As the trade war escalates between the U.S. and China, some countries in Southeastern Asia could come out winners.
On Monday, U.S. President Donald Trump announced Washington will apply a ten percent tariff on imported products from China starting on September 24, 2018. The tax will increase to 25 percent later this year.
The new tariff will be implemented on Chinese goods worth a total of $200 billion and comes after the U.S. imposed tariffs already on $50 billion of Chinese goods.
Trump shows no sign of calming down tensions and threatened China by saying Washington will put a tariff on another $267 billion of imported goods if “China takes retaliatory action against our farmers or other industries.”
Trump said that the tariff aims to prevent U.S. business technology and intellectual property rights from going to Chinese businesses and to also protect job opportunities for Americans.
U.S. imports from China in 2017 reached $506 billion, almost four times its exports to other countries.
Which countries will be the hardest hit by the trade spat?
Analysts worry the impact of the U.S.-China trade war will be widespread. Asian countries like Malaysia, South Korea, Taiwan, and Singapore rely heavily on exports. When the global economy is shaky, their economies are threatened as well.
Speaking to CNBC Indonesia in July, Taimur Baig, Chief Economist at the DBS Bank predicted that Singapore’s economy would drop 0.8 percent should a trade dispute occur and 15 to 25 percent tariffs are imposed on products sold in the U.S. and China. This year, Singapore’s economy is expected to grow three percent this year.
The growth in Taiwan and Malaysia is predicted to drop 0.6 percent to 2.8 percent and 5 percent respectively. South Korea’s economy is predicted to lose 0.4 percent of its growth due to the trade war.
Southeastern Asia Could Win in a US-China Trade War
Some Southeastern Asian countries may experience the trade war as an economic opportunity that can boost the country’s growth. Based on a survey conducted by AmCham China and AmCham Shanghai, around one-third of 430 American companies in China have considered or are considering relocating their businesses outside China. Countries in the ASEAN region are the likely alternatives for any business relocations.
Vietnam-based furniture manufacturer PhuTai Corp, for example, anticipates a 30 percent rise in exports this year and 2019. The company supplies products to Wal-Mart in the U.S.
Even China may relocate their business to Vietnam as long as the U.S. does not try to stop it, said Bill Stoops, Head of Investment at Dragon Capital. Vietnam is seen as a country with a positive current account balance and with adequate reserves.
Despite a falling currency, Indonesia is still optimistic it will benefit from the trade war. The Rupiah’s downfall is not as severe as other countries’ currencies such as the Turkish Lira and the Argentine Peso.
As Indonesia is due to host the World Bank-IMF annual forum in Bali next month, the country will have an opportunity to attract more investors.
How will China react?
One day after Trump’s announcement, China said it would slap a new import tariff on American products worth $60 billion effective on September 24, 2018, as Reuters reported.
Chinese Prime Minister Li Keqiang said Beijing would not devaluate the Yuan to drive exports.
China will never go down the path of stimulating exports by devaluing its currency,” Li Keqiang said in Tianjin Wednesday.
As CNBC reported, the Caixin/Markit Purchasing Manager’s Index – which is an indicator of China’s economic activity – hit its lowest level since June 2017 and came in at 50.6 for August. A reading above 50 indicates economic expansion, while a reading below that signals contraction.
China may be more protected in a trade war as it has more leeway than the U.S. to fix any economic damage. Unlike the Federal Reserve, the Chinese Central Bank is not independent, so it can be instructed to cut interest rates to boost domestic demands if needed. State-owned banks can also be asked to extend credit.
China has let the Yuan appreciate against the greenback since Trump took office, but China can push its domestic currency Renminbi as an alternative, to make exports more competitive.
The Chinese government has a healthier fiscal condition and can better replace industrial damage hurt by the trade war. On the other hand, the U.S. is suffering a budget deficit of up to four percent of its GDP that will increase in the next few years.