If the trade war continues and the global trade environment worsens, ASEAN countries will have to go through a tough journey. On June 23,...
If the trade war continues and the global trade environment worsens, ASEAN countries will have to go through a tough journey.
On June 23, 2019, a week after President Donald Trump and President Xi Jinping agreed to restart talks at a sideline meeting on the G20, ASEAN countries also ended the summit. 34th peak in Bangkok. There, the leaders of the 10 ASEAN countries emphasized their economic integration and regionalism. This promises to promote the Regional Comprehensive Economic Partnership (RCEP).
However, since that event, trade tensions between the United States and China have been made even worse by repeated tariff declarations, along with concerns about the onset of monetary war. and global recession.
Some experts are pointing out that Southeast Asian countries are the winners when companies must relocate production from China and look to neighboring countries to avoid tariffs. They said that this decision of companies, along with foreign investment flows, will be very beneficial for ASEAN countries. For example, according to a report from Nomura Securites, Vietnam has enough potential to receive orders shipped from China, equivalent to 7.9% of GDP. Because importers are evading tariffs. In addition, a number of other signs were also noted, that Vietnam's exports to the US increased 36% in the first 5 months of 2019 compared to the same period last year.
The Nomura report shows that other countries like Malaysia, Indonesia and the Philippines could also benefit from companies leaving China, albeit on a smaller scale. It seems that the trade war between the two largest economies in the world is a golden opportunity to realize ASEAN's dream of transforming itself into a unified production base.
Nonetheless, the above view points to the challenges and disadvantages faced by Southeast Asian economies. For Southeast Asia to truly reap the benefits of the trade war and hedging. They will have to strengthen their engagement with multilateralism, actively invest in infrastructure and production capacity, and strengthen regional supply chain integration.
Is Southeast Asia really the ideal destination?
First, while it's clear that many companies have been seeking to relocate production from China since the trade war broke out. So, this has not brought about any radical change. This process has been carried out fairly smoothly for many years due to rising labor costs and shrinking workforce in China. According to UNCTAD data, the manufacturing sector witnessed FDI inflows into the mainland from 62% in 2006 to only 27% in 2017. Meanwhile, FDI inflows into Southeast Asia, especially especially in production, which has increased since the start of the trade war.
While the spillover effects from trade will undoubtedly accelerate this change, Southeast Asia is not really ready to take over production activities from China. Multinational companies are increasingly paying attention to weak infrastructure and logistics networks in some countries. This factor increases the cost of doing business.
In addition, the improvement of production capacity in a short time is not easy. In order to gain benefits from the spillover effects of trade, Southeast Asian countries need to invest heavily in infrastructure, production capacity and labor productivity. Through training programs or promoting the development of highly skilled workers in the region and creating a business environment to attract long-term investment.
Moreover, the US decision to impose a 400% duty on steel imported from Vietnam shows that Mr. Trump is not only targeting China in the trade war. Mr. Trump's labeling of currency manipulation for China also raises concerns for Southeast Asian countries.
Therefore, the trade conflict between the US and China is a sign of a bigger step for the United States to withdraw from free trade principles and towards protectionism. Besides asking for TPP and participating in renegotiation for NAFTA, Mr. Trump is criticizing the WTO, constantly threatening to withdraw from the organization and asserting that Washington does not necessarily follow its rules. The disintegration of trade order, which is based on global rules and escalating trade tensions. It could cause even bigger contradictions for free trade rules and the interests of other countries.
The pressure comes from all sides, not just trade wars
The danger here is that a prolonged trade war and a worsening global trade environment will deal a blow to Southeast Asian economies. Singapore is an open economy, highly dependent on trade and susceptible to external problems. Now, the country is witnessing a 3.4% annual decline in GDP in the second quarter of 2019 compared to the previous quarter, the weakest growth in the past decade. This is also a warning sign to other Southeast Asian countries about the disadvantages caused by trade war.
Finally, the escalation of the trade war and the possibility of the global economy falling into recession are putting pressure on business sentiment worldwide. We have seen China's economic growth reach only 6.2% in the second quarter of 2019, the worst figure in nearly 3 decades. US economic data also shows more worrying issues. According to a report by the US Department of Commerce, business investment there has dropped for the first time in more than 3 years and real estate investment has also declined in the 6th consecutive quarter.
Many experts from the business community are speculating that a recession is gradually appearing. We have seen investors rush to safe-haven assets like bonds and gold, fleeing emerging markets. Moreover, Asian central banks such as the Bank of Indonesia and the Bank of Thailand are lowering interest rates just like the Fed to take measures to stimulate the economy.
The decline in demand around the world will pose a serious challenge to the entire economy of ASEAN and can erase all benefits gained from the trade war. If ASEAN can adapt to the changing global economic environment and always follow its principles, it can shake off the effects of the trade war and will be even stronger than before.
According to Diplomat
Compiled and translated by Mr. Nerd
