So far, the economic threats levelled by Donald Trump towards China have failed to materialise. The US president pledged to brand China a “currency manipulator” on his first day in office. He also proposed on the campaign trail to impose a 45 per cent tax on imports from China.
But the lack of concrete action so far should not lull Asian trading partners into a false sense of security. Even if the threats against China are diluted or scrapped, the introduction of a possible border adjustment tax, which would effectively tax companies’ spending on all imports into the US, could hit China and other Asian trading nations hard, analysts said.
The time for greater clarity on the Trump administration’s intentions may be approaching, analysts said. The expected confirmation of Wilbur Ross, Mr Trump’s designated commerce secretary, may presage the implementation phase of some form of an “America first” policy on trade.
“Once [Mr Ross] is in place, we can expect some action to demonstrate that Trump is fulfilling his promise to get tough with China on trade,” says Arthur Kroeber, head of research at Gavekal Dragonomics, a research company. The adoption of a border adjustment tax is not certain, but the possibility is prompting an analysis of which Asian countries would be most vulnerable.
Aside from China itself, Vietnam and the Philippines appear most exposed if Washington toughens its stance on trade and immigrant labour. Other parts of Asia, such as India and Pakistan, would also be vulnerable, though to a lesser degree, analysts said.
Shen Jianguang, chief economist at Mizuho Securities in Hong Kong, says a trade war between China and the US would create a “demand shock” for the Chinese economy, slowing economic growth and spurring unemployment.
This is because in 2015, China’s exports to the US reached $410bn, or 18 per cent of the total and 3.8 per cent of GDP. Out of an estimated 121m people employed in the export sector in 2015, some 20m owed their jobs to US exports and thus would be affected by any US-China trade war, Mr Shen said.
In addition, it would not only be China’s labour-intensive industries that get hit; exports to the US in China’s capital-intensive sectors such as electrical equipment and mechanical appliances would also be vulnerable, Mr Shen added.
In the case of Vietnam, the vulnerability to tougher US policies on trade comes both from its own exposure to the US market and through its exports of intermediate goods to China. The US is the main destination for Vietnam’s exports, buying $42.1bn in goods from the Southeast Asian nation last year to create a trade surplus of $32bn in Vietnam’s favour.
Such an exposure is equivalent to about 18 per cent of Vietnam’s GDP, by far the highest level in Asia — though Singapore, Taiwan, Malaysia and Thailand would also be pegged back by any US protectionist backlash against Asia as a whole (see chart).
If Washington was to single out China as the sole target of its protectionist ire, Vietnam would still be vulnerable because some 10 per cent of Hanoi’s exports go to China. An increasing portion of these are intermediate goods that are destined to be processed and re-exported to destinations such as the US.
From a different perspective, the Philippines also appears vulnerable. In terms of merchandise trade, Philippine exports to the US are worth the equivalent of about 3 per cent of its GDP, making it less vulnerable than other countries in emerging Asia to moves by the US to restrict imports, such as through a border adjustment tax.
However, around three-quarters of the total revenues from the Philippines’ business process outsourcing (BPO) sector comes from servicing US companies, according to Capital Economics, a research firm. The booming BPO sector’s revenues are equivalent to 8 per cent of GDP and it employs more than 1m people, meaning a hit to this sector would be likely to slow overall economic growth.
Lastly, if the US was to adopt a tax on overseas remittances by migrant workers, the money that 4m or so Filipinos send home would be correspondingly diminished. So large are these flows that they account for about 3 per cent of the Philippines GDP (see chart), according to Capital Economics.
“We are keeping our (Philippines) GDP growth forecast of 6.5 per cent for this year unchanged, but the risks are firmly to the downside,” said Gareth Leather, economist at Capital Economics. “In particular, any aggressive move by Trump to target the outsourcing sector would prompt us to cut our forecasts.”
India and Pakistan are much less vulnerable in terms of the contribution that remittances make to GDP (see chart), but they would nevertheless be affected.
Follow us on Twitter @em_sqrd