest regional trade volume growth of any region in 2017 with a 6.7 percent increase in exports and a 9.6 percent increase in imports. As Asian economies increase their trade with each other, their reliance on trade with the US and China will lessen, and an escalation in trade protectionism from both governments should be less of hindrance in economic growth. Furthermore, due to strong continued demand for labor and a steady increase in wages and income for many ASEAN countries, economic growth for many economies in the region have been supported by rising domestic consumption. As domestic consumption is expected to increase, Asian nations are going to be less reliant on trade growth to boost their economies.

 

Furthermore, as long-term economic trends blunt the fallout from the trade war, as the US-Chinese dispute continues to escalate, Asian nations can potentially capitalize on this trade dispute for their own economic benefit. In a survey of 430 American companies that have operations in China that are going to be affected by American tariffs, one-third of executives have stated that their companies are moving production abroad to Southeast Asian nations. Vietnam has especially benefited from foreign investment from businesses seeking to reduce their exporting and production exposure to China as trade tensions increase. Thai companies are seeing an increase in exports due to the increased competitive nature of Thai products, as American tariffs have made Chinese suppliers more expensive in several industries. The Malaysian Finance Minister Lim Guan Eng told reporters that he expects an increase in industrial capacity and investment as companies move their business outside of China and look at Malaysia as an alternative shipping and industrial center. This interest by businesses who are suffering losses due to the trade war is most likely going to translate into higher investment and exports for other Asian economies, which can cancel out the losses suffered through the trade war.

 

During the current Chinese-American trade disputes, companies that are heavily involved in American-Chinese supply chains have suffered losses due to the protectionist policies implemented on both sides. This negative fallout of this trade war has led many analysts to conclude that other Asian economies that are connected to the American and Chinese economies will also suffer negative consequences, as the loss incurred by the escalating trade dispute spreads. However, other Asian economies like Vietnam, Malaysia, and Thailand are not going to suffer lower economic growth due to the long-term economic trends of rising consumption and an increase in Asian regional trade that will minimize the macroeconomic impact of decreasing American-Chinese trade volume. In fact, many nations are well positioned to win from this trade war because they offer an alternative for companies that want to avoid American and Chinese protectionist policies.

 

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