Trade war impact could extend to other Asian nations

How will Washington's trade war with Beijing affect Asian countries? Here is a look at the potential economic damage to China and other most-at-risk Asian economies.

WHAT GOODS ARE TO BE TARGETED?

US tariffs on Chinese exports will apply to engines and motors, construction and farming machinery, electrical, transportation and telecom equipment and precision instruments. Counter-tariffs by China will hit US agricultural commodities, autos and aquatic products. Soya beans are the country's biggest import from the United States by value.

IN CHINA, WHAT WILL THE ECONOMIC IMPACT BE?

The tariffs are already having an effect. As an example, Chinese companies are reselling US soya beans, and the firms are expected to cancel most of the remaining soya beans they have committed to buy from the US in the year ending Aug 31, once the extra tariffs take effect.

In the scenario where the US and China just stick to this round of tariffs - US$50 billion (S$68 billion) of imports - and go no further, then the drag on China's economy would be 0.2 percentage point of growth in 2019, according to Bloomberg Economics' calculations. If things escalate, then the hit will be bigger, cutting as much as half a percentage point from growth. China's economy grew by 6.9 per cent in 2017, and Beijing has set a target of 6.5 per cent for the current year.


US farmer John Duffy loading soya beans from his grain bin onto a truck in Dwight, Illinois. Soya beans are China's biggest import from the US by value, but the tariffs are prompting Chinese firms to resell US soya beans. PHOTO: AGENCE FRANCE-PRESSE

Domestically, it is China's rich coastal provinces which have the biggest reliance on exports. Guangdong, Shanghai, Zhejiang, Jiangsu and Fujian all have export-to-GDP ratios that are higher than the national average of 18.5 per cent, according to Bloomberg Economics. In the meantime, these provinces have lower debt-to-GDP ratios, stronger growth and more dynamic private sectors, which can help cushion the blow.

"The tail risk of a Sino-US trade war is getting fatter," said Mr Chi Lo, greater China senior economist of BNP Paribas Asset Management in Hong Kong.

"The two sides may misjudge each other's intentions when patriotism takes over rationality and push themselves into an escalating series of attacks and retaliation."

SINGAPORE, MALAYSIA, TAIWAN AND SOUTH KOREA ARE MOST AT RISK IN ASIA

A DBS analysis shows that Taiwan, Malaysia, South Korea and Singapore are the economies most at risk in Asia, based on trade openness and exposure to supply chains.

South Korea could see a drag of 0.4 per cent on growth this year; Malaysia and Taiwan could lose 0.6 per cent, and Singapore 0.8 per cent. And the impact would be roughly double next year.

OECD data - which breaks down value addition embodied in Chinese exports by its source country - shows Taiwan as the most exposed economy in Asia with more than 8 per cent of GDP, followed by Malaysia at 6 per cent, South Korea, Hong Kong and Singapore at 4 per cent to 5 per cent, Philippines, Thailand and Vietnam at around 3 per cent, and Australia, Japan and Indonesia at around 2 per cent.

There are other variations to consider. For instance, the US and China are Hong Kong's major economic partners, but its economy is dominated by services, which are not subject to tariffs. An economy such as Vietnam's, reliant on manufacturing, could feel more pain.

DIRECT IMPACT IS LIMITED

Ballpark estimates from economists show that every US$100 billion of imports affected by tariffs chips away around 0.5 per cent of global trade, wiping off 0.1 percentage point of GDP growth.

The direct impact on China's economic growth this year is estimated at 0.1 per cent to 0.3 per cent, while the drag on its export growth is expected to be 1 per cent.

The effect on the US will be less, given the bilateral trade imbalance: China imported US$130 billion worth of US goods last year, while the US purchased US$506 billion of goods from China, according to US data.

Global inflation should rise by 0.1 to 0.3 percentage point, not accounting for currency volatilities.

INDIRECT IMPACT IS FAR-REACHING

Morgan Stanley estimates that world trade could be seriously disrupted as two-thirds of goods traded are linked to global value chains.

The Peterson Institute for International Economics shows that almost two-thirds of US imports from China come from companies with foreign capital, another avenue through which US tariffs targeted at China have an impact beyond its borders.

Based on foreign investment flows, the capital is likely to have come mostly from the US, Japan and South Korea.

Some analysts such as Singapore-based DBS say the US economy could suffer more than China's, as US levies could affect American firms with investments in the country, and Washington is also involved in other trade conflicts.

Uncertainty about trade could make banks wary of their exposure to affected industries and hurt the price and flow of credit. It could also make businesses reluctant to invest.

Any tariff pass-through to consumers could affect domestic demand and consumer confidence.

Higher volatility in financial markets hurts all of the above. A model by Pictet Asset Management reckons that a 10 per cent tariff on US trade fully passed on to consumers could tip the global economy into stagflation and knock 2.5 per cent off corporate earnings globally.

ARE MARKETS READY?

Chinese stocks have taken a beating in recent weeks, entering a bear market, as concerns about the trade war have mingled with worries about how an ongoing debt-control campaign will feed through into the outlook for economic growth.

The US dollar fell yesterday, as did the yuan, but a muted reaction in currency markets suggested the escalation had largely been priced in by investors.

World stocks rose 0.2 per cent to their highest level in a week, while Asian stocks climbed nearly half a per cent, led by a rebound in Chinese shares.

REUTERS, BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on July 07, 2018, with the headline 'Trade war impact could extend to other Asian nations'. Print Edition | Subscribe