Asia’s emerging markets: collateral damage in the trade wars

Beijing's financial district ©
Emerging Asia is still a solid growth story: stay invested

Trade tensions between the US and China are rising. On top of the tariffs that are already in place, the US plans to impose a 10% tariff on a further $200bn-worth of Chinese imports, which could be lifted to as much as 25%. China responded with plans to impose retaliatory tariffs on US imports worth $60bn, with levies ranging from 5% to 25% on everything from aircraft to soya bean oil, smoked beef, coffee and flour.

What does this mean for the emerging markets surrounding China? If these tariffs lead to a slowdown in Chinese imports to the US, there would inevitably be knock-on effects for countries caught up in China’s supply chain. After all, 9% of exports from China originated in other emerging Asian markets, notes Capital Economics. If Trump followed through on his threat to impose tariffs on all US imports from China, this could impact not only Chinese GDP, but Taiwan, Malaysia and Singapore in particular.

China’s currency cushion

So far, China has devalued its currency (the yuan) by 10%, which means that its products are currently no more expensive to US firms than before. But the escalating trade dispute “will have repercussions on the multilateral trading system”, say Sun Xi and Faisal Ahmed of the South China Morning Post. Both China and other export-led economies will see the price of their products rise and there will be costs associated with “supply chain disruptions”, as well as “spill-over effects on partner countries and sectors”. Hong Kong, Taiwan, South Korea, Japan and Singapore are already feeling the heat, as they are part of the global value chains for components and semi-conductors.

But it’s worth remembering that China is the dominant exporter in many areas. That means the US will struggle to find alternative suppliers in the short term. As for the long term, other Asian exporters could benefit from a shift in US demand away from China. In 2011, China was the dominant exporter of solar panels to the US, for example. But when US tariffs were imposed the following year, some production lines moved to Malaysia.

So even with higher trade barriers in place, “the gains from globalisation made over the past two or three decades by emerging economies including China would not be reversed”, according to Capital Economics. But future growth may still be slower. Poorer Asian economies such as Vietnam, the Philippines, India and Indonesia would find it more difficult to emulate the success of the region’s richest economies, which have thrived on supplying a world that was open to trade.

Geopolitical risk will “continue to weigh on markets”, and more trade-war turbulence could ensue in the coming weeks, with China perhaps punching back on alternative fronts such as North Korea, notes Mark Rosenberg of GeoQuant on MarketWatch. “These dynamics will dampen global economic growth in quarters three and four.” But in the long run, emerging Asia is still a solid growth story, with its young population and growing domestic demand. Stay invested.