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As trade tensions between the United States and China escalate, short-term but widespread disruption can be expected in Asia — but other regional players may stand to benefit in the long run, said Nick Marro from The Economist Intelligence Unit.
Supply chains in Asia are so “incredibly integrated,” Marro, an analyst at the research firm told CNBC on Thursday.
“As a result of the trade war, in the short term, we are expecting pretty widespread regional disruption.”
Marro identified three major industries he considered “battlegrounds” for the trade war: technology, autos and agriculture.
Vietnam and Malaysia could benefit the most from the trade escalation particularly in low-end manufacturing of technology products such as “intermediate components and manufacturing of consumer goods like mobile phones and laptops,” according to a report by the EIU.
Major electronic companies have existing operations in the two countries, which would make redeployment of investment and production relatively smoother, the report stated.
Source: The Economist Intelligence Unit
The sector that has held the greatest importance in the trade war has been technology, and is expected to intensify, Marro said.
“Most tariffs are already on electronic components and machinery and we expect the tariffs to escalate to ultimately cover final finished goods — such as mobile phones and laptops — and to push the discussion around tech increasingly into the umbrella of national security,” he said.
The tech sector plays a significant role in the trade war because electronics and related components amount to the “biggest category of US imports from China” and Washington wants to hamper Beijing’s Made in China 2025 development agenda — an initiative focused on cultivating high-tech sectors.
U.S. tariffs on Chinese auto parts will bring adjustments in supply chains and investments benefiting some regional players such as Thailand and Malaysia.
“The U.S. is the world’s largest auto parts consumer and it has already put tariffs on auto parts that will inevitably squeeze Chinese manufacturers,” Marro explained.
This will result in “investment re-diversification, supply chain adjustments into some of China’s neighbors,” he said.
Source: The Economist Intelligence Unit
Thailand’s auto space stands to benefit due to its well-diversified trade links with the U.S., Japan and other parts of ASEAN. As such, local parts producers should be able to win market share from Chinese competitors, according to the EIU report.
Malaysia has over 800 auto component manufacturers and a diversified auto component export network, which would be a huge advantage for the sector, the EIU report said.
Disruption in Asia as result of the U.S.-China trade war is inevitable, Marro said.
“China is a major destination for intermediate and final ICT goods from all four economies, meaning that companies in that sector will be heavily exposed to the impact of tariffs on demand for these products,” according to the report.
This might have long-term consequences as companies may decide to move towards this position of not being as reliant on China anymore, Marro added.
However, Taiwan and South Korea might be cushioned from the impact as these countries have a secure positioning in the supply chain since they specialize in high precision equipment.
The U.S. and China are currently embroiled in a trade dispute, with both countries slapping additional duties on each other in the past few months. The U.S. has imposed extra tariffs on $250 billion worth of Chinese imports — with U.S. President Donald Trump threatening to impose levies on all $500 billion worth of goods from the Asian giant. Beijing has retaliated with additional tariffs on $110 billion worth of U.S. imports.
A meeting between Trump and his Chinese counterpart Xi Jinping at the G-20 summit in Argentina this month will be of great significance, China’s State Councillor Wang Yi, said on Thursday. But analysts are divided on whether any reprieve can be expected from the escalating tensions between two of the world’s economic superpowers.