2018 was filled with aggressive posturing regarding trade protection by the US and China. Recently, this was escalated further. Discussions have apparently not taken place since the Trump administration ratcheted up its scrutiny of Chinese telecom companies.
An agreement on trade is at risk since the negotiations between the US and China appear to have stalled as both sides dig in after disagreements earlier this May. Undoubtedly for investors, a protracted dispute between the world's two largest economic superpowers will surely impact Asian markets. But in what way?
Asia's open economies
Asia has some of the most open economies in the world and a trade war between the US and China will certainly jolt financial markets in the region. Though the situation appears grim, most multinational companies are fleet-footed and there are companies, industries, and economies that stand to benefit from the ongoing trade war.
Laymen observers might suggest the US is winning the trade war since its stock market continues to make gains. Meanwhile, the Chinese stock market has felt the heat and companies operating out of China are being forced to redraw their supply chain maps. Simply put, if the companies unable to manufacture goods in China, they will likely move operations to Thailand, Vietnam or Indonesia.
Winners and losers
As reported by the Economist Intelligence Unit (EIU), Asia stands to be the biggest beneficiary when manufacturers move out of China. The report stated that:
"We expect the trade war to escalate further in the coming months, ultimately covering finished consumer products including mobile phones, laptops and other electronic goods, as well as apparel".
Additionally, a strong network of free trade agreements in many Southeast Asian nations exists, which makes it easy for them to jump on the bandwagon. The recent Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade pact, that includes countries such as Malaysia, Singapore, and Vietnam, is a prime example of this trend.
Who stands to gain?
President Donald Trump announced tariffs on USD $200 billion worth of Chinese goods last week, escalating the US-China trade war. The US Trade Representative removed almost 300 products from an initial list released in July. But 5,745 Chinese goods will still get hit.
Keeping this in mind, there are two channels of potential benefit from the fallout of this trade war: import substitution in the short term and production relocation in the middle term.
These two channels are conduits of gain for different Asian countries. It is highly likely that Malaysia will be the largest beneficiary of import substitution by companies in the US and China. It is followed by Japan, Pakistan, Thailand, and the Philippines respectively.