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ASEAN countries stand to benefit from the China-US trade tensions. While the direct impact of higher tariffs is negative for all, the impact on the Association of Southeast Asian Nations is far less negative than for the rest of Asia as production and exports move from China to other countries.

However, export growth has slowed everywhere since the trade war started and there are few short-term signs that new production or export capacity is outweighing the downward momentum in exports caused by a slowing tech cycle and weaker global growth.

The trade upcycle since 2017 was led by electronics – semiconductor production encompasses a sizeable share of ASEAN’s manufacturing – but sales softened throughout 2018, independent of the trade wars. With Chinese exports highly input-intensive, ASEAN suppliers to China are directly impacted.

Vietnam, Malaysia, and Thailand stand to gain most as trade is diverted from China because they export significant amounts of the same products as those impacted by US-China tariffs. The mix of labour and logistical costs is also competitive in some countries, particularly Vietnam and Malaysia.

Thailand’s exports have decelerated more sharply because of its large sales of industrial and vehicle components to China. Vietnam and Malaysia’s resilience may reflect increased capacity: they have consistently received the highest manufacturing investment from abroad.

There is a limit to how much trade can divert without additional investment.  Foreign direct investment has improved since the global financial crisis but Singapore, Vietnam, and Malaysia receive much more than Indonesia, the Philippines and Thailand. Given their current-account deficits and the need to create export-oriented industries to employ growing labour forces, this matters for Indonesia and the Philippines.

Falling commodity prices have added to short-term pain in some markets. Palm oil prices plummeted in 2018 because of Indian import tariffs and possible EU import bans, hitting Malaysia and Indonesia. Coal is the second largest contributor to Indonesia’s trade balance but its price has fallen too: most of the country’s new manufacturing is linked to commodities, including lithium-ion battery production using domestic nickel and cobalt deposits.

A potential El Niño this year also impacts the region. Abnormal rainfall disrupts ASEAN agricultural production, with higher food prices pushing up inflation.

But the impact on economic growth of slowing exports will be muted by resilient domestic demand. Fiscal policy will also be expansionary for much of the region, especially Thailand. An expansionary Philippine fiscal budget means government spending on education and social welfare should aid growth. Meanwhile, Malaysia’s budget stance is expansionary in the short-run.

Global disinflationary pressure and improved policymaking has helped control ASEAN inflation, though it became a key concern in the Philippines recently, even if falling oil prices partly offset higher food costs.

This affects monetary policy. With the US Federal Reserve now expected to raise interest rates only once, in late 2019, then cut a year later we now see Indonesia and the Philippines leaving their rates unchanged this year but still expect marginal tightening in Singapore and Thailand.

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Asian Economics Quarterly – Brace, Brace
Outline of our views for Asian economies from China to India to ASEAN in 2019
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