Asia 'unlikely to benefit from trade war because it's hard to shift supply chains'

Singapore

NEGOTIATIONS towards a permanent United States-China trade deal will be a long drawn-out affair and Asia is not expected to benefit much from supply chain shifts, said JPMorgan chair of global research Joyce Chang.

And export-dependent economies in Asia are likely to take the heat from the ongoing dispute between the two economic superpowers, according to a JPMorgan Global Research report in October.

The first phase of the trade deal was concluded after a two-day meeting between negotiators from the US and China in Washington DC from Oct 10 to 11. However, the agreement is expected to take several weeks to finalise.

As part of the agreement, China will buy US$40 billion to US$50 billion worth of US agricultural products. In exchange, the US will delay a tariff hike that was set to go into effect on Oct 15, which would have raised the tariff on US$250 billion worth of Chinese goods to 30 per cent.

Ms Chang, speaking to The Business Times noted that while the overall impact of the trade war on Singapore has been "fairly benign", like the rest of Asia, it is unlikely to benefit much from a shift in supply chains.

"The impact has been small because in reality, it is hard to shift the supply chain," she said.

So far, only Vietnam has been a significant beneficiary of supply chain shifts. Since the escalation of the trade war, it has expanded its position as a key manufacturing and export hub in Asia.

According to data from JPMorgan, there was a sharp increase in companies evaluating supply chain shifts, from 11 per cent in the second quarter of 2018 to 37 per cent in the final quarter that same year.

Despite that, Ms Chang said that actual mobility has been limited. "When we survey CEOs, many of them say they are looking at this, but very few of them have actually moved their operations.

"Even if there could be some movement in the supply chain, that would be a long haul. It is hard to scale given the size of some of these markets," she said. And with China being one of the largest revenue centres, companies cannot necessarily relocate that easily, she added.

According to JPMorgan's report, Asian economies such as Hong Kong, Singapore, Malaysia, Taiwan and Thailand are likely to be the most hurt by trade tensions due to their reliance on exports.

Among these export-dependent Asian economies, Hong Kong and Singapore see the largest volume of exports at around 160 and 115 per cent of GDP respectively. Exports to China, on the other hand, was over 80 per cent of GDP for Hong Kong and around 15 per cent of GDP for Singapore.

The exposure of these open economies to the supply chain puts them in a vulnerable position amid poor global trade outlook. Trade tensions could hence spill over to Asia, with business sentiments and capital expenditure suffering.

To date, the tariffs put in place have shaved about 0.2 per cent off global growth and 0.4 per cent off China's growth, said Ms Chang. This comes as the bank lowered China's 2020 growth forecast to 5.8 per cent - the first time it is below the 6 per cent level.

Against this backdrop, China is turning to fiscal policy to stabilise growth, with a focus on tax cuts for corporations and households. According to JPMorgan estimates, a tax package of around 2 trillion yuan (S$385 billion), or 2 per cent of GDP is expected this year, adding 0.46 percentage points to GDP growth.

The ongoing trade war has also led the firm to lower overall growth forecasts. "Since these trade tensions started 15 months ago, these political shocks have turned into economic shocks, leading to a lower growth forecast of 2.3 per cent globally in the third and fourth quarter this year," said Ms Chang.