How is the trade war affecting Asia?

Perspectives and Profiteers of the Trade War

Even if there has recently been a rapprochement: The trade dispute between the USA and China has generated a degree of mistrust that even a larger “deal” will not lead to a return to the previous situation. Global trade relations are generally moving in the direction of an intensified struggle for national advantages. Which scenarios in Asia-Pacific are plausible - and are there any beneficiaries of this trend?

Much has been referred to the US President's view of the world to classify the trade conflict. Soberly, Trump's “America First” doctrine is a defensive approach. This can be explained by the stable double deficit of budget and current account (2018: minus USD 488.5 billion) and an appropriately derived overload as a global regulatory power. There is an objective problem here as a result of a partial drop in competitiveness. Trump is trying to reduce the trade deficit in particular by all means and has a long leverage with the many domestic consumers as the “consumer of last resort”. In addition, there is a low export quota for goods and services, even for a large country (World Bank: 12.1% of GDP in 2017), which makes countermeasures by other countries less effective. At the same time, bailouts for old industries will hardly help with economic revitalization. The process of alienating even old allies is clearly counterproductive. However, conclusive alternatives are also not quite discernible. Since there is no fundamental change in sight in the US deficit, the trade dispute with China - the main source of the deficit - is unlikely to be resolved by consensus, but rather can only be weakened temporarily. It should be added that India, as another potential economic superpower in Asia, has not yet really started the race to catch up and cutthroat competition.

Variable forms of conflict
It has often been emphasized that the US, despite its current account deficit, enjoys a large welfare gain from the demand for US dollar securities in the form of imports financed from abroad. On the one hand, this perspective overlooks the employment aspect - citizens not only want cheap imported goods, but also jobs. More importantly, the USA and China are - at least in Asia-Pacific - on the verge of a real hegemonic conflict. The core of the US position is therefore the largely non-partisan concern for future national security. This concern has always been the main motive of all “economic wars”. It should be remembered that China - unlike Japan, the economic rival of the 1980s - also has a potent military strength. Not only from the US perspective, China is a power that challenges the status quo. This also leads to the bitter struggle between the two countries for technological leadership, which always has an impact on security policy. However, such a constellation does not necessarily have to lead to rigid isolation. Especially since the USA and China continue to share common interests. Rather, diverse and variable forms of conflict are conceivable. The reference to globally branched supply chains, domestic political interest groups and upcoming election campaigns will continue to have a moderating effect. However, the basic mode remains set to a more acute point. The bottom line is that in order to achieve political goals, one also accepts economic losses in case of doubt. A variant of future battles for position is likely to be the establishment of strategically oriented production chains and the targeted setting of relevant norms and industry standards. New alliances for the USA after Trump are not excluded.
Shadow of history
Overall, it appears that the Sino-American trade dispute is part of a global trend. The most recent confrontation between South Korea and Japan, which concerns the final extent of the reparations as a result of the rabid Japanese occupation from 1910 to 1945, shows how badly a troubled history can damage trade relations. A limitation of the security cooperation was threatened in each case. These relationships are not the only ones with historic burdens in the region. A Japanese-Chinese reconciliation has not yet taken place either. Although there is currently a phase of rapprochement between Tokyo and Beijing, this can change quickly. Here too, real economic constraints will help curb emotions - but major disruptions are still possible at any time. With the many positive prognoses for the further rise of Asia, the various open and latent political conflicts on the continent are mostly left out. Little attention is also paid to the stabilizing role that the USA has played there so far. Furthermore, there are considerable trade tensions in Asia itself. For example, the accusation against China of pursuing “one-sided trade policies” in the face of a loss of 54 billion US dollars in bilateral trade has led to India's withdrawal from the Regional Comprehensive Economic Partnership (RCEP). None of this speaks in favor of the beginning of a clear era of free trade in Asia-Pacific.

Who can benefit?
In this structurally uncertain environment, companies basically only have the option of further diversifying their risk diversification activities and arming themselves as best as possible against negative developments. This is likely to result in at least a partial realignment of production and supply chains. The consequences will be lower efficiency and higher consumer prices - but an end to the geopolitical upheaval is not to be expected in the medium term either. In order to circumvent possible punitive tariffs, importers in China and the USA should increasingly look for suppliers in third markets. Producers, on the other hand, are looking for alternative manufacturing locations. This is an opportunity for emerging countries with acceptable framework conditions to further promote their development by attracting new investments. The existence of preferential trade agreements with the main global buyer countries is likely to be an important criterion when considering a new location. As far as the sectors that are primarily willing to relocate are concerned, these will be those that are particularly vulnerable to punitive tariffs. In addition to countries like Mexico, these alleged profiteers of the trade frictions are mainly in Asia, more precisely: in South and especially in Southeast Asia. In the first place in the current debate is Vietnam, which benefits from its geographical proximity to China, an agile government, many trade agreements and a growing industrial base. The representatives of individual sectors should look specifically at countries that already have recognized strengths: Thailand in the automotive industry, Malaysia in the ICT segment and in electrical engineering or Bangladesh in the textile sector. The focus is generally also on India and Indonesia, both of which have a high population as well as a favorable demographic trend. However, effective reforms are necessary here in order to convince financiers that the undisputed potential will be realized at some point. The Indian government recently took an important first step in this direction with a significant reduction in corporate taxes. Investors are only likely to wait for more convincing signals.

Limits of relocation
With all these considerations, however, one must consider: Relocating productions to other countries is not a simple process. The popular formula “China Plus One”, for example, suggests a simplicity that in fact does not exist. The example of Vietnam also shows the hurdles of any production relocations. Because China has rightly acquired the label “Workbench of the World” since it opened in the 1980s and, in addition to high industrial capacities, also has very powerful supplier industries. Vietnam can hardly come up with this in the foreseeable future. Complex electronic components for specialized supply chains, for example, are rarely available. The same applies to Thailand, which is seen as a relocation destination for parts of the value chain of the automotive sector out of China. The available production capacities are also limited here and would first have to be set up in a time-consuming and costly manner. Factories whose goods are destined for the local market are likely to remain in China. The countries mentioned are also grappling in unison with the problem of an increasing shortage of skilled workers. All in all, companies will have to adjust to a significantly increasing complexity in the planning and design of their production and delivery networks.

Daniel Müller

Daniel Müller is regional manager ASEAN at the OAV; [email protected]