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Geopolitical headwinds circle Asian trade

Asia / 01-06-17 / by
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Asian trade

Despite a relative improvement in Asian trade flows, geopolitical headwinds continue to circle and remain a threat to the major trading nations in the region.

The risk of conflict in the South China Sea is still relatively high, while tensions between the US and both North Korea and Iran add to the risk perception of the region. In individual states such as the Philippines and Indonesia, local leaders have been rolling out drastic and dictatorial policies which threaten open markets.

Add to these a range of economic risks, including the continued threat of trade wars between the US and China, China’s potential hard landing, a likely Fed hike this year and overheating property markets throughout the region, and Asia Pacific all of a sudden looks like a risky place to do business.

These were the views of Rajiv Biswas, Asia Pacific chief economist at IHS Markit and the keynote speaker at GTR‘s Australia Trade Forum 2017 in Sydney this week. Few of these factors are new, but many have escalated in recent months and weeks. And if the trade sector has learnt anything over the past year, it’s to expect the unexpected.

Perhaps the takeaway for businesses and banks, in that case, is to tread with caution – a message which seems to have already filtered through trade, given the relatively sluggish deal flow this year to date.

Biswas feels the risk of a trade war between China and the US has receded slightly. US President Donald Trump has been much less confrontational in his rhetoric on China since his counterpart Xi Jinping visited Trump’s Florida resort at Mar-a-Lago. In fact, in May a 10-point trade package was revealed, through which the US would be able to resume exporting beef to China (the product was banned in 2003) and China’s market would be opened to credit card and credit rating companies.

It was hailed as a landmark achievement from within Trump’s government and a far cry from the campaign trail denunciations of China as a currency manipulator. However, it’s worth pointing out that China has made such promises on these markets before, and that many of the 10 points were already agreed under Barack Obama’s administration.

South China Sea 

Biswas feels that the risk of a conflict in the South China Sea escalates as the region becomes more militarised. Huge build ups of Chinese artilleries are amassing on the country’s territorial claims, which have earned previous rebukes from many other governments in the region. Despite the more amenable tone struck between the two governments in recent weeks, two Chinese fighter jets conducted unsafe manoeuvres while intercepting US surveillance aircraft in the South China Sea last week.

Incidents such as these carry great risk, Biswas says, because any accidental collision could lead to conflict. Given that one-quarter of all the world’s oil passes through these channels via the Malacca Strait, en route from the Gulf, the risk to Asian trade is clear. Perhaps more relevant at the moment, however, is the increasingly belligerent stance of a nuclear-armed North Korea.

The economist focused too on the worrying shift in regional governance. In recent weeks, we’ve seen human rights questions raised against the shariah rule in Aceh, Indonesia, where two gay men were flogged for violating shariah law on homosexuality. Add to this the occupation of Marawi in the Philippines by Islamic State-backed forces and you have a real ratcheting up of risk in two of the region’s most promising economies.

In the Philippines in particular, many in the business speak in concerned tones about the martial law established by President Rodrigo Duterte in Mindanao, the island Marawi is on. “Duterte’s decision to declare martial law is likely to increase the risk of engagements between security forces and insurgents across Mindanao over the next three months,” Biswas says.

Ratings agency Moody’s has this week said that while martial law is “manageable for the economy”, if it persists, it will carry risks. In particular, what message does it send to investors who might wish to put their money into the Philippines?

Despite all these issues, though, Asia Pacific will continue to be the fastest-growing trade market in the world for the next number of decades. If you’re willing to run the risks, the opportunities in Asian trade are plentiful.

 

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