Impact of trade war on emerging Asia: No short-term winner but Vietnam, India and Thailand to gain in the medium-term

T oday, o ne out of five manufactured goods in the world come from China – a great leap from only 3% in 1996. The rapid rise of China’s export engine, especially in manufacturing, and its ambition to take the highly-prized high-tech USA-made goods in its “China Manufacturing 2025” strategy seem s to be the key motivation behind the United States’ imposition of tariffs on USD250bn of Chinese exports , causing China to retaliate with tariffs on USD110bn of US goods . T he truce agreed in Buenos Aires, while buying both parties three months of further discussion , leaves the crux of the issue the same: the US and China are set to be strategic competitors for years to come . This note looks in to two key questions : a) in the short-term, how much of Chinese-made manufacturing and American-made products can be substituted by regional counterparts such as ASEAN and India; and b) in the medium-term, who will gain most from higher costs of Chinese exports via relocation of the supply chain ? The short-term gain of trade-war for ASEAN is not obvious, as it is difficult for the region to substitute China as source of manufacturing products to the US and US exports into China. The former is due to China’s dominant manufacturing capacity and high revealed comparative advantage (RCA), and the latter is because of ASEAN’s low RCA for the sectors that China has imposed tariffs US goods. For example, one out of three global labor-intensive manufactured exports are from China, which makes even a manufa cturing rock star like Vietnam difficult to replace China, as Vietnam only has 4% global market share . Moreover, even if ASEAN can benefit from higher volume of sales, China would likely reduce prices if demand for its goods decline in the short-term, negatively impacting ASEAN through the price effect given its market-making position. I n the medium- term, however, ASEAN and In dia can capture some of China’s labor-intensive and even medium-tech manufacturing. Based on our analysis of four key metrics: demographic trends , input costs, infrastructure and manufacturing FDI as a share of total , Vietnam and India will benefit most from the cost-arbitrage out of China’s rising costs . D espite its favorable demographic trends , t he Philippines will gain the least due to relatively expensive electricity and weak business infrastructure . In contrast, Thailand tops the rankings for higher va lue manufacturing thanks to both excellent hard and soft infrastructure, mitigating some of the negative impact of worsening demographics .