While trade disputes such as the one between China and the US are damaging for Asia, silver linings could mitigate the damage, says Manu Bhaskaran
This article was first published in the January 2019 China edition of Accounting and Business magazine.
The ups and downs of the dispute between the US and China will be a major determinant of Asian economic prospects in 2019 and beyond. Should the current negotiations fail, it is not just China that will lose out but the many Asian exporters that are part of the supply chain.
Moreover, lower investor confidence would lead to a further outflow of capital from the region’s financial markets and place greater downward pressure on currencies. Foreign direct investment would also be diminished. However, this is not the entire picture; two sets of potential silver linings to this dark cloud could mitigate the damage: production relocation and regional responses.
Because of China’s rising costs, many firms had already started to move some production out of the country but US-China tariff risks appear to be accelerating this process. Some firms are relocating back to their home base such as the US, Japan or South Korea. Others are planning to move to low-cost production locations close to developed markets such as Mexico and Turkey.
But the majority appear to be still committed to the offshoring of manufacturing in Asian locations. The biggest winners seem to be Vietnam, Thailand, Cambodia and Malaysia.
These trends are likely to accelerate in 2019. Taiwan, for example, with 100,000 firms with production facilities in China, is keen to reduce dependence on the Chinese economy, and its ‘New Southbound Policy’ could see production relocate to South-East Asia. Similarly, South Korea has stepped up engagement with the region.
Governments across Asia are also planning policy reforms to strengthen their economies’ capacity to withstand potential shocks. The first set involves the supply side in a bid to improve the business environment. Such reforms have already led to striking improvement in the rankings of Asian economies such as Indonesia and India in the World Bank’s ease of doing business study. A big infrastructure push is also under way that will help cut logistics costs and improve competitiveness.
A second set of moves is to accelerate negotiations for free trade agreements and regional economic partnerships so as to maintain the momentum of trade opening despite the rise in protectionism. The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) brings 11 countries in the Asia-Pacific region together in a highly liberal trade arrangement that will significantly boost trade growth across the region. With South Korea and Thailand keen to join as well, the CPTPP could become a strong countervailing force against the harm caused by protectionism. A separate Regional Comprehensive Economic Partnership embracing the South-East Asian nations, China, Japan, South Korea, India, Australia and New Zealand is also being negotiated.
In short, the production relocation as well as the new trade agreements described above should help boost intra-regional trade and help contain a good part of the damage caused by the rise in protectionism.
Manu Bhaskaran is CEO of Centennial Asia Advisors in Singapore.
"Governments across Asia are planning policy reforms to strengthen their economies’ capacity to withstand potential shocks"