A bitter trade battle is currently on-going between the world's two largest economies, known as the US-China Trade war. China is the world's largest exporter and US is the world's largest importer.
Tangled in the dispute are geopolitical tensions at play with China’s Belt and Road Initiative, the South China Sea dispute and activities of telecommunications company Huawei issue.
The trade war has simmered for over 18 months now, with no signs of being able to fully resolve soon. As of June 2019, the US has slapped tariffs on US$550 billion worth of Chinese products. China, in turn, has set tariffs on US$185 billion worth of US goods.
The International Monetary Fund has described the US-China trade war as the major source of global economy uncertainty. It estimated that the trade war reduced world's economic growth to 3 percent, instead of the estimated 3.8 percent.
A phase 1 trade deal was signed between US and China in January 2020. There are multilateral relationship where China is expected to increase purchases of U.S. goods and services to $200 billion above 2017 levels over the next two years.
Countries closer to China, such as Vietnam, Cambodia, Thailand, benefit most from relocation of factories to supply to the US
Countries bordering with China benefits most from the trade war. This is because there has been a boost of investments into these countries, as multinationals build a second manufacturing facility outside of China to avoid tariffs.
Vietnam is the largest beneficiary for ASEAN in the trade war. Vietnamese exports to the U.S. increased 28 percent in the first three quarters of 2019. In 2019, it was recorded as the eighth largest recipient of foreign direct investment in the world and largest in South East Asia. It received over USD 38Bn, of which 45.8 percent went into the processing and manufacturing sector.
However, due to increasing development and investments, it faces challenges with its infrastructure. It needs to fast-track its infrastructure development to cope with investments. Businesses are raising concerns about congested ports and roads and there is soaring costs for land and labour. Thus, businesses still keep their production in China, where the underlying infrastructural base is fit for purpose.
There are also risks for Vietnam. US is complaining of huge trade surplus from Vietnam and may impose tariffs on Vietnam. In the past, it has imposed tariffs on Vietnamese seafood and metal exports. It is also accusing Vietnam of manipulating its currency by keeping value of its currency low to increase exports.
Cambodia is also gaining some investments where investors are finding resource difficulties in Vietnam. It is however unrealistic for all companies to move to Cambodia because it does not have a good production support or well-established industries.
On another note, China’s exports to Cambodia have been rising steadily since start of the trade war. Coincidentally, Cambodia’s exports to US is also rising. In the first three months of 2019, it rose 22 percent. Some Chinese companies are using Cambodia to dodge taxes. Over the long term, Cambodia may face trouble with the US.
In September 2019, Thailand introduced a relocation package called Thailand Plus. The package seeks to expedite investments from companies seeking to relocate to Thailand as a result of the US-China trade war. Some incentives offered under the package include a five-year, 50 per cent reduction of corporate income tax as well as grants for upskilling workforce.
The remaining ASEAN countries may gain slightly from increased exports
Singapore, Philippines, Malaysia and Indonesia are located further away from China. It is benefiting less in terms of investments from factories relocating from China (although there are a few). For most of these countries, US and China also remains their largest trading partner.
Singapore's economy is taking a hit due to its dependence on trade and manufacturing activities. Industries most likely to be affected include the electronics, chemicals and maritime & shipping industry.
Malaysia is considered to be one of China's main competitors in terms of key exports of chemical products to the US. It will be an alternative for US to import chemical products from. This is also the same for LED products where Malaysia is one of the top 3 suppliers of LED.
Indonesia has a mixed outlook. China and US are Indonesia's main trade partners. The multiplier effect of the trade war has put pressure on the ability of the country to achieve growth targets.
Indonesia still struggles against regional peers for FDIs because of inadequate infrastructure, particularly in transport, rigid labor rules, limits on how much foreigners can invest in several industries, bureaucratic red tape and a habit of backtracking on regulations that makes it tricky to do business in the country.
The US-China trade war has fueled some investments into the region. There are some shifts in terms of high-tech or high-value goods, and production in the majority of industries is incorporating new technology or smart automation. This may help in technology transfer. Vietnam has gained most from the trade war, but faces challenges with infrastructure development to keep up with investments.
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Baker McKenzie, Thailand Plus - New Relocation Incentives, https://www.bakermckenzie.com/en/insight/publications/2019/10/thailand-plus-new-relocation-incentives, published 18 October 2019
Bloomberg, Why Indonesia Failed to Cash-in on the China-US Trade War, https://www.bloomberg.com/news/articles/2019-11-05/why-indonesia-failed-to-cash-in-on-the-china-u-s-trade-war, published 6 November 2019