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The (potential) impact of Trump on Asia Pacific

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  • US President Trump’s policy regarding Asia is a downside risk for Asia Pacific
  • Trump’s first moves in the geopolitical arena were met with much apprehension by Asian countries, but has softened his stance towards Asia, compared to his campaign statements
  • If Trump increases trade barriers, this could have major implications for the APAC region
  • If there would be protectionist retaliations (for example by China), this could stifle trade and, in a bleak scenario, could even lead to a trade war. Retaliation would likely focus on products that are exported to the US in net terms
  • Security actions in the South China Sea or increased military presence in South Korea/towards North Korea could trigger a hard line response from China
  • A further tightening of US monetary policy could lead to increased capital outflows from Asia

President Trump is the main downside risk for Asia Pacific

US President Trump’s policy towards Asia represents a downside risk for Asia Pacific. In his campaign, Trump advocated a hard line towards trade with China and security in Asia. Thus far, the actions of his administration towards China and Asia have been softened, though. The influence of the internationalists Mattis, Kushner and Tillerson on the recent confirmation by Trump of China’s “One China” policy and the long meeting of Trump with Japanse Prime Minister Shinzo Abe, might indicate that Trump may follow a more balanced approach towards Asia than he advocated in his campaign. On the other hand, the appointment of ‘China-hawks’ Navarro, Lightizer and Ross as trade representatives highlights America’s more aggressive trade stance towards China.

Overall, we expect that US trade and foreign policy towards Asia, and especially towards China, will toughen. Due to the uncertainty surrounding Trump’s policy agenda, the impact on the region is still hard to predict. A rise in US import barriers could damage economic growth in the APAC countries. Furthermore, the US administration’s foreign policy could have a detrimental impact on the geopolitical dynamics in the region. In addition, due to Trump’s fiscal policy, the Fed might be urged to increase the US policy interest rate, which could lead to capital outflows from Asia and put downward pressure on Asian currencies. We will discuss these risks in more detail below. 

Asian countries are vulnerable to a move to US on-shoring and a rise of US import barriers

In his campaign, Trump promised to increase trade barriers to protect American industries. He also mentioned plans to support on-shoring, albeit to a lesser extent. If pursued, these plans could hurt Asian economies significantly. With respect to import barriers, Trump has, as President of the United States, the authority to take protectionist measures without approval from Congress (for example, he could impose a 45%-import tariff on the import of Chinese goods and services). Although the US and China are both members of the World Trade Organisation (WTO), which binds them to the most favoured nation principle[1], Trump has room to increase tariffs or impose other import restrictions in order to deal with current account deficits, unfair trade practices, national security threats, national emergencies, and war. However, a blank import tariff is not allowed under WTO-agreements in case it’s above the average MFN tariff[2].

Figure 1: Trade balances with the US
Figure 1: Trade balances with the USSource: UNCTAD, Rabobank

At the moment of writing, the introduction of a US border adjustment tax (BAT) is being discussed. In short, this would mean that for the purpose of corporate tax payments, the costs of imported inputs can no longer be deducted from a company’s revenue, while the revenues accrued from exports will no longer be included in a company’s total revenue. In other words, this would be a tax on imports and a subsidy on exports. It’s unclear yet whether a BAT would be in violation of the WTO agreements. While Trump’s campaign promises on protectionism were merely aimed at China (and Mexico), other countries with which the US has a trade deficits are at risk as well (figure 1) if a BAT is introduced.

If Trump will indeed increase trade barriers, in whatever form, this could have major implications for the APAC region. The region in total exports roughly 15% of its total goods export to the US, but some countries, such as Singapore, Vietnam and Japan, export a larger share to the US (figure 2). We also notice that exports to the US are an important contributor to many economies in Asia Pacific (figure 3). This indicates that the Asian economies are vulnerable to a decrease of US demand. Regarding China for example: China’s exports to the US account for approximately 20% of China's total exports measured in domestic value added, which is equivalent to 3.7% of Chinese GDP.

Figure 2: Exports of goods of APAC countries to the US
Figure 2: Exports of goods of APAC countries to the USSource: UNCTAD, Rabobank
Figure 3: Exports to the US are an important contributor to Asian GDP
Figure 3: Exports to the US are an important contributor to Asian GDPSource: OECD TIVA, Rabobank

Retaliation of China and possibly the rest of Asia

If Trump’s actions result in protectionist retaliations, this could stifle trade and, in a bleak scenario, could even lead to a trade war. Together the US and China account for 28% of global imports. If they end up in a trade war, the global trade fallout could be substantial. A trade war and the negative impact thereof on China’s economic growth would have knock-on effects for countries that export heavily to China. Here Taiwan and Malaysia are likely to take a hit, since they are relatively large suppliers of intermediate goods to China (intermediate exports are about 1.5% and 1% of Taiwanese and Malaysian GDP’s respectively), particularly electronics. If China, and possibly other APAC countries, were to retaliate, they will probably target those products that run the largest trade deficits with the US. China would likely target US electronical consumer goods, soy bean and maize imports and American aircraft.

Trans-Pacific Partnership is the first trade victim

An important event in the aftermath of Trump’s election was the US withdrawal from the Trans-Pacific Partnership (TPP). This trade agreement would have covered the US and some other countries around the Pacific Ocean (figure 4), but excluded China. The withdrawal implies a certain loss of potential gains for some Asian economies in the region. Especially Southeast Asian countries such as Vietnam and Malaysia would have benefitted disproportionally, as TPP, next to a reduction of tariffs, also included provisions on state-owned enterprises (SOEs), labour protection standards and the protection of (intellectual) property rights.

The TPP non-tariff measures could be perceived as a way of passing reforms that structurally benefit the economies of the participating countries. For example in Malaysia, stronger intellectual property laws required by TPP would have helped the country to attract FDI to further develop its electrical and electronics sector. In Vietnam, TPP could have driven reform of the country’s inefficient SOEs, which the Vietnamese government has been trying to pass for years, but has been unable to do so due to vested interests.

Figure 4: Initial TPP members
Figure 4: Initial TPP membersSource: Rabobank

Trump’s withdrawal has indirectly handed China an opportunity to step in with a different regional free trade deal and expand its influence in Asia. The alternative trade deal, the so-called Regional Comprehensive Economic Partnership (RCEP), includes a number of Southeast Asian countries, Japan, India and Korea, but excludes the US (figure 4), directing Asian trade towards China. It is important to stress that RCEP is not a proper alternative for TPP, especially for the countries mentioned above that would benefit from the non-tariff measures that are not part of the RCEP. Moreover, most countries in (Southeast) Asia already have trade agreements with China.

Trump’s presidency raises security risks

Trump’s first moves in the geopolitical arena were met with much apprehension by Asian countries. Not only did he accept a congratulation call from Taiwan President Tsai Ing-wen, which was the first direct communication between leaders of the US and Taiwan since 1979; but also raised doubts about the ‘One-China’ policy, which is a foothold of Chinese foreign policy and the foundation of the US’ stance towards Taiwan. Undermining it would certainly increase tensions with China. Trump has also repeatedly criticized traditional US’ allies, such as Japan and South Korea, for not contributing sufficiently to their own defense. More recent moves of the Trump administration reflect a softened stance, however, with a successful phone call of Trump with Chinese leader Xi Jinping, Trump’s confirmation of the ‘One China’ policy and a long meeting with Japanese prime minister Shinzo Abe. Trump has advocated a more aggressive stance towards stopping China’s takeover of the South Chinese Sea in his campaign. His administration has not taken noteworthy actions yet, but the risk remains that the Trump administration will be more aggressive towards China’s land reclamation project. Tensions have been high in these international waters for some time, as China claims almost the entire south China sea, while Vietnam, Taiwan, Philippines, Malaysia and Brunei also claim parts of the sea (figure 5). The sea is an important international route for both countries in South East Asia and for the US.

Figure 5: South China Sea territorial claims
Figure 5: South China Sea territorial claimsSource: Rabobank

Trump has stated in his campaign that he would take tougher actions towards North Korea to stop the county’s nuclear threat. After his inauguration his tone on this subject eased a bit, but an increase in military actions towards North Korea remains a significant threat for peace in the region. North Korea is an alley of China. US security actions in the South China Sea or increased military presence in South Korea/towards North Korea could trigger a hard line response from China. If this results in a greater level of militarisation or even a military confrontation, political and economic uncertainty in the region will increase. This will hurt foreign investor, business and consumer sentiment, probably hurting economic activity in the region. 

Looming risks from further US monetary tightening

Another noteworthy concern for some Asian countries is related to further tightening of US monetary policy by the Federal Reserve. The majority of Asian currencies already depreciated against the US dollar in 2016 (figure 6), and suffered from the broad-based rally in the US dollar as the Fed signalled a more hawkish monetary policy path in 2017 in its December meeting. Some countries would face additional currency pressure from a potentially stronger dollar. A sharp depreciation in their dollar-related exchange rates will (next to higher domestic inflation) cause problems for parties that have borrowed in foreign currency. Debt levels of Asian countries could become problematic when the debt is mostly denominated in foreign currency (especially if it is dominated in US dollars). Given Trump’s policy agenda and the expectation of one or more policy rate hikes by the Fed would exert an upward pressure on the US dollar. Most countries are in good shape to weather US rate hikes, with mostly positive current account balances (figure 8), relatively low (external) debt, appropriate FX reserves levels (figure 9) and more flexible exchange rates.

The countries who are most vulnerable to a weakening of their currency vis-à-vis the USD, are the ones with large amount of foreign currency debts (figure 7). In addition, higher US’s policy rates also limits the room for emerging markets in Asia to lower their policy rates in order to boost economic growth.

Figure 6: Asian currencies depreciate against the US dollar in 2016
Figure 6: Asian currencies depreciate against the US dollar in 2016Source: Macrobond
Figure 7: Asian foreign debt stocks end-2016
Figure 7: Asian foreign debt stocks end-2016Source: Macrobond

We expect one Fed rate hike this year, therefore the effect of an unexpected rate hike by the Fed should be limited for Asia. But it is important to take into account possibilities for interventions. If an individual country is positioned well due to relatively stable currency developments and low foreign debt levels, then the negative effects resulting from a rate hike are expected to be lower.

Figure 8: Current account balances to counter depreciating currencies
Figure 8: Current account balances to counter depreciating currenciesSource: Macrobond
Figure 9: Import covers in FX terms
Figure 9: Import covers in FX termsSource: Macrobond

Footnotes

[1] Under the WTO agreements, countries cannot discriminate between their trading partners, which are also a member of the WTO and in case there is no free trade agreement in place. For example, if a country favours another country by lowering the import tariff for one of its products, and the partner country is a WTO-member but the favour is not part of a FTA, the country has to apply the favour to every WTO-member.

[2] Of course, Trump might be willing to discontinue US’s WTO-membership.

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Author(s)
Carlijn Prins
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 60033
Björn Giesbergen
RaboResearch Global Economics & Markets Rabobank KEO
+31 (0)30 21 62562
Hugo Erken
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 52308

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