IT IS hard to argue that the United States and China are not on the brink of a trade war. President Donald Trump is threatening to impose higher tariffs on $450bn of imports from China, with the first tranche, on $34bn of Chinese goods, due to take effect on July 6th. Mr Trump expects China to blink. But what if it doesn’t? Other countries in Asia are only now starting to ask that as they realise how much is at stake.
Nowhere would a rupture of global supply-chains have more impact than in East and South-East Asia, which sit at the heart of them. Intermediate goods account for more than half of Asian countries’ exports, on average, and more than three-fifths of their imports. The region is deeply integrated, in often underappreciated ways, argues Deborah Elms of the Asian Trade Centre, which advises governments and business. South Korean screens and Taiwanese chips famously head to China for assembly into iPhones for American end-users; there are countless similar examples. Many Asian companies, Ms Elms says, may not even realise where their products end up. They may still not be aware that they are at risk from the looming trade war.
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Political leaders appear to be ahead of local businesses in thinking about the consequences. Mr Trump’s lambasting of America’s traditional allies at a vitriolic G7 summit in Canada in early June belatedly triggered alarms across Asia. Since then leaders have rushed to show their commitment to an open, rules-based trading order—one without America if need be.
One example is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a gold-standard free-trade pact involving 11 countries on both sides of the Pacific. A successor to the Trans-Pacific Partnership, which Mr Trump pulled America out of in early 2017, the CPTPP was signed in March. But several of its members had seemed in no particular rush to ratify it. No longer. Canada, Australia and Japan have all said they will speed up the process. South Korea, which was forced by Mr Trump to renegotiate a bilateral trade pact (and which also has concerns about the strength of its military alliance with America), looks set to apply to join the CPTPP.
Japan’s prime minister, Shinzo Abe, once hoped he might persuade Mr Trump to bring America back in to the pact. Instead, Mr Trump has repeatedly humiliated him, not least by refusing to exempt Japan from steel and aluminium tariffs, even though other allies have won a reprieve. Now Mr Abe is mending bridges with China. And he is continuing to fly the multilateral flag with another regional initiative.
On July 1st Mr Abe hosts trade ministers from the ten countries of the Association of South-East Asian Nations (ASEAN), plus the countries in the region with which ASEAN signed bilateral free-trade deals: Australia, China, India, Japan, New Zealand and South Korea. Negotiations over the so-called Regional and Comprehensive Economic Partnership (RCEP) have for years crawled along at a snail’s pace. But the meeting in Tokyo signals a quickening—and is the first big RCEP meeting to be held outside ASEAN.
In terms of rigour, RCEP falls far short of CPTPP. It includes China, which was pointedly excluded from TPP, in which the previous American administration explicitly set out to design a template for open trade that would not be diluted by China’s questionable commitment. RCEP was seen at the time as the lowest common denominator—a pointless or even counterproductive distraction. But today its backers promote it as a useful step towards regional integration. With America now hostile to open trade, every initiative has fresh worth to countries whose prosperity was built on commerce.
Collateral damage from trade tensions between America and China seems inevitable. Even if a full-blown trade war is averted—because either country backs down—both sides would not return to the rules-based trade order that has prevailed until now. Rather, a deal would involve some kind of managed trade. That is certainly better than full-blown conflict. But it repudiates that order, while diverting trade and investment.
As for a full-blown war, it could upend the world-spanning supply chains which epitomise Asian economies. Above all, Mr Trump’s trade nationalists hate it that, in their search for efficiency, savings and speed, American businesses have internationalised their operations over the past four decades. If the administration’s belligerence on trade unsettles American firms and forces them to “onshore” production, Asia would be an early victim.
The supply-chains that bind
Yet some spy a silver lining. Led by China and Japan, Asian countries are at last opening to one another. They are striking bilateral trade deals among themselves, as well as with the European Union. And that begs a question: if the Trump administration succeeds in smashing existing supply-chains, why assume manufacturing will return to America? Might more links in the chain simply relocate within Asia instead? After all, as Japanese policymakers point out, America does not have a monopoly on tech. Reforming Vietnam, which is a member of the CPTPP and has eight bilateral free-trade agreements, including with the EU, has great allure as a production base. Recently President Joko Widodo of Indonesia, which does not typically make life easy for foreign investors, has been asking visitors whether there might be an upside for his country.
Even American multinationals are accountable to shareholders, not to Mr Trump. And America’s 326m potential consumers, walled up behind trade barriers, may not prove such an appealing market as Asia’s nearly 4bn consumers at a time when dynamic Asian economies are opening to each other. It’s an interesting time, as Ms Elms puts it, to experiment with resetting trade patterns. Not that anyone would wish an all-out trade war to be the occasion to experiment.