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Asia Must Start Talking Trade with Trump

John Lee

The current respite in tit-for-tat tariff threats between the U.S. and China is just a temporary halt in a serious dispute between the world’s two largest economies.

The two countries’ trade differences are far from being resolved, and other Asia-Pacific governments need to think hard about how to avoid getting caught in the cross-fire. Their best course is to start discussions with Washington now.

As the U.S. and China begin negotiations on resolving the impasse, their Asian trading partners have some time to consider their responses. Officials and commentators in some countries are speculating that they may stand to gain from a U.S.-China trade war, at least in the short term, as opportunities arise to grab a share of the trade between the two giants. But these nations should keep in mind an African proverb often quoted by Southeast Asian officials: “When elephants fight, the reeds get trampled.”

The natural temptation for the 10 countries of the Association of Southeast Asian Nations, and regional economies such as Australia, will be to stay out of the way if things get uglier. But it will be very difficult remain neutral.

China would prefer trading relationships to stay as they are. Beijing will continue with its self-serving and disingenuous campaign against U.S. protectionism, and step-up its self-appointed role as a champion of free trade — a stance embraced by Chinese President Xi Jinping. Beijing will offer inducements for countries to denounce U.S. President Donald Trump’s policies, alongside pressure to do so.

Meanwhile, Trump believes trade between America and Asia is fundamentally unfair. In his view, China is the biggest offender — but not the only one. Trump is also perturbed by what he perceives as economic free-riding by Asian economies. For example, he has criticized both Japan and South Korea for allegedly “unfair” practices which he claims contribute to trade surpluses with the U.S. and create jobs in East Asia at the expense of American workers.

Furthermore, in the Trump world view, countries are either part of the problem or part of the solution. This means that remaining silent or on the sidelines may not be possible or even desirable. If Asian countries seek renewed American economic leadership in the region — as all major economies do — then working with Trump may be their only sensible option.

Trump’s criticisms of China go to the heart of how the Chinese political economy works, meaning it may be difficult for Beijing to respond in a way that is acceptable to the White House. Trump’s complaints concern industrial policies such as subsidies and cheap credit for state-owned enterprises, regulatory barriers that prevent American companies from establishing operations in China, forced joint ventures with Chinese companies under which U.S. companies must share hard-earned know-how, and intellectual property theft from American firms worth an estimated $600 billion a year.

For trading partners such as ASEAN, there are both positive and negative aspects to the escalating trade frictions between the two powers.

The tariffs against an estimated $50 billion worth of Chinese imports into the U.S. — in the form of a 25% tariff against more than 1,300 products — is targeted against strategic sectors linked to Beijing’s “Made in China 2025” initiative to upgrade Chinese industry.

This focuses the U.S. tariff thrust on areas such as industrial materials, solar panels, aerospace, machinery and medical equipment.

In response, China has indicated it will impose 25% tariffs on U.S. exports such as aluminum, soybeans, wine and dried fruits. The Chinese move merely led Trump to threaten unspecified tariffs against a further $100 billion worth of Chinese imports to emphasize his point the U.S. has more room to move than China.

So there could be some immediate winners among Asian countries if the threatened tariffs are imposed. Southeast Asian producers of electronics, electrical goods, machinery, chemicals, aircraft parts and medical equipment may well see instant opportunities. For example, Singapore and Thailand are already significant exporters of parts and assembled products to both the U.S. and China. Any immediate shortfall of soybeans in the Chinese market could be met by producers in Indonesia, Malaysia and Australia. Malaysian and Indonesian palm oil is a ready substitute for any shortage of American soybean oil in China.

Australia made much of the fact it has consistently run a trade deficit with the U.S. Singapore, Thailand and Malaysia could all mount this argument to build up their negotiating capital with the U.S. Vietnam and Indonesia have run small trade surpluses or deficits since 2012. Of all the regional maritime economies only the Philippines consistently enjoys a trade surplus with the U.S.

However, it would be dangerous for several reasons for regional economies to try to keep a low profile and seek to benefit from U.S.-China trade war opportunities. First, buying into Trump’s view that trade surpluses are good for the U.S. economy and its workers while deficits are detrimental is dangerous and wrong.

The structure of trade — and therefore the likelihood and size of surpluses and deficits — changes over time.

Second, perceived opportunities arising out of a deepening U.S.-China economic spat may not be as real or lasting as one might believe. This is particularly the case in manufacturing sectors such as electronics, electrical goods and machinery, which attract the bulk of foreign direct investment from advanced economies and make up the lion’s share of exports for countries such as Malaysia, Singapore, Thailand and Vietnam.

If there is a serious trade war between the U.S. and China, Made in China products will face greater barriers entering the U.S. But Southeast Asian manufacturers are part of a vast production supply chain throughout East Asia, with China the central and major hub for final assembly and shipping to end consumers.

Any fall in volume of Made in China products into the U.S. market will reduce the volume of parts and products exported to China by Southeast Asian firms. In short, regional manufacturing exporters would find it impossible to avoid the negative impact of a U.S.-China trade war. Trade war opportunities would probably increase only for commodity and agricultural exporters.

Even then, the White House would not be blind to regional economies benefitting from a U.S.-China trade war, especially if they join China in denouncing American protectionism. If Trump really believes that “winning a trade war” against China is “easy,” as he tweeted on March 2, then he is likely to see victory over smaller economies as assured.

To minimize the damage to their economies, regional governments will need to convince the Trump administration of three things: that a trade surplus with the U.S. does not necessarily damage the interests of America’s economy and workers; that they are undertaking their own measures to reduce behind-the-border protection and ensure that trade is “free and fair,” and that collective rather than unilateral pressure should be brought to bear on China’s rule-breaking.

Those that shy away from this debate will be negatively impacted by the scale of China’s gaming of the system and the unpredictable impact of Trump’s wrath. Better to begin a conversation with the White House about what “free and fair” trade should look like than to suffer the consequences when two elephants fight.

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