4 November 2019

Asia’s self-sustaining growth is a shield against US tariffs

In the latest episode of the trans-Pacific trade dispute a can was kicked down the road – the US tariff hike originally scheduled for 15 October has been suspended.

How the finale will shape up is anyone’s guess, but one macroeconomic trend has solidified: Asia is on the cusp of creating a virtuous circle of growth that will make China and the rest of the region less susceptible to external pressure.

The data tell a compelling story of a region maturing from an export-driven “Made in Asia” model to a “Made for Asia” model where growth comes from a regional economic ecosystem self-sufficient in the mutually reinforcing elements of growth: manufacturing, consumption and investment.

If Asia can create its own economic weather, it would enhance its ability to rebuff Western economic demands and make it less vulnerable to volatility elsewhere in the global economy. Asia now contributes two-thirds of global economic growth, implying that we could be approaching a point where Western economies become more dependent on Asia for their future economic wellbeing than Asia is dependent on the West.

Asia’s largest trading partners are no longer in North America or Europe: last year, 54 per cent of exports from Asian countries went to other Asian countries. Although some of this is driven by increasing diversification of supply chains within Asia, the trend of regional consumption-driven trade is likely to build momentum.

Asia’s new consumers are already changing the face of the global economy. Regional manufacturers and international corporations which once used Asia as a cheap place to create products for western consumers are now focusing on customers closer to the factory.

Around the world, cars are getting bigger grilles that cater to Chinese tastes; clothing lines are incorporating smaller and slimmer fits for Asian customers; and furniture companies are introducing new designs made from materials that can cope with the heat and humidity of tropical climates.

Asia’s ability to make up for the tariff-affected demand for its products in the US and elsewhere is already evident. China’s trade with the US dropped by 9 per cent year-on-year in the first half of 2019, but its overall trade rose by 3.9 per cent.

China has significantly cut its exposure to the US market in recent years, too. HSBC Global Research estimates that the total value to the Chinese economy of exports to the US -- direct and through third countries -- has almost halved since 2005, dropping from 7.1 per cent of China’s GDP to 3.7 per cent.

That is not to say that Asia is immune to the impact of increased trade tensions. Inter-regional exports and international investment are both down, but these impacts are more driven by the uncertain future than the tariffs themselves, and do not on their own represent an existential threat to the region’s economic future.

They may even help promote Asia’s self-reliance in the long term. Some American companies have switched to manufacturing sources outside China, typically moving production to countries like Vietnam and Malaysia to avoid tariffs and legal sanctions.

The two weakest links in Asia’s ability to create self-sustaining growth lie in investment and trade policy.

The Asian Development Bank estimates that Emerging Asia’s local currency bond markets -- excluding India -- are worth $15 trillion, three-quarters of which is in China, now the world’s second largest bond market.

The recent inclusion of Chinese government and policy bank bonds in the Barclays-Bloomberg Global Aggregate Index has boosted international capital markets integration, but Asia still needs to collaborate on creating deep and liquid capital markets that can recycle the region’s high savings into cost-effective investment.

A recent World Bank report on the trade corridors covered by China’s Belt and Road Initiative, the vast majority of which are in Asia, estimated that they under-trade by 30 per cent and fall short of their foreign direct investment potential by 70 per cent due to policy gaps and inadequate infrastructure.

Attempts to minimise trade barriers within Asia have met with varying degrees of success, but the overall record has been disappointing. The vision of a free-trade area uniting the 10 members of the Association of South-East Asian Nations has stalled; the biggest regional initiative, the Regional Comprehensive Economic Partnership, has taken 26 rounds of negotiation over the past seven years; and the recent dispute between Japan and South Korea is a timely reminder that there are still lingering intra-regional tensions in a number of places.

The trans-Pacific trade dispute has given a new sense of urgency to resolving these issues. A framework agreement on RCEP is expected to be signed later this year, although Indian sensitivities remain, and trade featured prominently on the agenda of the ASEAN summit held in June.

The emergence of an Asia that derives its growth from intra-regional manufacturing, consumption and investment has profound implications for the global economy. A region with alternative sources of growth has less incentive to give concessions.

A contribution piece by Stuart Tait, Regional Head of Commercial Banking, Asia Pacific, HSBC. A version of this piece was first published in The Business Times ASEAN Portal on 4th November 2019.