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Asian economies are still growing, but the first-quarter expansion may well be the peak for 2019. Escalating trade tensions are weighing on exports across the region amid already wobbly global demand.

Trade diversion from the US-China tensions is boosting other economies’ market shares. So while exports of tariffed goods from mainland China dropped USD15.8 billion between the first quarters of 2018 and 2019, Korea, Taiwan, Vietnam, India, Japan, and Thailand gained.

However, that is unlikely to compensate for the broader drag on trade, already hit by sluggish global automotive and electronics demand.

Slowing growth in the important Chinese and US markets could hurt exporters everywhere. Global industrial production growth is the slowest since 2015 and new orders point to further deceleration – a challenging outlook for a region highly dependent on the world industrial cycle.

Japan and most of emerging Asia, except for India and Indonesia, have substantial exposure via supply-chain linkages.

However, even with tariffs, Chinese suppliers are highly competitive with flexible local production networks not easily replicated elsewhere. Other Asian economies may thus not gain immediately. Further, some production may move outside the region, possibly to Mexico or the US, cutting out Asian suppliers.

Also, Chinese suppliers shut out of the US by tariffs may raise exports to other Asian markets.

However, the main risk to Asian exporters is that the trade tensions reduce growth in the US and China. Markets like Malaysia, Vietnam, and Taiwan – often deemed well positioned to pick up market share from China – are also hugely exposed to swings in Chinese demand.

A 1 percentage point reduction in Chinese GDP growth, for example, could lower Korean growth by 0.7 points, requiring substantially higher Korean exports to the US to compensate – yet if US growth also slows by 1 point, Korea's economy could slow by another 0.4 points.

However, with the US Federal Reserve expected to cut interest rates this year, Asia’s central banks can follow or cut even further. Fiscal policy, too – notably in China, Korea, and Australia – should offer support, even if the effect is less than seen previously.

Monetary easing in Asia may also boost growth less than in the past cycles. Already-low rates reduce the scope to cut and high corporate and household leverage may deter additional borrowing.

Malaysia, India, Australia, New Zealand, and the Philippines have cut this year and we expect reductions in Indonesia, the Philippines, Australia, New Zealand, India, Korea, and Thailand.

China still seems reluctant to turn on the credit taps though, giving fiscal policy a more important role, with lower taxes and increased infrastructure spending. However, house building is exceeding sales and extra monetary easing may be required to stabilise the construction sector.

Domestic demand in Japan has been resilient so far, but October’s planned tax hike could push the economy into two quarters of contraction and its central bank will only reluctantly join others in easing.

Rate cuts in India may be slow to take effect and the government has limited room for fiscal easing but growth should remain at 6.8 per cent this year and next while China slips to 6.5 per cent in 2019 and to 6.3 per cent next year.

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