U.S. trade war set to hurt China, but may render ASEAN winner

Kyodo News

Posted at Dec 27 2018 09:42 PM

A trade war waged by U.S. President Donald Trump is likely to deal a further blow to China's economy in 2019, but ASEAN may gain from the dispute between the world's two biggest economies.

The Chinese economy, if U.S.-China trade tensions are prolonged, is set to face significant downward pressure as weakening consumer and business sentiment could weigh on household spending and investment at home.

Some of the 10 countries comprising the Association of Southeast Asian Nations, meanwhile, are expected to attract foreign direct investment as an alternative destination to China, economists say, adding that their economies are certain to grow steadily on the back of robust domestic demand.

China's economy grew at an annualized rate of 6.5 percent in the July-September period of 2018. The pace of expansion was the weakest since the January-March period in 2009, when the world economy suffered from the aftermath of the 2008 global financial crisis.

Although Chinese President Xi Jinping has pledged to implement large-scale fiscal stimulus measures including tax cuts, the country's leaders may be forced to accept an economic slowdown of about 6.0 percent in 2019, analysts say.

Given economic data like production, corporate profits, the job opening-to-application ratio, retail sales and exports, China's economy "fell into a stagnant phase in August 2018," said Kaori Yamato, senior economist at the Mizuho Research Institute in Tokyo.

The Chinese economy would remain sluggish "for an extended period," if a downturn in exports, triggered by a tit-for-tat tariff fight with the United States, negatively affects investment and consumption in the country, Yamato added.

So far, the United States, one of the world's major markets, has imposed tariffs of up to 25 percent on $250 billion of Chinese imports -- or around half the goods it imports from China each year.

In retaliation, Beijing, which has been urged by Washington to reduce its huge trade surplus with the United States and rectify its alleged unfair business practices, has levied tariffs on more than 80 percent of all U.S. imports.

At their summit in Buenos Aires on Dec. 1, Xi and Trump agreed that Washington and Beijing will hold off on imposing further tariffs on each other's imports and attempt to complete talks about technology and intellectual property rights issues within 90 days.

The United States, however, warned at the time that "if at the end of this period of time, the parties are unable to reach an agreement, the 10 percent tariffs will be raised to 25 percent," suggesting that a failure to end negotiations will rekindle trade strains.

"I think the differences between what the United States wants from China and what China will be willing to give the United States are very large," said Malcolm Cook, a senior fellow at the ISEAS-Yusof Ishak Institute in Singapore.

"I expect trade tensions to continue in 2019 and the United States to either raise existing tariffs or expand the range of tariffs," Cook said, adding, "The trade war will hurt China more than the United States."

Jeff Kingston, director of Asian Studies at Temple University Japan, expressed fears that a slump in the world's second-biggest economy would drag down the economies of ASEAN nations that have supplied components to manufacturers in China.

"China has been an engine of growth, so if it sputters the regional consequences will be severe," Kingston said.

But other pundits are rather optimistic about the outlook for the ASEAN economies, as several major economies, particularly Japan, have been bolstering investment in Southeast Asia in the wake of the escalating U.S.-China trade spat.

A number of foreign companies have been recently moving their production bases to the ASEAN region from China, now that the goods they make in that country face heavy U.S. tariffs and are not in much demand in the United States.

According to the Japan External Trade Organization, 57.4 percent of Japanese firms are eager to expand their business in the ASEAN area within the next one or two years, compared with 48.7 percent that are keen to do so in China.

The government-backed JETRO surveyed more than 5,000 Japanese enterprises operating in 20 Asian and Oceanian countries for one month through Nov. 9, 2018.

In 2018, the central banks of some ASEAN member states, such as Indonesia and the Philippines, tightened credit, with a series of rate hikes by the U.S. Federal Reserve accelerating an outflow of capital from emerging markets.

As the pace of U.S. rate increases is set to slow and monetary tightening pressure in developing nations may ease in 2019, the ASEAN economies are expected to be boosted by healthy domestic demand, said Makoto Saito, an expert on emerging Asian markets.

ASEAN groups Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.