- Last week, US imposed import tariffs on solar panels and washing machines
- Still no major trade war US-China expected, but risks are rising
- Short-term impact on Chinese economy small, but longer-term uncertain
- Generally, export oriented Asia would suffer from more protectionism
Last week, the world’s political and business leaders came together at the annual World Economic Forum in the glamorous Swiss ski resort Davos. Normally, this gathering is a symbol for globalisation, inter-national cooperation and free trade. This year, the stage was a bit different, however. Just before the Forum started, the US announced to impose a 30% import tariff on solar panels (mainly affecting Chinese, Korean and Malaysian exporters) and a 20-50% import tariff for washing machines (mainly affected Korean exporters). The US government’s main argument for these measures was protection of domestic industry, an element of its ‘America First’ campaign. US Finance Minister Mnuchin added oil to the fire by stating that a weak dollar policy was benefiting US exporters. These actions and remarks have met wide international criticism, not only from Asian countries but also from the EU. Meanwhile, ‘Davos’ led to a further broad weakening of the US dollar, with the CNY reaching the highest levels since the currency turmoil period of mid 2015.
A key question is whether these measures will mark the start of serious trade tensions between the US and China. During the first year of his term, US president Trump has not lived up to his pre election anti-China rethoric, partly because he needed China in managing the risks from North Korea. Last year’s meetings between Trump and Xi Jinping in Florida and China even led to a range of bilateral agreements on trade and investment. Now that the North Korea crisis has eased, the US tax plan has been approved and with mid-term elections looming in late 2018, Trump seems to have changed tactics. With the bilateral trade deficit versus China having risen further last year, the US government seems to have become more vocal in containing China’s rise as a strategic competitor, including in technology and related areas. Given the strong mutual interdependencies (including China being the key holder of US Treasuries), we still do not expect a major trade war in our base scenario. However, that does not mean there are no risks.
For China, solar panels and washing machines amount to only 0.1% of exports, so from a macro point of view the impact of the import tariffs imposed last week are not significant. That said, the US is China’s key trading partner (around 20% of exports), so an escalating trade dispute would certainly have an effect. Within Asia, China would likely be the country most ‘in focus’ to the Trump-administration, given that the US bilateral deficit with China is by far the largest. China’s (goods) exports to the US surged by over 11% last year and corresponded to around 3.5% of China’s GDP. That suggests that a 10% reduction of Chinese exports to the US would – ceteris paribus – take off almost 0.4% of China’s GDP. Of course, China has the potential to direct exports to other destinations and take measures to support companies impacted by protectionist measures. But the bottom line is that a serious protectionist stance would lead to downside risks for global manufacturing hub China.
A further escalation of trade disputes also poses downward risks for other Asian countries, whose growth models are based on the global supply chain. Next to China, Hong Kong, Singapore, Malaysia, Thailand and South Korea look particularly vulnerable, as they have relative large export linkages with the US. As global trading hubs, Hong Kong and Singapore are in any case vulnerable to a serious rise in protectionism. Japan, Vietnam, Malaysia, India and South Korea belong to the top ten of countries with whom the US has the largest bilateral deficits. Moreover, China, Japan and South Korea are on the US Treasury’s watchlist regarding FX policies. All in all, while in our base scenario we expect (emerging) Asia to remain the global engine (around 6% growth), a rise in protectionism clearly poses downside risks for this export oriented region.