Opportunities for some businesses from trade wars

While a trade deal between China and the US appears close at the time of writing, only time will tell how these dynamics play out across the region.

It’s often said that everyone loses in a trade war, but as tensions continue to strain relationships in the Asia-Pacific region, some businesses can see opportunities.

As China and the US engage in “will-they-won’t-they” jockeying about their future trading relationship, many businesses in the Asia-Pacific region remain nervous about how the repercussions will spill over.

The latest CPA Australia Asia-Pacific Small Business Survey shows pockets of hope among some industries and regions, but even the optimists should prepare for continuing tensions among the world’s two top trading partners, say experts.

Monash Business School senior lecturer and former international trade lawyer, Dr Giovanni Di Lieto, says China has gone from being a US trading partner to a competitor and the two economies are decoupling. He does, however, believe there’s little chance of a new cold war developing between the two nations because they understand the market in similar ways.

Khoon Goh, head of Asia research, ANZ Research, believes the US now sees China as a threat in both trading terms and in developing new technology. Goh expects within the next 10 years, based on current projections, China will overtake the US as the largest economy in the world.

As a result, Goh expects ongoing tensions on several fronts. “Trade is probably an area that is easier to resolve; even though negotiations have gone into overtime, I’m hopeful some form of trade deal can be done between both parties. That will help de-escalate trade tensions that emerged last year. But lingering tensions remain around intellectual property and technology.”

While he expects there will be an eventual trade deal between China and the US, he says the escalation of tensions around trade has shown businesses should not continue to make decisions assuming a world without tariffs.

“Even if a trade deal is done, it’s likely it will include clauses that will allow the US to impose tariffs again if they feel China is not living up to its side of the deal. So the threat of future potential tariffs lingers and for that reason we’ll see companies continue to look to diversify their manufacturing production base away from China to other locations to produce goods, particularly for exports to third countries.”

The bigger picture

US President Donald Trump’s election has “weaponised US trade policy,” says Di Lieto. “We have returned to a bipolar world in trade terms, which is spilling over into security matters and it’s becoming harder to tell the difference between trade and geopolitical issues.”

Territorial tensions between the US and China regarding the South China Sea and Taiwan are among the issues driving tensions.

Nevertheless, this new world order is difficult for other countries to navigate. “If China and the US come to a grand bargain, it won’t be positive for small countries,” says Di Lieto.

“If we give up the multilateral trade order we will go back to a world that was all about power relationships. Middle countries like Australia won’t have much say. Smaller, developing countries will be even worse off because many are commodity suppliers and price takers. It’s also tricky for Australia as a commodity supplier.”

Di Lieto says the best scenario is the status quo. “But things are changing and we need to change accordingly.”

One example he gives of a positive initiative to help local businesses evolve is the Australian parliamentary inquiry into why small businesses don’t take advantage of free trade agreements (FTAs) in the same way big businesses do.

“Small businesses can fall through the cracks of bilateral arrangements, which they find difficult to navigate. A more bilateral world would exacerbate these issues, with small businesses benefiting more from a unilateral world.”

The problem with tariffs

Tim Harcourt, JW Nevile Fellow in Economics at UNSW Business School, agrees a direct trade agreement between China and the US would be a poor outcome for Asia-Pacific countries.

“I Initially thought Donald Trump was going to make trade policy by Twitter; using threats to get a couple of companies to move back to the Midwest and declare victory. But he’s gone further than I thought.”

President Trump has introduced tariffs on steel and aluminium from many countries. Harcourt says tariffs “are like putting rocks in your harbour. Ultimately, it hurts exports and that’s why US soy bean farmers and other producers are suffering. But the real dangers are an extreme trade war or a really good deal between the US and China, where China agrees to buy certain amounts of US goods. That could be really bad for Australia and some other trade partners.”

Harcourt says a good outcome would be President Trump pushing China hard on intellectual property, foreign investment laws and structurally changing the Chinese economy so it’s more market-orientated.

Small business impacts

The tensions in the trade relationship between China and the US, and their knock-on effects on other economies, are changing small business owners’ plans, CPA Australia research reveals.

The 10th CPA Australia Small Business Survey, which explores business issues and sentiment across 10 economies in the Asia-Pacific region, indicates trade tensions are weighing heavily in China, Hong Kong and Singapore, with growth expectations lower than in previous years  in these markets.

A third of the 3600-plus businesses surveyed expect a trade war to have a negative impact this year, with Hong Kong businesses most likely to expect a negative impact and New Zealand small business least likely to expect a negative impact.

Despite the unpredictability of the global trade environment, it’s not all doom and gloom. Indonesian small businesses, for example, are more likely to expect global trade tensions to have a positive impact on their business in 2019 than a negative impact.

Some Chinese businesses also anticipate a trade war will have a positive impact. Firms in the Chinese city of Shenzhen, for example, expect the trade war will help them because US tariffs may make their products more competitive domestically. As the CPA Australia survey notes, they are “well placed to expand into other markets by taking advantage of policies such as the Belt and Road initiative and the Greater Bay Area plan.”

The One Belt and Road initiative is China’s plan to build an inland trading route from Asia to Europe and across to the Middle East and Latin America. The Greater Bay Area plan is about better linking the cities of Guangdong, Hong Kong and Macau in southern China.

Key regional economies

Di Lieto says there are two countries to watch. “Malaysia is one. Its culture is closer to China.” The other is the Philippines. “This is a bellwether country to understand how the South-East Asian economy is performing.” It is one of the largest South-East Asian recipients of US aid, notwithstanding also developing closer ties with China.

Malaysia, which has traditionally enjoyed strong ties to China, is at a turning point. The Chinese government is making substantial investments to improve transport systems between China and Malaysia and Singapore. The Malaysian government is, however, pushing back.

Harcourt says Malaysia’s ties with China won’t necessarily protect it from an escalation of trade tensions. “Its semiconductor industry is still very dependent on the US,” he notes, but he acknowledges Malaysia’s Islamic finance sector and links with Dubai and the Middle East should help bolster the economy. The present administration under Prime Minister Mahathir also has a global vision, evidenced by its multimedia superhighway.

South Korea is key because it has existing free trade agreements with the US and China and could potentially act as a fulcrum between the two countries.

In tandem with these trends, supply chains are becoming more regional and less global. An example is the Thai automobile sector. Car parts is a global industry and the US has imposed tariffs on Chinese products, so auto parts manufacturing is ramping up in Thailand. This nation is not the only one that has benefitted from US tariffs on China.

As Di Lieto notes, Vietnam is the new frontier in manufacturing, like China was 20 years ago. Labour costs have also risen dramatically in China, leading businesses to turn to lower-cost countries to manufacture. Vietnam, in particular, has been successful in attracting foreign direct investment.

Shifting growth centres

Goh agrees there has been a shift in supply chains in terms of where products are sourced and manufacturing is based. “For businesses selling in the Chinese market, given the market is so huge it makes sense to base some production there. But if it’s for export to a third market, it may be better to manufacture elsewhere. That shift is underway,” says Goh.

Harcourt says Hong Kong will be hard hit because its economy relies on trade and so it will be affected in the event of escalating trade tensions or the introduction of further tariffs.

Goh also notes the changing nature of Chinese growth. “Even before the trade war escalated, Chinese authorities had been trying to shift the composition of growth to become less reliant on exports and manufacturing and more reliant on domestic demand, particularly consumption. So there’s a shift happening from the old economy based on manufacturing, mining and construction to the new economy, which includes services, retail, financial services and technology. The new economy is much larger than the old economy and is growing at around eight to nine per cent each year. Whereas the old economy is growing at sub six per cent. This change will have regional repercussions.”

While a trade deal between China and the US appears close at the time of writing, only time will tell how these dynamics play out across the region.

Meanwhile, the world waits while a deal is – or isn’t – thrashed out behind the scenes between the two global super powers.

The CPA Australia 10th annual Small Business Survey is now available.

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