Robert Mueller’s report on Russian meddling isn’t the bestseller in Asia it is in the US. But its fallout is written between the lines in bold font as Asian punters run for cover.
The threat posed by special counsel Mueller’s report is dawning on Donald Trump. The spike in impeachment talk in Washington is almost perfectly correlated with the US president’s Twitter tirades.
And now, it appears to have Trump lashing out overseas – from Venezuela to Iran to China.
Oil markets are gyrating over hints from John Bolton, Trump’s trigger-happy national security advisor, of military dramas to come in Caracas and Tehran. But tangible actions are already slapping Asian bourses around.
Case in point: an imminent boost in tariffs on Chinese goods.
A week ago, the Trump crowd was all optimism and celebratory bluster. The spin was that a 12-month brawl with Beijing was ending, imparting a risk-on vibe in world markets.
Now, Trump threatens to hike the current 10% levies on US$200 billion of Chinese goods to 25% Friday. He’s also talking about targeting an additional $325 billion of goods “shortly.”
“This has all the makings of a complete disaster that could lead the stock market to crater this week and send those external risks to the US economic outlook soaring,” warns economist Chris Rupkey of MUFG Union Bank.
Yet the what behind Monday’s market plunge matters less than the why.
As domestic troubles mount, Trump is desperate to change the narrative on his embattled presidency. Looking tough on China has long been his go-to ploy to change bad news cycles.
Much of that news is coming from Democrats in Washington ramping up investigations. Ditto for the 14 ongoing criminal probes swirling around Trump’s White House and family businesses.
Such headlines have Trump desperate to change the subject.
Step one: rolling out a Trade War 2.0, just as 2020 election jockeying heats up. Step two: make a killing in trade talks with Japan. Step three: show the broader Asia region who’s boss.
The first step is roiling markets, resurrecting the risk-off crouch that dominated 2018. No one knows how far Trump will take this latest offensive. Xi arguably is not about to kowtow to Trump’s negotiators.
Faced with his own domestic challenges, Xi can no more afford to cede big ground to the protectionist-in-chief in Washington. It’s an open question whether Xi’s top negotiator Liu He will make a planned trip to Washington this week.
Tokyo in the spotlight
Yet step two – Tokyo – is now looking dicier than ever. Shinzo Abe’s team spent the last 12 months trying to run out the clock on bilateral trade talks they want no part of.
Prime Minister Abe spent vast amounts of political capital joining the Trans-Pacific Partnership, only to see Trump renege. Abe also signed history’s biggest trade deal with the European Union.
This, it’s worth noting, gives Abe far more free-trade street cred than Trump. Even so, Trump is turning his mercantilist energy Abe’s way, forcing Tokyo to attempt a seemingly impossible balancing act.
Abe must appear to cede ground to Trump, without actually doing so. Opposition forces already complain Abe has already lowered Japan’s trade defenses too much. Lawmakers also gripe that Abe has had zero in return for his sycophantic embrace of Trump’s White House.
Still, Trump raising the ante on China suggests his team is willing to go the extra mile to get a win on the international stage. Thus far, Japan Inc has tried to, effectively, buy Trump’s friendship.
One strategy: pumping tens of billions of dollars of investment into “Trump country” states like Indiana, Kansas, Kentucky, Mississippi, Ohio, Pennsylvania and elsewhere. It might not be enough, though, as trade talks heat up.
Stuck in a bygone era
That gets us to step three, which might be 25% taxes on imports of cars and auto parts. Trump the business mogul came of age on the 1980s, back when cars were the core of America’s trade with Asia.
His world view remains stuck in that era, 35 years ago, when Washington could dictate currency rates and tariff tweaks alone could enrich America.
What Trump misses is that Japanese and South Korean consumers buy cars based more on quality than tariff levels. By those metrics, Detroit often losses out. Trump’s demands that US automakers scale back fuel-efficiency standards won’t help.
Yet a fearful and desperate US leader may figure the end justifies the means if it gets his Mueller report troubles off the front page.
Taxing car imports is a live risk to economic growth in Japan, South Korea and China. That goes, too, for Thailand, India and other nations increasingly reliant on related supply chains.
The ripple effects would be felt far and wide. In April, Asia’s emerging markets saw $9.3 billion of net inflows from overseas portfolio managers. It was a hopeful sign, says economist Jonathan Fortun of the Institute for International Finance. All bets could be off, though, as Trump tosses fresh grenades.
Debt concerns from India to Indonesia to the Philippines could re-emerge in a hurry. China, too. And the shockwaves are sure to reverberate back Washington’s way.
Yet this also has all the makings of Asia’s worst nightmares potentially coming true: being directly in the firing line of an embattled White House spoiling for bigger battles. Mueller time could be a bad time for Asia.
Correction: A duplicate quote was removed from an earlier version of this story.