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US-China Trade War: Who Will be Asia’s Winners and Losers?

Throughout 2018 there had been aggressive posturing regarding trade protection by the US and China. Recently, this was escalated further. Discussions have apparently not taken place since the Trump administration ratcheted up its scrutiny of Chinese telecom companies.

An agreement on trade is at risk since the negotiations between the US and China appear to have stalled as both sides dig in after disagreements earlier this month. Undoubtedly for investors, a protracted dispute between the world’s two largest economic superpowers will surely impact Asian markets. But in what way?

Asia’s open economies

Asia has some of the most open economies in the world and a trade war between the US and China will certainly jolt financial markets in the region. Though the situation appears grim, most multinational companies are fleet-footed and there will be companies, industries, and economies that will stand to benefit from the ongoing trade war.

Laymen observers could say that the US is winning the trade war given its stock market on the up. Meanwhile, the Chinese stock market has felt the heat and companies that are operating out of China are being forced to redraw their supply chain maps. Simply put, if the companies unable to manufacture goods in China, they will likely move operations to Thailand, Vietnam or Indonesia.

Winners and losers

As reported by the Economist Intelligence Unit (EIU), Asia stands to be the biggest beneficiary when manufacturers move out of China. The report stated that:

“We expect the trade war to escalate further in the coming months, ultimately covering finished consumer products including mobile phones, laptops and other electronic goods, as well as apparel”.

Additionally, there exists a strong network of free trade agreements in many Southeast Asian nations and this makes it easy for them to jump on the bandwagon. The recent Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade pact, that includes countries such as Malaysia, Singapore, and Vietnam, is a prime example of this trend.

Who stands to gain?

President Donald Trump announced tariffs on US$200 billion worth of Chinese goods last week, escalating the US-China trade war. The US Trade Representative removed almost 300 products from an initial list released in July. But 5,745 Chinese goods will still get hit.

Keeping this in mind, there are two channels of potential benefit from the fallout of this trade war. They are “Import Substitution” in the short term and “Production Relocation” in the medium term.

These two channels are conduits of gain for different Asian countries. It is highly likely that Malaysia will be the largest beneficiary of import substitution by companies in the US and China. It is followed by Japan, Pakistan, Thailand, and the Philippines respectively.

Import and manufacturing beneficiaries

Of all the Asian countries, India, Bangladesh, and South Korea seem to be the least likely to gain from import substitution. Malaysia can benefit from electronic integrated circuits, communication apparatus and liquefied natural gas, Japan from automobiles, Pakistan from cotton yarn, Thailand from units of automatic data processing while the Philippines could stand to gain from electronic integrated circuits.

If there is a prolonged US-China trade standoff, it would, over time, encourage multinationals to divert production to factories situated in other countries or even relocate whole manufacturing processes in a bid to escape tariffs. In the medium term, Vietnam benefits the most, followed by Malaysia, Singapore, India, and Thailand.

Despite any positive substitution effects, most Asian countries happen to be suppliers of parts and components to China where they are in turn assembled into exports destined largely for the US and Europe. All Asian economies will indirectly be negatively impacted by higher US import tariffs on Chinese goods. As a region, Asia stands to lose if a full-blown US-China trade war comes about.

Where do we go from here?

It is probably going to take at least a few years for the drama (and repercussions) of the trade war to completely play out.

Worldwide organisations will require time to draft new global and territorial procedures, find new accomplices, explore diverse lawful frameworks and secure the required licenses. Indeed, according to the EIU, even under the most hopeful situation the advantages for Asia’s champs in the trade war are probably not going to be seen before 2020.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.