Just when China’s economy seemed to be stabilizing, Donald Trump’s election as U.S. president poses significant new risks. Not just for Chinese growth, but the entire Asia region.
That’s because the president-elect campaigned on a policy platform with protectionism at its center. Trump wants to slap punitive tariffs on Chinese goods and label the world’s No. 2 economy a currency manipulator.
Such a move would hurt Chinese exports. But it could also trigger a trade war if Beijing retaliates, catching other Asian economies in the crossfire.
Other worries: a planned major regional trade pact, the Trans-Pacific Partnership, likely won’t get off the ground. Slower trade flows and rising uncertainty means less investment and weaker growth. Then there are controls on movement of people, the risk of capital repatriation back to the U.S. and major security concerns.
“Profound changes in U.S. trade and security relations with the region are likely and probably negative,” economists at Morgan Stanley wrote in a note.
Targeting China with trade barriers could pose an unpleasant choice for policy makers in Beijing: accept the hit to growth from weaker exports or respond in kind, economists at Goldman Sachs Inc. wrote in a note. A weaker yuan could trigger an acceleration in capital outflows, pressuring China’s international reserves and draining money from a slowing economy.
“One possible measure would be to allow a somewhat faster weakening of the yuan, although from China’s perspective this or other trade measures could carry the risk of escalation,” the Goldman economists wrote.
An investor survey conducted in July by Nomura Holdings Inc. flagged a long list of worries under a Trump presidency: from a possible rise in trade protectionism to threats to regional security if the U.S. cuts its military commitments in Asia.
The conclusion is clear: after Mexico, Asia is most at risk.
In Nomura’s report, titled “Trumping Asia,” 77 percent of respondents in its survey expect the U.S. will brand China a currency manipulator under Trump and 75 percent predict he will impose tariffs on exports from China, South Korea and Japan. Only 37 percent think he will follow through with a pledge to build a wall along the Mexican border.
Nomura didn’t disclose how many respondents it surveyed.
Investors’ fears aren’t unwarranted. Asia is the world’s manufacturing hub and many nations are export-dependent, putting them at risk if trade barriers start rising. China was the U.S.’s biggest trading partner last year, and if trade restrictions are imposed on the nation, the knock-on effects on the rest of Asia would be substantial, according to Nomura.
None are more vulnerable in Asia than South Korea and the Philippines. South Korea faces a possible backlash from two sides: Trump has criticized a 2012 free-trade agreement with the country, saying it has destroyed almost 100,000 American jobs; and he has vowed to force South Korea to meet the full cost of security guarantees provided by the U.S., which may add to fiscal woes there, Nomura said.
The Philippines faces risks because of possible immigration restrictions. The U.S. is host to 35 percent of the total number of Filipinos working abroad, and Nomura estimates they account for about 31 percent of total worker remittances, a key source of foreign inflows for the local economy.
The Philippines has one of the biggest export exposures to the U.S. in Southeast Asia and Trump’s pledge to bring jobs back to the U.S. may threaten the nation’s burgeoning business process outsourcing sector. The industry caters mostly to U.S. companies and attracts revenue that may equal the size of total worker remittances, about 9 percent of GDP, over the next two years, according to Nomura.
To be sure, it remains to be seen how much Trump delivers on his campaign rhetoric. His promise to ramp up fiscal spending could cushion the U.S. economy, which is a potential positive for world growth too.
But even then, the absence of any new trade agreements would probably offset that.
“Asia would, therefore, benefit less from a faster pace of U.S. growth than it would have otherwise,” economists at Deutsche Bank AG wrote. “Asian exporters – especially in North Asia – are particularly vulnerable, having long relied on external demand as the main impulse to growth.”