As the US and China edge closer to an all-out trade war, analysts are scrambling to assess the impact on Asia’s export hubs.
Tensions ratcheted up another notch this week, after US President Donald Trump ordered US Trade Representative Robert Lighthizer to find US$200bn-worth of Chinese products, on which a 10% tariff would be imposed. Trump has threatened China with a further US$200bn in action if it retaliates.
With China pledging to “take comprehensive … strong, powerful countermeasures” in response, “it represents another step towards a full-blown trade conflict”, according to analysts from Focus Economics, a research group.
Economists have thus far been keen to play down the wider significance of the multilateral tariff battle instigated by the the US, but which has drawn in the EU, China, Canada, Japan, Mexico, South Korea and others. However, this tranche, should it be implemented, would have greater resonance.
“The case of another round of tariffs affecting up to US$200bn or more in Chinese imports, the impact on economic growth would be more noticeable. Along with the direct impact of the tariffs, the economy will be negatively affected by a potential disruption in supply chains and a deterioration in business sentiment,” Focus Economics analysts write, stating that it could detract 0.4% from China’s 2018 GDP growth.
Deutsche Bank analysts, meanwhile, predict that the cumulative impact of tariffs on US$250bn (including existing tariffs) on Chinese exports would be a 0.3% drop in GDP.
China is in the midst of a deleveraging programme that is straining capital from heavy industries, which have been hooked on cheap debt for decades. It has been less forgiving of such “zombie companies”, allowing some of them to die, as it looks to modernise its economy. The addition of scything tariffs on top of this economic shock is likely to make China’s economy more fragile, analysts say.
The fact that China exports far more to the US than it imports means that it is restricted in the level of retaliatory tariffs it can impose. China’s imports from the US were US$155bn in 2017 – well below the potential US$400bn-plus of Chinese exported goods targeted by the Trump administration. However, it has alternative, non-tariff barriers in its armoury.
“It is possible that China will target US services, and it is also plausible that China could also formally or informally adopt non-tariff means of retaliation, such as selective regulatory enforcement, border delays and customs audits. While these activities fail to capture headlines, seasoned trade professionals can attest that what happens at or even long after the border can be just as costly and disruptive to business operations as the tariffs themselves,” Jon Cowley, trade partner in Baker McKenzie’s Hong Kong office, tells GTR.
Trade and commodity finance markets have yet to feel any material impact from the trade skirmishes. Deal flow is improved, while new entrants, eyeing opportunity in a potential vacuum left by US companies and banks, are emerging in China’s commodity trading and financing markets.
However, any escalation in tensions will be viewed nervously around Asia Pacific – especially in nations with supply chains that are heavily exposed to China or the US.
“The country [other than China] that stands to lose the most is Taiwan, which supplies around 10% of China’s total imports of intermediate goods. We estimate the value-added within Taiwan of these exports is equivalent to around 1.8% of its GDP,” says Gareth Leather, senior Asia economist at Capital Economics.
Leather adds that Malaysia and Singapore are also in line to lose out from a full-blown trade war. These nations are among the largest suppliers of raw materials to manufacturers of finished goods in the US and China.
It is unclear yet, however, which sectors will be targeted or, indeed, if Trump’s latest sanctions will come to fruition. In recent months, some experts have praised the robustness of the Asia Pacific trade economy, pointing to increasing interdependence and the idea that increased intra-regional trade could mitigate some of the impact of the US’ action.
“There could be opportunities to transfer final production processes from the US and China to confer origin in jurisdictions whose products are not subject to the tariffs,” says Cowley at Baker McKenzie.
Accordingly, Focus Economics has upgraded its growth forecast for East and South Asia in 2018. It is now predicting that the region will grow at 6.2%, up 0.1% on its previous forecast. The region continues to benefit from strong consumer demand and favourable monetary policies, analysts say.