By Frederic Neumann
Trade has been stuck for a while now. That matters for Asia: the region’s economy has been built on trade, and despite lacklustre demand in the West over recent years, and the pivot to local leveraged-fuelled demand, exports still matter hugely. Signs of strength in the US, and one might even hope Europe, should thus be positive.
Problem is: there is a palpable protectionist turn. Optimists argue that rhetoric might not be followed up by equally forceful action. Plus, it may take time before the various measures that restrain trade are put in place. Perhaps. But a more immediate concern for Asia is that such noise will already put a dent on investment. Even with market access restrictions, not yet, if ever, realised, why expand production facilities now?
That trade matters for Asia is hardly a secret. However, in years to come, exports might matter even more: as debt-fuelled growth reaches its limits, shipments to the West, and the world beyond, offer one of the few opportunities to sustain economic expansion. One might look at the period between the global financial crisis and today as an aberration, when credit fuelled Asia’s growth engine, before the West regained its appetite for imports from the East and allowed a gradual deleveraging without a tumble in growth. Trouble is: protectionism could make that pivot far more difficult, if not impossible to deliver.
Recent headline numbers, to be true, have been a little better than expected. In November and December economies especially in Northeast Asia reported stronger exports. But it’s difficult to believe that this pick-up will be sustained for long. New export orders, as recorded by the region’s manufacturing PMIs, were flat on the month in December. In addition, a temporary surge in electronics shipments has flattered readings, as have base effects from depressed activity the previous year. Meanwhile, higher prices for commodities are also lifting headline numbers, especially for petrochemicals, masking stagnating volumes.
Growing protectionist sentiment, especially in the US, evidently poses risks. The exact contours of future policy, including their legality under national and international law, aren’t entirely clear yet. And it might take some time to craft measures designed to pull production back in the United States. And yet, the economic impact of protectionist rhetoric will already be felt over the coming quarters. For one, there might be voluntary restraint by some firms in sourcing goods from Asia to stave off potentially more severe official restrictions.
More meaningful will be the impact on investment. Already, companies have curtailed capex, with expenditure on facilities and equipment slowing to a multi-year low in China, and declining outright in places like Japan, Korea, and Thailand. Worries over market access could amplify this in 2017. Foreign direct investment, a key driver of growth in much of ASEAN, for instance, may slow and so could spending by local companies looking to export part of their production. Growth in Asia, in other words, might suffer even well before restriction on exports to the West become binding.
One might argue that there are other plans under way that blunt the uncertainty over market access to the West. For example, Asian economies are likely to ink a deal this year, liberalising trade under the framework of the Regional Comprehensive Economic Partnership (RCEP). Moreover, the WTO recently ratified an Information Technology Agreement, which cuts trade barriers for 201 new products, a useful step in a region where electronics is important business. Plus, a Trade Facilitation Agreement under the auspices of the WTO may also be completed soon, not a small achievement in a world where multilateral trade agreements have become rare.
Yet, as helpful as these steps are, they pale in comparison to the uncertainty that has emerged around market access to one of the world’s largest consumer markets. Even RCEP, an agreement spanning economies that comprise some 30% of world GDP, cannot make up for this, being composed of markets that largely run external surpluses and with often similar production patterns.
The rise of protectionism, for the moment at least, remains a risk, rather than reality. Yet, in 2017, Asia will find that such rhetoric already harms growth, not necessarily through reduced trade volumes in the near future, but through a decline in foreign direct and local investment. Words alone can be costly.
(The writer is Co-head of Asian Economics Research, HSBC.)