The economic outlook doesn't seem as rosy as it once did for most Asian countries looking toward 2019. The relatively dynamic world trade recovery that began in late 2016 is now threatened by tensions between the United States and China, coupled with increasing protectionism in many economies.
Possible escalation of trade conflicts as countries retaliate against each other's protectionist measures, has become an important impediment to trade and investment worldwide. Some economists even say a new global economic recession is on the horizon.
"The truth is that the global trade cycle has been slowing regardless of what is happening with US-China trade tensions, driven by a gradual deceleration in the tech cycle and semiconductor orders," Joseph Incalcaterra, chief Asean economist at HSBC Global Research, told Asia Focus.
"We see some increasing signs of shifting manufacturing capacity to Vietnam, Malaysia and Thailand, but for the most part this is unlikely to offset the broader trade deceleration."
Although the recent plunge in oil prices has helped lift consumer spending in oil-importing economies, and the US and China are talking again, that's not enough to bring the region's economic growth back on track, HSBC noted in its latest "Asian Economics Quarterly".
"The global trade cycle looks set to cool further, adding a drag to Asian export growth above the toll exacted from continuing trade tensions," the report said.
Ben May, director of Global Macro Research at Oxford Economics, agreed, saying the gloomy tone of this year may linger as the US and Chinese economies are expected to slow simultaneously in 2019.
"After expanding by 3% or more in 2017 and 2018, the global economy looks set to record weaker growth in 2019 - our baseline view is for expansion of 2.8%," Mr May wrote in a report released earlier this month.
"The US will remain one of the fastest-growing economies in the advanced world. But the growth differential with the euro zone and elsewhere will narrow sharply."
A full-blown trade war still cannot be ruled out, while a major economic crisis in Italy and increased populism are also concerns. Oxford Economics has raised the probability of recession -- a fall in global per capita GDP -- over the next two years to 25%, but sees just a 5% chance of it occurring next year.
"But recession still needs a trigger," said Mr May. "Perhaps the most plausible scenario is that upside inflation surprises coincide with more aggressive tightening and poor decisions by policymakers (a trade war and the fiscal situation in Italy) which are then amplified by weaknesses in the global financial system."
Asian companies, meanwhile, fear that disputes between the world's two biggest economies threaten businesses throughout the region as global value chains are affected, according to a recent Thomson Reuters/INSEAD survey of 84 companies.
Its Asian Business Sentiment Index edged up to 63 for the current quarter, slightly above a near three-year low of 58 seen in the third quarter. Anything above 50 indicates a positive outlook but the latest result is still one of the lowest readings since the rout in Chinese stocks in mid-2015 rattled world markets.
"This confirms the reading of the previous quarter: there is more uncertainty, there are increasing concerns about growth," said Antonio Fatas, a Singapore-based economics professor at the global business school INSEAD.
"This doesn't mean there is going to be a crisis over the next few quarters, but if there is one, this is an indication that it wouldn't be a large surprise to some."
ECONOMIC & JOB LOSSES
This year, the US has imposed a series of unilateral tariffs on selected imported goods, with China its highest-profile target. Beijing, as of November, has retaliated with tariffs ranging from 5% to 25% on US$100 billion out of $130 billion worth of merchandise imports from the US.
The United Nations Economic and Social Commission for Asia and the Pacific (Escap) has estimated that the tariff increases already in place are expected to cut global gross domestic product (GDP) by $150 billion, and regional GDP by a little over $40 billion if they remain.
US-China trade tensions have also begun to disrupt existing supply chains and dampen investor confidence, as evidenced by the deceleration in trade growth after the first half of this year, it noted in its "Asia-Pacific Trade and Investment Report 2018" (APTIR).
If tensions persist, export growth may slow to 2.3% in 2019, from nearly 4% estimated this year. Foreign direct investment (FDI) inflows to the region are also expected to continue on their downward trend next year, following a 4% drop in 2018.
"Importantly, as many of the main export industries in the region are relatively labour-intensive, a contraction of exports could spell at least temporary hardship for many workers," the report said. "At a minimum, Asia and the Pacific will see a net loss of 2.7 million jobs due to the trade war, with unskilled workers -- often women -- shouldering more severe impact."
If the tariff war escalates and investor and consumer confidence drop in 2019, global GDP could ultimately be cut by nearly $400 billion, also driving regional GDP down by $117 billion. Almost 9 million people could be put out of work in the region, with many more workers also moving to new jobs in different sectors, said Escap.
"Given the current scope of tariff imposition by the US, the direct exposure of Asia Pacific economies, beyond China, is limited," said the report, noting that China's direct exports to the US accounted for about 24% of its total merchandise exports in 2017.
"Southeast Asian economies such as Singapore, Malaysia, Thailand and the Philippines face a moderate degree of vulnerability. Although these economies' exports of electrical and optical equipment are at risk, their relatively high diversification in intermediate export markets explain the moderate levels of vulnerability."
Mia Mikic, director of the Trade, Investment and Innovation Division at Escap, foresees winners and losers emerging in the region as trade frictions reshape global value chains.
Southeast Asia is well positioned to benefit in the medium term. Vietnam, in particular, is poised to take over some value chain activities from China. But seeking to profit from trade tensions is not a very sound long-term strategy, Ms Mikic cautions.
"[Value chain] redirection and trade flows induced by trade tensions are not optimal, nor stable. It's probable that investors will postpone at least some investments until policy uncertainties decrease," she said.
"As production shifts take place and resources are reallocated across sectors and borders due to trade conflicts, tens of millions of workers may see their jobs displaced and be forced to seek new employment."
Regional integration will be important to create new economic opportunities. But other complementary policies, such as labour, education and retraining policies, plus social protection measures to support people negatively affected, must also be high on the policymakers' agenda if the region is to continue making progress toward the UN Sustainable Development Goals, she added.
The Escap report highlights that neither China nor the US can win a trade war but both will see significant economic losses from continuing conflict. It also finds that implementation of major regional trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) among Asean and its six partners, could offset many of the economic losses from trade tensions.
Escap estimates that if such pacts take effect, they could increase exports by 1.3% to 2.9% and add between 3.5 million and 12.5 million jobs in Asia Pacific. This underscores the importance of regional cooperation and taking advantage of existing initiatives, including the new UN treaty aimed at digitising trade procedures and enabling cross-border paperless trade.
Mr Incalcaterra of HSBC shared the same view, stating that leaders must double down on the goals of the Asean Economic Community (AEC).
"After all, reduced non-tariff, services and labour barriers would increase the competitive proposition of shifting production to Asean," he said. "No single country can absorb a large capacity shift from China, but easing cross-border barriers makes it more likely that the region as a whole will benefit."
TRADE RESTRICTIVENESS
The Escap report also noted a dramatic increase in trade measures in 2018 as "a cause for concern". These take the form of subsidies, government procurement regulations, non-tariff measures (NTMs) and others.
Worldwide, the average number of new trade-discriminatory measures introduced in the first 10 months of the year totalled 88 per month, the highest since the 2009 economic crisis. That compared with just 32 new liberalising measures per month in the same period.
"Asia and the Pacific followed a similar trend, with the introduction of 33 discriminatory measures and 15 liberalising measures per month, on average, in the first 10 months of 2018," the report stated. "Although many of these measures could be WTO-compatible, their increasing use by an economy could lead a protectionism spiral as other economies also find them acceptable to use."
About 30% of the discriminatory measures introduced were subsidies provided to producers, with another 12% given to exporters. Import tariffs accounted for only 17%, while contingent trade-protective measures represented around 15%. The US is the highest contributor of new discriminatory measures with its share surging from 9% of new measures in 2016 to 22% this year.
In Asia, a significant increase in discriminatory measures is seen in India, the second largest initiator after the US, with China, Indonesia, and Australia also among the top 10 contributors in 2018.
"Asia Pacific is an important target of the discriminatory measures, because the region includes important exports of products under scrutiny," the report noted.
"Around one-third of the newly implemented discriminatory trade measures affected Asia-Pacific economies. Thailand and India are among those affected more than others regional peers because they are major exporters of products under dispute, such as aluminium and steel, automotive products, solar panels and washing machines."
Likewise, investment restrictions are on the rise. These are often used to protect industries deemed strategic in host economies, or to control transactions with or from economies and entities that have political issues with the host countries. A common concern is that foreign acquisitions of strategic local companies might give foreign investors access to critical infrastructure, technology and sensitive data. Many economies have expanded restrictions on FDI based on national security concerns.
Roberto Azevedo, director-general of the World Trade Organization (WTO), has also expressed worries about a sharp rise in the restrictive measures by the WTO members.
"This proliferation of trade restrictive measures and the uncertainty created by such actions could place economic recovery in jeopardy," he said. "Further escalation would carry potentially large risks for global trade, with knock-on effects for economic growth, jobs and consumer prices around the world. "I urge WTO members to use all means at their disposal to de-escalate the situation."
The Escap report, however, noted that despite their contribution to the overall increase in protectionism, Asia Pacific economies have remained very active in engaging in preferential trade agreements to cut tariffs and other trade barriers with selected partner economies.
"They are currently participating in a wide variety of trade agreements both at the bilateral and plurilateral levels," noted the report, adding that 17 new free-trade agreements have been signed in the region since the start of 2017, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Asean countries together with China, India, Japan, South Korea, Australia and New Zealand are still slogging away in an attempt to reach an agreement on the RCEP next year -- four years behind schedule. Notable bilateral agreements include those signed by Japan and Singapore with the European Union in 2018. Asean has also signed a bilateral FTA with Hong Kong and China.
"Given the trade tensions with the US, China appears to be speeding up the implementation of its regional trade agreement policies," the report said.
As well, US-China trade tensions may provide a new incentive for Asia Pacific economies to deepen intraregional trade relations as well as those with other economies outside the region.
"Trade tensions are expected to continue shaping the dynamic of RTAs (regional trade agreements). Ensuring that new RTAs are consistent with established rules under the WTO and that they serve as building blocks toward a new and stronger multilateral trading system will be important."
