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The fallout from the trade war: what next for Asia?

The trade war between the US and China has left Asian economies caught in the middle,

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Vietnam's clothing sector could profit at China's expense

The impact of the US-China trade war on the rest of Asia has been modest so far, says Gareth Leather of London research consultancy Capital Economics. Exports to mainland China from Korea and Taiwan (which often supply intermediate goods that are processed and shipped on to the US) are sharply down since last year, yet that has been largely offset by stronger direct demand from US firms seeking alternative suppliers.

Malaysia, Singapore, Thailand and the Philippines have probably lost a modest 0.1%-0.2% of GDP from the disruption. For less open economies such as India and Indonesia the trade war has been "negligible".

Trade disruption typically strengthens the dollar and weakens the Chinese renminbi as investors turn to the perceived safety of US assets. That leaves these economies caught in the middle, says Udith Sikand in Gavekal Research.

Weak currencies cause domestic inflation and make it more expensive to service foreign debts, but an even weaker yuan could also make their manufacturers less competitive against China. South Korea, Taiwan and Thailand look the most well prepared for this scenario.

Malaysia and India, where central banks have been running dovish monetary policies, look the most exposed to inflation. The dispute has already prompted a reorganisation of global trade networks, says Keegan Elmer in the South China Morning Post. Vietnam's exports to the US were up 29% year-on-year in April and foreign investment has jumped.

A study last year by The Economist Intelligence Unit found Vietnam and Malaysia well-positioned to take overIT equipment manufacturing from China, while Bangladesh, India and Vietnam couldgrow their garment manufacturing industries.

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