A host of Asia Pacific countries are priming themselves to take advantage of the escalating trade war between the US and China.
Beijing stepped up the rhetoric last week, vowing to retaliate against US president Donald Trump’s decision to slap a further $200 billion (£152.4 billion) worth of tariffs on almost 6,000 items, including handbags, rice and textiles.
The Chinese government has yet to make a decision on what action it will take, but in August it had promised to impose $110 billion in retaliatory tariffs on US exports.
Sensing an opportunity, Taiwan – one of the countries most exposed to an economic slowdown in China – recently announced plans to encourage companies with factories in China to move their operations to Taiwan.
While the consensus is that the slowdown in China’s economic growth is a structural trend driven by president Xi Jinping’s campaign to deleverage the corporate sector, there are fears the trade war could also hit the economy if trade tensions escalate.
Aninda Mitra, a senior sovereign analyst at BNY Mellon Investment Management, said Taiwan has not been the only one looking beyond China.
‘The Koreans have been doing this in a sense. Some of Samsung’s biggest factories, for example, have been moved from China and are now in Vietnam. They’re also diversifying into India and so on,’ he says.
‘Japanese companies have also started moving some production away from China and that could all very well intensify if some of these products become subject to these tariffs.’
The big worry, Mitra adds, is whether Chinese demand will slow down — something which would be a ‘big shock to the rest of Asia’.
He says: ‘I’m not convinced a limited trade war at the current levels would have a devastating impact on other Asian countries. But if we saw a very sharp slowdown in China, that would put more stress on Asia Pacific and emerging market (EM) countries more widely.’
One country tipped to do well out of a trade war is emerging markets favourite Vietnam, one of the world’s fastest-growing economies.
Karine Hirn, a Hong Kong-based partner at East Capital, believes the trade war could create ‘favourable’ conditions for Vietnam in particular, with companies looking to take advantage of cheap labour costs for manufacturing.
She says: ‘[Vietnamese workers] earn a fourth or a fifth of what Chinese factory workers earn, but they work just as hard. And when you look at demographics, the median age in China is growing, whereas it’s lower in Vietnam. So if you’re a company thinking about building a factory, these are things you take into account.’
Hirn also highlights Indonesia, another emerging market darling of recent years, despite seeming to take the brunt of the emerging market sell-off recently, as another country set to benefit.
Indonesian president Joko Widodo’s government has encouraged foreign direct investment into the world’s fourth most populous country, despite his recent adoption of economic nationalism ahead of the country’s elections in April 2019.
Hirn says Indonesia, seen as the ‘Africa of Asia’ due to its potential future growth, is becoming increasingly attractive for Chinese companies which could potentially be impacted by the trade war.
‘Where this potential “slowdown” could have some negative impact is where Chinese companies that have been more prone to investing domestically are now starting to look for high growth rates elsewhere,’ she says.
‘Indonesia is a country we hear a lot about from Chinese companies. They talk about the high growth rate in sectors linked to consumption.
‘Indonesia is a very interesting country for China because of its size. You’ve got a government there which has made it a priority to get investment from other countries – it’s the Africa of Asia in terms of being a market people want to enter. And they’re keen to attract Chinese investment.’
Hirn is doubtful however about the likelihood of any significant Chinese slowdown, and it is a notion that Jan Dehn, head of research at Ashmore, is not buying either.
He puts the lower second quarter figures down to the rotation of the economy into domestic demand, in a country where saving rates are nearly 50%. There is ‘huge potential’ for spending to increase in China, he said.
Dehn also believes it is the US that will lose most from the trade war, with emerging markets as a whole gaining.
‘If America does not want to import stuff from China, China will instead export to other countries. This will increase costs for the US and lower costs for everyone else. Lower costs means higher real income in the rest of the world, but higher costs mean lower real income in the US,’ he says.
‘Outside of the US, this will be good for consumers, but will challenge producers, which will become more productive.
‘In the US, consumers will suffer and producers will get protection from competition, but sadly this will only undermine their productivity and turn them into rent-seekers. Overall, EM will get fitter and the US will get fatter.’