The Asian Development Bank’s chief economist does not agree with the financial markets. Yasuyuki Sawada struck an upbeat tone at the launch of the bank’s Asian Development Outlook report in mid-April, even as fears of a US-China trade war were rocking risk assets across the world.
The US stock market posted its worst week in two years in mid-March after US President Donald Trump announced tariffs on imports of steel and aluminium. Then a tit-for-tat round of tariff threats in early April caused further jitters, dragging Chinese stocks in Hong Kong to their lowest of the year.
As well as steel and aluminium, Trump has announced tariffs targeting US$50bn of Chinese imports and threatened US$100bn more. China, in retaliation, has slapped duties on US$50bn of US goods and said it has more extreme measures up its sleeve.
“The scale of the trade policy change is only 0.4% of GDP for China, 0.2–0.3% for the US. So it’s not really a fundamental change,” said Sawada.
“So far these have not made a discernible dent in volume trade flows to and from developing Asia,” said Sawada, though he conceded that further US tariffs and retaliatory moves from partners “could undermine the region’s outlook”.
A US-China trade war has emerged as one of the biggest risks to Asia’s continued economic expansion. So far, the consensus among analysts and economists is that the two superpowers will eventually come to a deal, keeping the region on track for another strong year of GDP growth.
The ADB’s outlook report projects 6.0% growth for developing Asia in 2018, a revision from its latest forecast of 5.8%, on the back of stronger-than-expected trade flows last year.
“We view US trade actions targeting China more as an opening gambit for negotiations than the start of a trade war,” wrote Richard Turnill, chief investment strategist at BlackRock, the US-based money manager.
Chinese analysts at ICBC International agree that a “new Cold War” is an unlikely scenario.
“China and the US are so interdependent that their relations are ‘too big to fail’ … Both will finally come to terms after negotiations,” wrote analysts led by Cheng Shi on March 27.
Even if the immediate threat is modest, talk of tariffs is a significant change to the global trade environment. That, in itself, could have big implications for Asia, which has prospered in recent decades on the back of exports to the West.
“Since the end of WW2, Asian countries’ continued growth – as well as global economic growth – has been generated by open trade and liberalised transactions of goods and services across borders. So I think we should really reaffirm the importance of a multilateral free trade system,” said Sawada.
The ADB’s outlook report warns that Asia’s strong links with US manufacturing supply chains could be disrupted, or even severed, if US investors move out of the region.
“While the direct tariff costs of the announced measures may be small compared with growth in trade forecast for 2018, their disruption to supply chains could sabotage business expansion plans in related industries, and uncertainty over the global environment could dampen currently strong consumption growth.”
REGIONAL SAFETY NET
The US-China spat is putting Asia’s own trade initiatives under the spotlight. In the event of further US tariffs, could intra-Asian trade and connectivity take up the slack? And how significant are alternative free trade agreements to the region?
Sawada points to progress on the restructured Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership (RCEP) as positive steps.
“There are other international and global trade regime changes ongoing,” said Sawada. “It’s very unbalanced to pick one particular policy change to talk about the negatives.”
Following Trump’s rejection of the TPP in his first week in office, the remaining 11 countries signed a revised deal in Chile in March. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership, to give it its formal title, has been hailed as a victory for open markets and international cooperation. It still covers more than 13% of the global economy, even without the US.
Meanwhile, the RCEP is a network of free trade agreements between the ASEAN nations and six partners: China, South Korea, Japan, India, Australia and New Zealand.
It aims to produce “a modern, comprehensive, high-quality, and mutually beneficial economic partnership agreement” covering goods, services, investment, economic and technical cooperation, intellectual property, competition, dispute settlement, e-commerce, small and medium enterprises (SMEs) and other issues.
The partners together account for US$23.8trn of GDP and 3.5 billion people, according to 2016 figures.
Sawada describes it as history’s largest free trade agreement, covering 30% of global GDP.
“It’s a very important stepping stone towards our ultimate target of achieving a global multilateral free trade and free investment system,” he said.
Negotiations began in earnest in 2013 and are said to be progressing well. A 21st round took place in Yogjakarta, Indonesia, in February, and a March ministerial meeting reaffirmed a commitment “to intensify efforts in 2018 towards conclusion”.
“The ultimate goal of the global economy is to achieve a globally open free trade system so that growth can continue, but … (it) cannot be achieved overnight. We need some step-by-step process.”
Within Asia, there are hopes that growing demand for public goods will drive cooperation across borders, especially as rapid urbanisation continues.
“Large cities are becoming real drivers of public goods. People want a better quality of life, and that is a common agenda across the region,” said Arjun Goswami, technical adviser for regional cooperation and integration at the ADB’s Economic Research and Regional Cooperation Department. “There is every reason to believe that will result in collective action, collective mechanisms, greater intra-Asian linkages, and in turn will create the demand for larger connectivity.”
Asian integration follows a very different track to that of Europe, where supranational institutions have led the way.
“Ours has always been a market-driven integration process. Private sector demand is hugely important,” said Goswami. “If we really want intra-Asian linkages to happen they will primarily be led by facilitating those flows, of trade and investment and capital across borders, and making sure that businesses – including those that are mid-sized or small – have increasing opportunities to take advantage of those flows.”
National and global initiatives are important, but Goswami stresses the need for regional discussions to fill a “missing middle” to increase the impact of national actions and help meet Asia’s public goods agenda.
The ADB has long played a role in facilitating discussions between economic groupings, such as the Greater Mekong Subregion and the Central Asian Regional Economic Cooperation programme, where the 11 members have expanded beyond their original agreement to cooperate in four sectors.
The ADB agreed a US$450m loan in late 2016 to China that was designed to benefit Vietnam just as much, opening up stronger business linkages between Vietnam and China’s Guangxi province. As well as physical connections and trade facilitation, the facility provided for investment in e-commerce, healthcare and agricultural supply chains.
“Linkages are not just about increasing shared benefits. It’s also about managing risks across borders,” said Goswami.
The ASEAN initiatives, including its own economic community and the collaboration with China, Japan and South Korea under the ASEAN+3 framework, have been “hugely important”, Goswami says, pointing to efforts on financial integration, trade and capital markets.
Following the signing of the CP-TPP agreement, the RCEP free trade network would give the region a further boost.
“It means the liberalisation of products and markets across agriculture, services and goods, and getting businesses to really take advantage of that,” said Goswami.
“Intra-regional Asian trade and FDI flows have grown past the 50% mark, and they are robust. We never want that to be 100%, because that would mean the region is completely closed.”
BELT & ROAD
China’s Belt and Road Initiative has given Asian integration a further push. But it has also brought with it warnings that China is using its economic muscle to push for one-sided deals that have little benefit for the recipient country.
Ayumi Konishi, Director General of the ADB’s East Asia Regional Department, rejects that notion out of hand.
“Any regional cooperation initiative exists only on the basis of mutual agreement among the countries involved,” he said. “Can China do a project in Bangladesh without the other side agreeing? Of course not.”
Nomura economists say the scheme will add 0.1 percentage points a year to China’s GDP for the next decade, but also see it as an opportunity for poorer nations.
“The BRI is a platform for lower-income recipient economies to fast track to a higher stage of economic development by increasing FDI inflows, plugging infrastructure gaps, leapfrogging to a digital economy, and, importantly, integrating their trade into global supply chains, which can boost productivity and help lift potential growth,” wrote economists led by Sonal Varma in April.
The fact that so many global leaders attended last year’s Belt & Road Forum in Beijing also shows the international community’s confidence in the scheme.
“That shows that a lot of countries have high expectations of strengthening their economic partnership with China. To that extent it’s probably fair to observe that it won’t be one-sided,” said Konishi.
The ADB and other multilateral lenders are also on board. The ADB, Asian Infrastructure Investment Bank, European Bank for Reconstruction and Development, New Development Bank, the World Bank and the European Investment Bank signed a memorandum of understanding at the May 2017 forum, agreeing to cooperate on BRI projects that meet their existing mandates.
“The concept of promoting connectivity for shared prosperity is not new. We certainly share that vision. We should be able to work together, because we share the same vision.”
That cooperation extends to cofinancings with other development banks, including the China-backed AIIB and NDB.
Collaboration between MDBs is an “open mechanism”, says Goswami. “Because there is so much demand, there is plenty of room for others to come in.”
“There are risks in major infrastructure projects, and these multiply when you cross borders.”
Nomura notes that China has built up experience in managing outward investments, and describes the risks of BRI projects as ‘manageable’. But the Japanese bank also called on multilateral lenders to help mitigate some of the challenges and enforce high standards.
“We believe China’s own investment-led development has taught it valuable lessons, and via new multilateral funding institutions, there will be a focus on promoting the best practice of public-private partnerships and the role of market forces.”
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|Key BRI infrastructure projects|
|PROJECT||VALUE (USD bn)|
|Jakarta-Bandung High Speed Train||5.5|
|% of GDP||0.6|
|East Coast Rail Link||14.1|
|Malaysia-China Kuantan Industrial Park||8.4|
|Expansion of Kuantan Port||0.8|
|% of GDP||9.9|
|Two bridges across Pasig river||0.1|
|Metro Manila Flood Management Project||0.5|
|PNR South Longhaul Project||3.4|
|Safe Philippines Project, Phase 1||0.4|
|% of GDP||1.4|
|Thai-Chinese High Speed Train||5.7|
|% of GDP||1.3|
|Phnom Penh-Sihanoukville motorway||1.9|
|New Phnom Penh airport||1.5|
|New Siem Reap airport||0.9|
|% of GDP||19.3|
|% of GDP||33.8|
|Deep seaport in Kyaukphyu||7.2|
|% of GDP||10.8|
|Cat Linh – Ha Dong metro line||0.9|
|% of GDP||0.4|
|Rail line: Expansion/reconstruction of||8.2|
|existing Line ML-1|
|SSRL Thar Coal Block-I 6.8 mtpa & SEC Mine Mouth||3.3|
|Road: Peshawar-Karachi Motorway (Multan-Sukkur||3|
|Kohala Hydro Project||2.4|
|% of GDP||5.5|
|Colombo Port City||2.4|
|Hambantota deep sea port||1.6|
|% of GDP||4.8|
|Padma Bridge Rail Link||3.3|
|Dhaka Chittagong rail link||6|
|Payra power plant (1320MW)||2|
|Marine Drive expressway||2.9|
|Elevated expressway: Dhaka airport-Ashulia||1.4|
|Four-lane highway: Dhaka-Sylhet||1.6|
|% of GDP||6.9|
|Source: Nomura Global Economics estimates.|