Trade war a negative-sum outcome for Asia

Singapore

ASIAN economies may have made gains from the US-China trade war at the expense of China - but the gains are less than what China has lost, resulting in a negative-sum outcome for the whole of Asia, a Morgan Stanley economist has suggested.

"We are seeing the US importing a lot less from China. They are importing a lot more from the rest of the Asia region, so the other Asia producers are definitely gaining at China's expense - but whatever they have gained is actually still less than what China lost.

"My view is that there can actually be no absolute winners in the near term because the impact on aggregate demand from US-China trade tension will just overwhelm whatever positive trade substitution effect or FDI (foreign direct investment) impact," the investment bank's Hong Kong-based Asia economist Deyi Tan said.

She was responding to a question during a global macro outlook panel at Morgan Stanley's 18th Annual Asia Pacific Summit on Wednesday morning, on whether the rest of Asia is benefiting in terms of supply chains moving from China to other parts of Asia.

"We haven't quite seen concrete evidence on that yet . . . despite the anecdotes that we're hearing - like this company looking to relocate their facilities in some parts of Asia," she said.

Research data instead indicates that nine out of 10 Asian economies that the bank covers have lost global export share "to a similar extent" like China as a result of the trade war.

In an afternoon session focusing on the outlook for Asia in 2020, Ms Tan said that this hinges on what one assumes will happen to trade negotiations between the United States and China.

Discussions are still ongoing between the world's two largest economies on what a "phase one" trade deal should entail. Reports say it is possible that the US and China may sign the deal in early December, ahead of a second tranche of tariffs aimed at US$156 billion worth of Chinese imports meant to kick in from Dec 15.

Ms Tan likened the situation to a pendulum swinging between temporary escalation and temporary de-escalation, but never hitting sustained escalation or de-escalation. This has resulted in a "slowdown in slow motion".

"I will say that we are quite close to the worst point in time," she said.

If the December tariffs go through, there will be more slowdown before a recovery happens, but if the tariffs get cancelled by a phase one deal, Ms Tan said, this will allow Asia to "bottom out earlier" and shoo in a recovery soon.

"If we're right that phase one does get signed, tariffs don't go on, then I think a lot of this uncertainty and direct impact that had weighed on Asia before will reverse, and more importantly, it will probably also allow the policy easing which has been underway so far to get a little bit more effective," she said.

In Asia-ex-Japan, economies which are high-beta and more export-oriented, have better policy support and benefit from diversion of trade and non-trade flows are relatively better placed. These include South Korea, Singapore, India and the Philippines.

Overall, she said the "slow-motion slowdown" is likely to give way to a slow-motion recovery" in 2020, and the re-shaping of trade flows and non-trade flows could benefit India and low-cost Asean producers. Growth momentum in Asia is also expected to "trough" in the fourth quarter of 2019, which is a quarter earlier than originally thought.