What is the US-China trade war?

The murmur about the US-China trade war, which started after each country decided to introduce tariffs on goods traded with the other, has evolved into a full-fledged everyday dialogue over the past few months. It all began after U.S. President Donald Trump made a promise to fix China’s “long-term abuse of the broken international system and unfair practices” during his campaign. As a counter, earlier this year, the U.S. imposed a tariff on China-manufactured solar panel imports. This was followed by another specific targeted move by them in July when they imposed a 25% tariff on some $34 billion imported Chinese goods. This time China decided to respond with a similar tariff on U.S. products. It has been quite a series of give and take political and trade moves since then.

Statue of Liberty

So far, the U.S. has imposed tariffs on around US$250 billion worth of Chinese goods, and China has responded with tariffs on US$110 billion worth of American products. Neither Trump nor the Chinese President Xi Jinping seems to be willing to back down. China’s Ministry of Commerce warned that the way things are escalating, this might blow up to become “the largest trade war in economic history to date”.

How does this impact Southeast Asia?

There is no doubt in the fact that this economic feud is going to leave ripples throughout Southeast Asia. The general, globally accepted maxim among economists is that no one benefits from a trade war. Southeast Asia is trying to prove that notion wrong.

Owing to the intensifying trade war, there is a rush of production moves and new orders in the region as firms are reconsidering their business in the U.S. and China. According to a study by AmCham China and AmCham Shanghai, around one-third of over 430 China-based American companies have or are planning to move production sites amid the rising tensions. Southeast Asia is their top destination as the region offers the twin benefits of geographical proximity to major markets like India and relatively low labour costs.

Let us take a look at some other potential factors that may lead to Southeast Asia benefitting from the ongoing trade war.

Discounted Rates for Shoppers

According to Jeffrey Williamson (Director of the government-backed California State Trade Expansion Program), American exporters are now willing to explore untouched Southeast Asian markets. Although reports suggest that there are some U.S. exporters who are trying to get around tariffs through e-retailing because they do not want to give up trade in their biggest market (China), most of them are drifting to new playfields.

The effects of the trade war in the form of discounted rates for shoppers are starting to show. For example, American cherries sold in Hong Kong this year were over 10-20 percent cheaper than last summer. The price of American apples, oranges, plums and grapes in Hong Kong has undergone a depreciation of around 30 percent than last year.

bunch of red cherries in brown bowl

Investment Boom for Startups

The trade war also seems to be good news for startups and SMEs seeking funds. Reports suggest that the region is witnessing a boom in foreign direct investment.

According to a study by Maybank Kim Eng Research Pte, manufacturing inflows in Vietnam rose by almost 18 percent by September 2018. Central bank data reports suggest that the net FDI in Thailand surged 53 percent from the previous year to a whopping US$ 7.6 billion. Thailand witnessed almost five times manufacturing inflows than last year. Total FDI into manufacturing in the Philippines rose to US$861 million in the same period from US$144 million a year earlier. Singapore saw an influx of investments like new battery production lines and also became the digital innovation centre of several multinational corporations this year.

High demands for logistics and re-exports

cargo vessel on body of water

Singapore could witness a rise in demands for its logistics, re-exports and financial intermediation services as it is the region’s financial and shipping hub. Countries like Cambodia, Vietnam, and Thailand, have similar manufacturing cost structures as China. These countries could experience a surge in demand for their exports. Another advantage could come in the form of investments by Chinese companies that might be looking to circumvent the American tariff wall.

Rebalancing regional trade and investment dynamics

Rebalancing the economy and reducing regional inequality has been a major concern in SEA. The trade war could give this opportunity to shuffle supply chains and diversify sourcing locations. It could lead to the rebalancing of regional trade and also refresh the investment dynamics to a considerable extent, thus making way for new opportunities.

Opportunity for ASEAN countries to come together and win

The debate of ASEAN still not being one community never ceases. Now can be the time to actually come together and cushion the disadvantages while making the most of the benefits of the ongoing trade war.

During the annual World Economic Forum on the Association of Southeast Asian Nations (ASEAN) this year, the US-China trade war was a central topic of discussion. Leaders from all parts of the ASEAN neighbourhood agreed that it is time to join hands and look at the larger picture.

Ignatius Darell Leiking, Malaysia’s minister of international trade and industry, said that “ASEAN should start thinking about consolidating together once more.” He suggested that the region needs to “start taking opportunities” by creating “an economy through ASEAN”.

If all Southeast Asian countries come together and support each other while abiding by sincere economic strategies, the entire region could actually benefit from the US-China trade war. However, the international economic tides are in a state of perturbation right now, and it is only fair to say that the world will have to wait and watch for final outcomes.