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Trading blows

Potential winners and losers among Asean economies from the US-China trade spat

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TRADING BLOWS: How bad could the US-China hostilities get for South-east Asia?

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NOT too long from now, iconic and quintessential American Harley-Davidson bikes will roll off a new assembly line located in an industrial estate in the Thailand’s Rayong province.

Sluggish US sales and an urge to get closer to a growing customer base abroad led the Milwaukee-based motorcyle maker to Thailand’s eastern growth corridor just over a year ago, a plan that now appears almost prescient after the European Union raised duties five-fold on American-made motorcycles in June, in retaliation to the United States’ tariffs on European metal. (By riding on a cheaper base abroad to build its bikes for exports, the 115-year-old firm can dodge the higher tariff burden). The escalating trade fight between Washington and its growing list of vexed trading partners – China, Europe, Canada and Mexico – is inducing deep anxiety in South-east Asia over an imminent trade Armageddon.

That fear factor got a jolt over a week ago when Washington slapped tariffs on an additional US$200 billion of Chinese goods – this came into effect on Sept 24 – which experts say does not bode well for world growth, with most reckoning that an end to the trade squirmish may be a long way off.

But some, like Thailand and Vietnam, with populations of over 165 million, are also hoping to gain as demand for China-centred supply chains shift towards their economies, be it for cheap manufacturing of textiles and automotives or processed tuna and fresh fruit. Manufacturing is, after all, at the heart of the Association of South-east Asian Nations' (Asean's) economy and accounts for over 20 per cent of the region's gross domestic product, according to a recent White Paper by the World Economic Forum in collaboration with AT Kearney.

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Even so, in a full-blown trade war, "everybody loses", or so says Nouriel Roubini, professor of economics at New York University's Stern School of Business. Worst case scenario: "One of political and economic brinksmanship that culminates in an outright trade war and results in economic fragmentation and isolation, triggering a global slowdown/recession," says OCBC Bank's head of treasury research and strategy, Selena Ling.

The impact could be far reaching - slower growth, job losses, rising prices, less disposable income, lower profits, plummeting markets and escalating defaults. But let's face it, reminds ING chief economist for the Asia-Pacific, Rob Carnell: "It's really easy to paint a global financial Armageddon, but really hard to assess how realistic it is."

At best? Some countries may "merely suffer less than others in the region", he adds.

Hurt so bad

Trade was a hallmark issue of US President Donald Trump's campaign. He promised to protect US jobs and narrow the trade deficit - the gap between how much in goods and services the US imports and exports - and blamed past US leaders for worshipping "globalism over Americanism".

He's not alone on the protectionist wave. Since the global financial crisis, the world's top 60 economies have collectively introduced over 7,000 protectionist trade measures with the EU and the US each responsible for 1,000 restrictions, according to a recent study. Still, Washington's latest 10 per cent tariffs on US$200 billion of Chinese imports, affecting thousands of products from furniture and appliances to machinery parts, resulted in Beijing retaliating with new taxes on US$60 billion of US goods such as meat, chemicals, clothes and car parts.

Mr Trump's raft of surcharges now apply to over US$250 billion of Chinese goods - almost half the amount China sold to the US, its largest trading partner, in 2017. China has called off planned trade talks with the US while analysts say it could also be adopting a "wait and see" strategy until the critical US mid-term election is over in November. If the trade war turns out to be harmful to the US economy or there is a collapse in the stock market, analysts say it could pile the pressure on the White House ahead of the mid-terms. "There is a good reason to follow such a strategy in our view: the trade war will likely become painful for the US soon," says Deutsche Bank - prices of goods could soon rise.On the other hand, a poor result for Mr Trump at the mid-terms may push him to double-up a policy that has up till now won him votes. "It is worth considering this as an alternative view. If so, an end to this trade war might still be a long way off," says ING's Mr Carnell. "The biggest loser will be China and the impact will be long-lasting," says independent economist PK Basu in a note on SmartKarma. China was already facing rising wages and the "tightening of the protectionist noose" could speed up a relocation of labour-intensive manufacturing and China-centred supply chains to other countries.

Do the math

China's loss is Asean's loss. The 10-member region counts China as its biggest trading partner - it has been the region's top trading partner for eight straight years and Asean, China's third largest trading partner for the past seven years - and a key source of investment and tourism.

A severe trade war that involves US$250 billion of US tariffs and up could knock off 0.1 to 0.5 percentage points from regional economies, says OCBC Research. The impact will be deeper for economies that are more plugged into the global supply chain and which enjoy a chunk of US and China foreign direct investments. The outcome could be mixed, says OCBC's Ms Ling.

The good news: Asean bears none of the deep macro shortcomings and structural weaknesses that had led to the turmoil of the Asian Financial Crisis of 1997-98. Potentially, Singapore, Malaysia - the most open Asean economies - and Thailand will be the most exposed. Indonesia and the Philippines - blessed with sizeable domestic markets that can offer shelter in tough times - and Vietnam may have less to lose, according to OCBC's scorecard.

What's noteworthy is that the Philippines and Indonesia also export the highest share of raw and intermediate goods to China as a percentage of their total exports to China. The frontier markets of Myanmar, Cambodia, Laos and Vietnam are most dependent on China as well as the US for trade and could feel a whiplash as a result. Even so, experts say a recalibration of trade flows could make Vietnam a winner and lift its textiles and garments sectors.

Brunei remains relatively insulated from the ongoing trade tensions given its relatively limited export exposure to both the superpowers.

Silver linings

There may be winners in a potential reshuffling of supply chains. For one, if China moved some production offshore to fend off higher tariffs and activity clicked higher in the region, Singapore could benefit given its status as a regional transportation and shipping hub, says Hermes Investment Management senior economist Silvia Dall'Angelo. "Similarly, Malaysia might gain with respect to chemical and LED products, while Vietnam might emerge as an alternative to China with respect to the production of textiles and consumer goods," she adds.

This diversion of trade flows through the region with China no longer being the "obvious go-to economy" for cheap manufacturing is a best-case scenario and could play to the advantage of less developed South-east Asian countries, says DBS economist Radhika Rao. Europe's recovery could add more hope. The continent is in the midst of a solid domestic demand-led upswing and uncertainties over Brexit and rising US protectionism are unlikely to derail this trend, says Sharmila Whelan, deputy chief economist of Asianomics, in a recent note on SmartKarma. "Europe remains a significant market. In 2017, China exported as much to Europe as it did to the US, while for Hong Kong, India, Indonesia, Malaysia, Korea, Philippines and Singapore, the share of total exports going to Europe was higher than to the US. The point is, Asian exporters stand to benefit, more than is probably appreciated, from the business cycle upswing under way on the continent," she adds.

Up, up and - down?

Trade tensions are mounting amid the unwinding of monetary stimulus and rising interest rates. In the region, the central banks of Indonesia, the Philippines and India have already hiked rates. As expected, Indonesia and the Philippines pulled the trigger again over the week following the US Federal Reserve's latest move to hike the policy rates. Analysts are not ruling out more hikes by Indonesia and the Philippines this year and next to prop up beaten down currencies and to curb inflation.

ING is also not ruling out possible "no hike" calls for economies such as Malaysia and Thailand. "Could they be 'forced' to move if their currencies weaken much further? Never say never," says the report, referring to an environment where the currencies weaken further as tariffs bite and lead to a decline in trade and policymakers may be forced to intervene.

Asean currencies have suffered on the back of a sell-off in emerging market (EM) assets amid higher US interest rates and worries over spillover from homegrown problems in Turkey and Argentina which analysts have deemed as overdone.

The Indonesian rupiah has suffered the worst among its regional counterparts, plummeting to levels not seen in 20 years. While a rupiah rout is bad news for South-east Asia's largest economy - it will fuel concerns over Indonesia's current account deficit and accelerate capital flight - the weakening Malaysian ringgit, Vietnamese dong and Thai baht could boost their respective economies' export competitiveness, says FXTM's Lukman Otunuga. The Philippine peso has also been bruised in the EM rout despite its strong economic growth given its ballooning trade deficit.

But more pain may be in store. "When factoring in how the (Chinese) yuan could weaken in the event of a trade war as China's economy cools, the outlook for Asean currencies remains tilted to the downside," Mr Otunuga adds. "There are no winners," he reiterates.

Against the backdrop of a looming trade storm, it has become more imperative for Asean to tighten economic linkages and band together. One counterweight could be the Regional Comprehensive Economic Partnership (RCEP), a 16-nation grouping that could create the world's largest trading bloc with one-third of global GDP and one-quarter of global exports. Singapore Prime Minister Lee Hsien Loong recently said RCEP negotiations are at a "critical stage", with the possibility of "substantively concluding" talks finally in sight.

OCBC's Ms Ling says: "It's uncertain if it can mitigate the damage, but the time is ripe for bringing it to fruition."

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