US increases imports from China’s neighbours

After a little more than a year since the back-and-forth trade dispute began between the world’s two largest economies, economic data is beginning to show signs of its effect.

US imports from China have been falling sharply due to tariffs, but the US is buying more from other Asian economies, a recent report from PwC UK that tracks global economic trends highlighted. This trend is likely to contribute to faster economic growth in those countries.

US imports from eight Asian economies — Bangladesh, India, Indonesia, Malaysia, South Korea, Taiwan, Thailand, and Vietnam — rose an average of 16% in the first quarter of 2019, compared with the same period last year, the report noted. The effects of US tariffs on goods from China are only becoming more apparent in recent months due to the lag in economic data.

“What’s unusual is that there is a steep increase in US imports from these other Asian economies and a decline in US imports from China, which would not have happened if it were not for the trade war,” said Mike Jakeman, a senior economist at PwC UK, in an interview with FM magazine.

A separate report from securities and investment banking firm Nomura Securities showed that US import substitutions are predominantly in electronic products, furniture, and travel goods, while Malaysia has benefited from semiconductor trade.

However, this import data shows that the tariffs are not reducing bilateral trade deficits but are merely shifting US imbalances elsewhere, the PwC report noted. The US’s trade deficit with China is decreasing while at the same time widening with Vietnam. In the first quarter of 2019, the US trade deficit with Vietnam stood at $13.5 billion, compared with $9.3 billion in the same period last year.

In the short term, the upside for China’s neighbouring economies is increased exports to the US. This is not a new trend since low-end manufacturing was shifting out of China due to rising labour costs even before the trade tension between the US and China.

However, Jakeman noted that “the trade war has accelerated that process and given greater incentive for companies to move out of China”.

The US’s increased imports from other Asian economies is likely to contribute to economic growth in these countries, and Vietnam stands to be one of the biggest beneficiaries of this shift.

“If you look at Vietnam, it received a lot of foreign direct investment from South Korea. Companies like Samsung and LG have entered the market in Vietnam,” said Tommy Wu, a Hong Kong-based senior economist at Oxford Economics. “It’s not a surprise that they have already started supplying products out of Vietnam instead of through China.”

But absorbing the manufacturing capacity of China, built on the country’s vast pool of workers and decades of well-laid supply chain, will prove to be a challenge for other Asian countries.

“It’s actually not easy to move the supply chain out of China,” Wu said. “China has such a huge labour force, to begin with. It’s probably unmatched even with the other countries combined, except for India.”

Wu added that India and other Southeast Asia economies will need time to catch up in infrastructure, manufacturing quality, and labour skills.

“So in that sense, ASEAN countries will benefit more in the medium and longer term,” he said, referring to the Association of Southeast Asian Nations, an intergovernmental group of ten countries.

However, despite the benefits that Asian countries will enjoy, the downside is that the latest data point to slowing global economic growth, which will be a negative to all economies, Jakeman said.

The recent news of China’s GDP growth slowing to 6.2% in the second quarter of this year, its lowest in 27 years, is one indication of a softening global economy.

In July, the International Monetary Fund cut its projection of 2019 world economic growth for the second time this year to 3.2%, predicting a further slowdown from the 3.6% global growth in 2018. It cited the negative impact of possible US sanctions on global technology supply chains, continued Brexit uncertainty, and rising geopolitical tensions affecting energy prices as reasons for the downward revision.

— Alexis See Tho (Alexis.SeeTho@aicpa-cima.com) is an FM magazine associate editor.