On October 30, the Institute for China-America Studies (ICAS) held a public event to discuss the impact of the on-going trade conflict on growth trends in China and developing Asia (Asia excluding Japan) as well as the regional economic outlook, going forward. Ms. Valerie Mercer-Blackman, a senior economist at the Asian Development Bank (ADB) and a lead author of the trade war’s economic impact in the ADB’s latest Asian Development Outlook 2018 Update, was the featured presenter. Shanaka Jayanath Peiris, a senior economist at the International Monetary Fund (IMF), served as the lead discussant and provided his institution’s viewpoint too of the expected effects of the trade conflict.
Both Ms. Mercer-Blackman and Mr. Peiris shared a basic consensus that the effects of the Sino-American trade friction was a ‘net-minus’ for the region. The headwinds to growth prospects were real and the region would be negatively affected – albeit modestly. This having been said, the country-wise distributional consequences were much more varied. Should the trade war continue unabated, the ASEAN 5 (Indonesia, Malaysia, Philippines, Thailand, Singapore) economies stood to gain relatively from the relocation of China-based supply chains to their territories while China stood to lose in relative terms from the departure of these supply chains. In certain labor-intensive manufacturing segments, such as textiles, there is also expected to be a movement of production capacity out of China to countries like Vietnam and Cambodia. Overall however, the growth and employment effects of the trade conflict is expected to be muted. China will continue to grow in the 6-plus range in 2018 and 2019 with stable employment growth, even though there will be concentrated job losses in certain exposed tradeable sectors, such as textiles.
As for the U.S., the Trump Administration-initiated tariffs on over $250 billion of Chinese imports is unlikely to make any significant dent on the U.S. overall trade deficit. The trade re-direction channel is likely to ensure that China’s export losses are developing Asia’s export gains – as such the overall U.S. trade deficit is likely to see only a marginal decline. And it is most unlikely that the supply chains that currently run through China will pack-up and return to the U.S. Supply chains are resistant to rapid-fire shifts, though future U.S. investment in China could be impacted if the trade war continues on a prolonged basis.
Both Ms. Mercer-Blackman and Mr. Peiris were quick to caution that their regional projections were not set in stone. There are numerous contingent factors which can impact these forward-looking projections – not the least of which is the ‘(lack of) confidence effect’ that can kick-in harshly if private business, deterred by the escalating uncertainty of the trade war, sit on the sidelines and fail to make the requisite investments. The best antidote though to this uncertainty is for the countries in the region themselves to engage in unilateral liberalization of their manufacturing and services trade policy regimes. China and developing Asia have, as a general rule, benefitted handsomely from trade liberalization and there is ample scope still to liberalize further, especially in the area of services. Multilateral and regional trade and investment liberalization should also be pursued in earnest.
