In Asia, ghosts of crises past return amid Trumpian trade war

Chatter in Bali this week took on a somewhat panicked tone as western stock markets joined Asian currencies in the intensive-care ward.

Annual meetings of the International Monetary Fund and World Bank are typically staid affairs – heavy on jargon and theorizing, light on drama.

But Wednesday’s 831-point freefall in the Dow Jones Industrial Average morphed the confab into somewhat of a financial triage session. That’s because the fear battering Wall Street is the same one slamming markets from Jakarta to Tokyo: Donald Trump’s trade war.

But should Asia be more frightened than it already is? Comments by World Bank head Jim Yong Kim make you wonder.

The joy of trade

On the one hand, Kim said in Bali, “trade is critical because that is what has lifted so many people out of extreme poverty.” On the other, if Trump doesn’t let up, “we’d see a clear slowdown in the economy and the impact on developing countries would be great. We’re working with every single one of our countries to prepare them in case it gets worse.”

It’s a given that it will. As Mike Pence intimated in a speech last week, bashing China is Trump’s 2020 election strategy. Forget Russia, Pence also said, Beijing is the real election meddler.

This all but ensures Trump doubling the $250 billion of Chinese goods his retrograde tariffs currently target – he’s talked of as much as $505 billion.

Much of the collateral damage will be in developing Asia. That’s dawning on traders, as evidenced by cascading currencies from India to Indonesia to the Philippines. National leaders, unfortunately, have been slower to work out how their economies will continue to get trumped.

As the World Bank points out, developing nations account for 48% of world trade, a marked increase from 33% in 2000. Much of this transacting, it goes without saying, is in Asia. When the World Bank says that the number of people wallowing in extreme poverty has been halved since 1990, to roughly 1 billion today, most of the progress has been in Asia.

At the same time, Kim’s team says, increased trade has improved the quality of jobs and the productivity advances needed to modernize economies.

Well, it was nice while it lasted. Now, those same trade dynamics raising more and more boats in Asia are the main downside risk to global stability. Understandably, Kim is highlighting Indonesia, the host of this week’s confab, as among the trading nations most at risk as Washington tosses sand in the gears of Asia’s most important growth engine.

To follow this trajectory to its logical conclusion, might developing Asia be hurtling toward a lost decade?

Ghosts of crises past

Trump’s assault is terribly timed. On the one hand, it comes 10 years after the “Lehman shock,” a crisis from which Asia is still trying to recover. Emerging-market debt, it’s worth noting, has quadrupled since 2008.

On the other, it comes 20 years after Asia’s own reckoning, another blow that governments in Bangkok, Jakarta, Manila, Putrajaya and others are still struggling to move past.

The ghosts of 1997 and 1998 paved the way for the latest military junta running Thailand to grab the reins. They’re present in Jakarta, where President Joko Widodo is still contending with the political machine built by then-dictator Suharto.

The optics of then-Prime Minister Mahathir Mohamad returning to power to right Malaysia’s policy mistakes two decades ago are particularly tantalizing.

Manifestations of 1997 and 1998 are stymying Moon Jae-in’s reform drive in South Korea. Granted, his pivot to negotiations with North Korea distracted Moon’s team from increasing innovation and reducing a 9.9% youth unemployment rate.

But the same family-owned giants, or chaebol, that toppled the economy in the ’90s – and emerged from the crisis stronger than ever – are still blocking progress.

Asia boasts many such stories of post-traumatic economic stress disorder. Thankfully, it also boasts many tales of leaders strengthening financial systems, modernizing institutions and dropping trade barriers to generate rapid economic growth.

Trump is about to challenge both narratives in unpredictable and potentially devastating ways. Governments and central banks can avoid the worst by acting boldly and creatively to avoid another crisis. Failure could consign some of Asia’s most promising economies to another lost decade.