Asian Insider June 24: Trump-Xi meeting at G-20: Will it ease US-China trade tensions?

Asian Insider brings you insights into a fast-changing region from our network of correspondents.

In this special edition of the Asian Insider, ST takes an in-depth look at the key issues ahead of the two leaders' meeting on the sidelines of the G-20 summit in Osaka later this week.

MULTIFACETED FALLOUT

The fallout of this trade war is multifaceted. Last week, hundreds of small American business owners who sell goods imported from China told the US authorities that should the next round of tariffs take effect, they would be forced to raise prices, fire workers, or even shut down. As US Correspondent Charissa Yong reports, there is a wide spectrum of goods that could be affected. It ranges from Bibles that are printed in China using specialised machines which US producers are not able to handle, to paint brushes that use imported bristles from a unique breed of hog raised in south-western China.

The trade dispute has spilled over to scientific and academic collaboration. As US Bureau Chief Nirmal Ghosh and China Correspondent Danson Cheong report, Chinese students and scholars in American universities and research institutions are beginning to feel the chill from the souring US-China relationship. Chinese students in the US are facing suspicion that they might be agents of their government, with some facing visa delays or rejections. There has been a spike in the number of US visa denials to Chinese government-sponsored students. Last year, this made up about 3.2 per cent of the 10,313 students hoping to go to the US. In the first three months of this year, the rejection rate went up to 13.5 per cent.

Another unlikely victim of the trade war: American movies. Beijing is now constricting Hollywood's ability to peddle its products in China, according to a Washington Post report. If Hollywood blockblusters get locked out of the world's second-largest film market, it could lead to movie studios cutting their budgets.

SINGAPORE NOT SPARED

This turmoil has not spared Singapore, which counts the US as its largest investor and China as its biggest trading partner.  Last month, the Government lowered Singapore's growth forecast for this year to 1.5 per cent to 2.5 per cent, lower than last year's 3.1 per cent. Senior Correspondent Tan Ee Lyn reports that Singapore industries are seeing falling orders and sales, reduced factory activity and hiring freezes. The semiconductor industry has seen a cyclical slowdown made worse by uncertainties caused by the trade war, while some companies have frozen their headcount, usually the first course of action to control costs.

Prime Minister Lee Hsien Loong on Sunday warned Singaporeans to brace themselves for some fallout as the US-China spat plays out, adding that Singapore will have to focus on factors within its control, such as restructuring its economy and retraining its workers.

However, it is not all doom and gloom, analysts say. Singapore as a regional hub could potentially gain by meeting global companies' capital financing needs and logistic demands. These global companies can even set up their regional headquarters in Singapore, creating prospects such as employment for Singaporeans.

SOUTH-EAST ASIA GAINS

Thanks to its proximity to China and cheap labour, fledgling economies such as Vietnam and Cambodia stand to benefit from the trade war as businesses start to move their production bases out of China.

As Regional Correspondent Jeffrey Hutton found out during a visit to Hanoi this month, Vietnam is enjoying an investment boost. A Chinese company that makes Apple's AirPods earphones is shifting some production to Vietnam. Seattle-based Brooks Sports is doing the same with its running shoes and apparel production. Swedish furniture giant Ikea has indicated to local suppliers that it wants to rely less on China's furniture makers.

Vietnam's registered foreign direct investment has surged by nearly 70 per cent so far this year, especially in labour-intensive industries like electronics, furniture and apparel. But all this has also exposed the limits of Vietnam's fledgling economy as it struggles to deal with infrastructure bottlenecks, lack of skilled labour and shortage of raw materials.

Indochina Bureau Chief Tan Hui Yee, who was in Cambodia, reports that Chinese investments in the Kingdom doubled in value to US$3.3 billion between 2017 and last year. And the momentum is expected to continue as producers shift production of millions of bicycles from China to Cambodia which has a bicycle industry that enjoys tariff-free access to both the US and European Union.

WAR WITHIN A WAR

Clearly, this trade war is not all about trade. The Trump administration has taken aim at Chinese tech giant Huawei Technologies, banning the firm from buying vital US technology without special approval and effectively barring its equipment from US telecom networks on national security grounds.

Huawei's founder Ren Zhengfei last week admitted that he had under-estimated the extent of the US sanctions as he cut the firm's revenue forecast for this year by 20 per cent.

Analysts say the issue of Huawei looms large at the Trump-Xi meeting this week. "Further trade negotiations are likely impossible unless China sees some potential lifeline for Huawei. It is certainly possible that Trump will offer this, but it is complicated politically for both sides," Eurasia Group analysts said.  

Huawei, meanwhile, has revealed its Plan B to counter US sanctions: Its new HongMeng operating system is said to be compatible with the Android ecosystem of apps, much to the relief of Huawei smartphone users.

In its race to stay ahead in the technological race with the US, China is accelerating its national 5G roll-out, tasking three state-owned telcos with each providing 5G signal coverage in at least 40 cities by the end of the year. All this means China will spend more than 1 trillion yuan building this infrastructure.

THE TRUTH ABOUT TRADE DEFICIT AND TARIFFS

At the centre of the trade dispute is President Trump's claim that the US loses US$500 billion to China every year. He has promised to cut the trade imbalance to bring factory jobs back to the US, boosting its economy.

Just last week, in his speech launching his re-election campaign, Mr Trump again said: "We rebuilt China. They've done a great job, but they took us for suckers....Five hundred billion, five hundred billion."

But economists say that focusing on trade deficit alone is myopic and tariffs will not bring jobs back to the US. They tell Business Correspondent Seow Bei Yi that not all trade deficits are necessarily bad. "It means that some other country is more efficient at producing the goods than you are," explains one analyst.  

The use of tariffs, which do not help to reduce the trade deficit, is also likely to manifest as a consumer tax on US consumers, they add.

In fact, Mr Trump's own economic adviser Larry Kudlow conceded that American importers would pay more tariffs worked in as a custom duty on goods. This contrasts with Mr Trump's repeated denials that both sides will suffer from the trade war and that American companies and consumers will pay the tariffs.

US-CHINA DECOUPLING

Experts say that the separation of the American and Chinese economies is inevitable, even if Mr Trump and Mr Xi reach a deal to end the trade war. Experts believe decoupling, driven by wider political and economic forces, would hamstring the Chinese economy, echoing the dominant view in foreign policy and trade circles in Washington that a trade war was America's to win.

However, some experts point out that decoupling the two economies does not make it more likely that China will budge on conceding fundamental changes.

TRUMP 2.0?

Amid the caution and pessimism, Foreign Editor Jeremy Au Yong sees some hope yet. Mr Trump intends to make trade a key pillar of his re-election platform. And for someone who loves reality TV-style showmanship, Mr Trump "winning" in trade against foreigners out to sabotage the US economy sure makes for a decent campaign stump speech to rally his base.

For more insights into what the trade conflict means for the region and the world, join ST's panel of experts at the annual Straits Times Global Outlook Briefing on July 3. To register, go to globalbriefing.sphevents.com.sg