Redrawing Asia’s trade maps

Without a doubt, 2020 will go down in history as a black mark against the inexorable rise of Asia’s economies. Across the region, economic growth ground to a halt as attention was focused on battling the Covid-19 pandemic. 

The region as a whole was dealt a heavy blow by the pandemic. S&P’s report ‘Asia-Pacific losses near $3tn as balance sheet recession looms’, published in June 2020, forecast the region’s economy would contract by 1.3% in 2020, but grow by 6.9% in 2021. The cumulative impact would be a loss of almost $3tn across those two years. S&P warns of a possible balance sheet recession, caused by a drop in investment, a slow recovery and economic damage that will continue even after a vaccine has been found. 

At a country level, the declines are marked – particularly given previous years’ growth rates. For example, S&P forecasts Malaysia’s economy will fall 2% this year, while Thailand will decline 5.1% due to the impact on the tourism sector. The need to get trade flowing again is imperative to boosting the regional economy. But going back to the old way of doing business may no longer be viable. Across Asia, companies are having to reassess their trading partners and, in some cases, look beyond the region. 

China vs US continues 

The tensions between the US and China seem to be racing towards new heights. After years of trade spats and the imposition of tariffs, new disputes have become more specific, targeting individual companies. For example, the US blocked the use of products produced by Huawei, stretching from mobile phone handsets to component parts used in 5G transmission. The pressure has been extended to other countries, with the UK forbidding the use of Huawei’s 5G components in July 2020, and stating all parts must be removed from networks by 2027.

The impact has rippled across Asia too, as Japanese chipmakers have had to find new buyers after the US prohibited all exports to Huawei of products made using US technology. The move has a sizeable impact on the industry, as Japanese companies had sold parts totalling JPY1.1tn ($10.5bn) to Huawei during 2019. 

The US then announced plans to ban social media platform TikTok (owned by Chinese tech company ByteDance) and WeChat (owned by Chinese company Tencent) from app stores in September 2020. TikTok currently has more than 100 million users in the US alone. However, TikTok may be reintroduced if talks with US technology company Oracle to purchase its US operations are successful, with the decision needing approval from both Beijing and Washington. The move comes after India also banned 118 Chinese apps, including WeChat and TikTok, following clashes along the border. 

And while president Donald Trump’s administration has been hostile towards China, the US has done little to foster stronger relationships with the rest of the region. 

Anwita Basu, head of Asia country risk research at Fitch Solutions, says: “During his first term, president Donald Trump has only made a few official trips to Asia and, as such, bilateral links between Asian countries and the US have weakened. In contrast, he has signalled that the region does not hold as much significance to him as it did to his predecessor.” 

Ms Basu adds that backing out of the Trans-Pacific Partnership was a clear sign of the lack of interest in working with the region. She adds: “It was a very different approach to the [Barack] Obama administration, which had a clear Asia-Pacific strategy. During that period we saw a deepening relationship with Vietnam, South Korea and Philippines. Over the past five years we’ve seen all of that fade away.” 

The US did, however, send health secretary Alex Azar to Taiwan in August 2020 and the prospect of a bilateral trade deal was discussed. Just one month later, US undersecretary for economic growth, energy and the environment, Keith Krach, travelled to Taipei. The move was seen as provocative towards China due to the issues around Taiwanese sovereignty, and China responded by stating the country would give a “necessary response” depending on how the situation develops. 

However, should president Trump lose the November 2020 election, it should not be assumed that the US will return to the type of trade deals seen under the Obama administration. Chris Rogers, supply chain research analyst at Panjiva, a global trade data company owned by S&P, says: “The US protectionist standpoint is not just president Trump and it’s not just the Republican party. It’s the political establishment in the US more broadly and, going into the elections, it is very much behind this position. It’s not the case that we’ll get to the other side of the elections and everything will go back to normal.”  

Production on the move 

The escalating issues between the US and China pushed many manufacturers and exporters to beyond China’s borders to avoid hefty tariffs. But this was not the only cause of companies adapting their supply chain to move away from China, as rising labour costs have also been a catalyst. What has followed is a noticeable decline in the number of exports coming out of China, Mr Rogers says: “If we think about mobile phones for example, five years ago China represented about 85% of manufacturing and mobile phones getting into the US. Now it’s down to about three quarters.” 

For those companies looking to move their chains, Aaditya Mattoo, chief economist for east Asia and Pacific region at the World Bank, explains there has already been a precedent set for how to achieve this: “In the 2011 [Tohoku] earthquake [in Japan], we saw suppliers react, but we didn’t see reshoring where they would move to produce more at home. Instead, they looked to countries like China and Mexico, especially for the manufacture of automobile parts. We anticipate a similar reaction to any further shocks that might be most beneficial to those countries which have shown competitive advantage and implemented reforms, like Vietnam.” 

Some high-profile manufacturers have already relocated to lower-cost locations. “Samsung and LG have put manufacturing capacity in South Korea and Vietnam, because it’s still close enough to China to be integrated into the electronics supply chain, but with cheaper assembly. Vietnam has also seen an increase in furniture and solar panel manufacturing,” Mr Rogers says. 

Moving to another location is also a strategic approach, especially after national lockdowns brought production and shipping to a halt in the early months of 2020. Lillian Li, vice-president and senior credit officer, credit strategy and research at Moody’s Investors Service, says limitations in the supply chain have been exposed. “The crisis has increased considerations over supply chain robustness or supply chain security. This means companies and governments are looking to build  more diversified supplier sources, rather than focusing on China alone. Some are looking at a China-plus-one model, with a second base either in Asia or close to their own locations.”  

However, while the US may think it’s finding alternatives to Chinese-manufactured products, the reality may be more complicated. Mr Rogers explains: “It is largely Chinese companies setting up manufacturing in Vietnam and Malaysia, so in some regards it is China replacing the US with the US.” 

Even the implementation of tariffs or the rising cost of production may not be enough for some companies to seek cheaper methods of production elsewhere. Mr Mattoo says: “With companies that require relatively customised products, like Apple or Foxconn, they’d rather deal with a 5% or 10% tariff than have to uproot their value chains. Some switches will happen, but they will follow existing patterns, such as Samsung’s move into Vietnam.”

The scale of investment already made into China ensures some will decide to weather the storm and continue their operations. Sandeep Uppal, global co-head of international subsidiary banking at HSBC, says optimising investments often outstrips the impact of tariffs. “Multinationals (MNCs) have invested nearly $2tn in China. If their capacity utilisation is at 60% or 70%, then no shift in supply chain will take place. Unless they are really pushed, they would want to squeeze every last drop out of that investment in China. Also, many MNCs are now producing in China for China, and thus they would continue to expand in line with the growth of the market.”

Mr Uppal adds: “We see the current climate as a correction in globalisation. Multinationals globally have invested $32tn which is stuck in bricks and mortar, and they can’t get that out of countries. Irrespective of geopolitics, we will see multinationals around for a very long time.” 

Belt and Road retracts 

China’s extension beyond its borders is not just in reaction to the US tensions. The Belt and Road Initiative (BRI) has been in motion since 2013, but had started to slow even prior to the Covid-19 pandemic. 

“The BRI investment value reached its peak in 2016,” Ms Li says. “After that we see a decline due to several factors, such as the geopolitical tensions, the global tightening in 2018 and now the Covid-19 crisis. There are also domestic factors, such as stricter screenings on capital outflows. BRI remains important to China, especially as the environment with some of the other large global economies becomes more competitive.” 

Following some controversy over the size of loans and repayment terms on some projects, Ms Basu says it is likely to be more discerning in future years. “In the short term, we think China will need to refocus its resources inwardly to build resources for its own population. The BRI will become strategic and more financially sustainable. We are unlikely to see new projects which are not directly linked to a financial or strategic gain. In Asia, BRI will become targeted and focused, especially in the neighbouring countries for low-cost manufacturing to export back into China.” 

The countries which China chooses to focus on moving forward are likely to be closer to home than in the early days of BRI. Ms Basu adds: “We’re likely to see focus on Pakistan, as that has strategic benefits for China. Cambodia, Laos, Vietnam and the Mekong Delta region will see a lot of investment – China is trying to move manufacturing into those countries as it moves towards higher value manufacturing domestically.” 

The BRI is still a priority in Pakistan, as the country’s foreign minister Shah Mahmood Qureshi visited China during August 2020 and had discussions on the ongoing China–Pakistan Economic Corridor, which forms part of the initiative. The visit came just two weeks after the approval of a $6.8bn upgrade for the country’s railway network between Peshawar and Karachi. 

Central Asia has also been a continuing benefactor of the BRI, with Uzbekistan announcing the modernisation of its Kadyrinskaya hydropower plant in August 2020 with the assistance of $9.8m in loans from China. 

It is also possible that the slowing down of the BRI is due to a shift in policy towards making the Chinese economy self-sufficient. President Xi Jinping proposed the dual circulation concept in May 2020, and it is likely the details will be outlined as part of the new five-year plan, scheduled for October 2020. 

Ms Li explains: “It has become part of Chinese economic policy to place more emphasis on developing domestic demand and consumption, with exports playing a supporting role rather than the main focus. It is impacting areas like technology and IT, which have been under restrictions in the US and other countries. The rise of self-sufficiency in China of these systems could impact both the local and the regional supply chains.” 

It is a belief echoed by investment bank Natixis, which stated in a note published in September 2020 that it may well have repercussions outside of its borders. “Beijing’s initiative is bound to raise new concerns with Japan, South Korea, Germany and others who have been profiting from exporting intermediate goods to Chinese companies looking to upgrade their output.” 

Japan’s Brexit plan 

There have been attempts to strengthen international partnerships more widely in the Asia-Pacific region. Japan has signed a post-Brexit trade deal with the UK. While it has been championed as a success by the UK government, it is not as groundbreaking as it may appear. Japan has a vested interest in the UK and the deal it has signed is, in part, to ensure it is protecting its own assets in a post-Brexit environment. 

“Japan’s interest in the UK is in terms of automotive production lines, and I know they are fairly concerned about Brexit and the impact that will have on their operations,” Fitch’s Ms Basu says. “The UK has provided Japan with a gateway into the EU market and, given the uncertainty, we’re not sure what shape that will take in the future.” 

Under the new agreement, 99% of trade will be free from tariffs, which will be of benefit to manufacturers like Nissan and Hitachi that import parts from Japan. But much of it replicates what Japan already has in place with the EU. 

“The agreement between the UK and Japan is just to replace the Economic Partnership Agreement trade deal, but with more focus on tariffs for the automotive industry,” Mr Rogers says. “There has been a lot of Japanese foreign direct investment into the UK as a way of accessing the EU, and Japan is keen to protect those investments. Ultimately, the Japanese government is pro free trade, so is keen to sign off trade deals.” 

Having another trade partnership guaranteed is important for Japan as it moves on from the peak of the Covid-19 outbreak. Japan’s trade has been significantly impacted, with August 2020 imports down 14.8% month-on-month and down 20.8% based on the same month the previous year, according to Ministry of Finance figures. 

Japan may see a boost from the election of new prime minister Yoshihide Suga, after Shinzo Abe stood down after almost eight years due to health reasons. However, it is likely he will continue to pursue the economic policies of his predecessor, replacing the former’s ‘Abenomics’ with a rebranded ‘Suganomics’. 

The desire to sign a trade deal before Brexit is finalised has not been replicated by other Asia countries. “For the rest of Asia, there is no immediate urgency to ramp up ties with the UK after Brexit; we believe that this is because bilateral ties already exist in many cases,” Ms Basu says, with the Commonwealth links among the reasons for these ties.  

Wider trade movements 

Much of what is happening across Asia now was already in motion prior to the outbreak of Covid-19. As supply chains move and new partners are found, the intra-regional trade chains look to become even stronger. 

“With the end of lockdowns, trade has recovered faster than expected. The greater regional integration has helped to offset the possible negative effects of the global contraction,” World Bank’s Mr Mattoo says. 

“Recent trade figures have suggested that the Association of South-east Asian Nations region as a whole is now one of China’s biggest trading partners, and has overtaken the US as an import market,” Ms Basu adds. “China has done more to internationalise and expand its focus to the rest of Asia. For the region, China is a big partner and the US is becoming less important, not least because of its own disinterest in the region.” 

However, the sticking point for China may be its wider geopolitical issues. Ms Basu adds: “While, economically, China is definitely the prominent partner in the region, diplomatically I think a lot of countries are tentative about Chinese foreign policy. As some remain strong strategic partners to Western allies, it might lead to some shifts that spread into trade links as well.” 

For the emerging economies, there is scope to capitalise on the changing trade patterns, but they need to ensure they do not fall foul of the rules set by their international partners. 

“The Vietnamese economy is still in growth mode,” Mr Rogers says. “However, there are still issues, such as an investigation by the US Commerce Department on the export of tyres into currency manipulation that has artificially depreciated the dollar to favour Vietnamese exports. But if there is a trade deal, this could help make these kinds of problems go away.” 

Meanwhile, some are looking to forge their own path and take advantage of the shifts away from China. 

“India is interesting as they have gone in almost the opposite direction to everyone else,” Mr Rogers adds. “The Modi administration has followed a protectionist approach to trade policy, seen with the 'Make in India’ programme. They have been encouraging manufacturers to move to India, from China in particular. We’ve also seen recent discussions between India, Japan and Australia to ensure the continued health of supply chains. However, it’s not certain if this is a good plan or a fever dream caused by the economic climate.” 

Another key point to widening trade is the development of new trade partnerships. Mr Mattoo says: “There are trade agreements which will conceivably create the conditions for trade flows. The Regional Comprehensive Economic Partnership, for example, will have an impact. But I think a big influence on trade will be how quickly the virus gets contained. No matter how many agreements a country has, the virus will be a deciding factor at the present time.” 

Overall, Mr Mattoo believes the current time should be used as a chance to revitalise economies in a new way. “If there are lessons to learn from this, it is not that the whole world is turning inwards and we must all revert to autarky, which is a dismal and disappointing message. Rather it is the opposite message that this is an opportunity for reform and greater co-operation.”