While the outlook for Asian economic prospects is worrying due to the intensifying US-China trade war, shaping effective policy responses is vital, says Manu Bhaskaran
This article was first published in the July/August 2019 China edition of Accounting and Business magazine.
The sharp escalation in conflict between the US and China in recent weeks poses a severe threat to Asian economic prospects both in the short and longer terms. Although there are some mitigating factors, such as increased production relocation out of China to other parts of Asia, the overall impact is clearly negative.
With the US expanding its pressure on China beyond tariffs and other trade-related measures to include bans on Chinese technology companies such as Huawei, the potential hit to Asian growth has grown. The risk to other Asian economies comes in many ways.
First, higher tariffs on roughly half of Chinese exports to the US have come into force and the country is considering imposing a 25% tariff on the remainder. That will slow China’s growth by a percentage point or more. While the Chinese authorities will mount a substantial policy stimulus to mitigate the impact, too much credit growth could lead to financial imbalances. Slower Chinese demand will hurt Asian exports and also cause commodity prices that are important to Asian natural resource exporters to fall as well.
Second, indirect effects will include businesses around the world holding back on capacity expansion, which hurts investment. Worse still, Asian exports of manufactured goods are highly correlated with capital spending so the trade impact could be severe.
Third, the US is pressing other countries to back it in its tussle with China and is reformulating the parameters determining which trading partners are ‘currency manipulators’ to include Vietnam, Malaysia and Singapore.
Things are set to get worse, with China hinting that it could hit back against the US. The country could, for instance, cut back on exports of rare earth minerals – a vital input in the manufacture of high-tech goods – damaging global supply chains.
Not everything is gloomy, though. The US Federal Reserve Bank has signalled that it will rein in its monetary tightening, providing some support to economic growth. China is almost certain to ramp up its stimulus efforts as well, and that will also help to counter the negative impact on global growth.
Manufacturers have concluded that the US-China clash will last a long time; consequently, there is an incentive to shift the production of goods exported to the US out of China to countries such as Vietnam, Cambodia and Bangladesh.
Even with these offsets, the outlook is worrying. Production relocation will take years and most of Asia is highly dependent on the world economy. Export-oriented economies – such as Korea, Taiwan, Vietnam, Malaysia, Thailand and Singapore – will clearly suffer. But even countries that are not major manufacturing exporters, such as Indonesia, still depend on the global economy for capital inflows, tourism and commodity-related incomes. It thus becomes vital for these countries to shape effective policy responses to boost domestic demand and thereby maintain growth.
Manu Bhaskaran is CEO of Centennial Asia Advisors in Singapore.
"Production relocation will take years and most of Asia is highly dependent on the world economy"