On July 15, US President Donald Trump took to Twitter to react to the news that China’s latest quarterly economic growth, though still coming in at a hearty 6.2%, had dropped to a 27-year low.
US tariffs “are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving,” Trump claimed in the tweet, foreshadowing the protectionist rhetoric American voters are likely to hear as he gears up for a re-election run in 2020.
While Trump will no doubt say that his tariffs on China are aimed at “onshoring” manufacturing jobs in American swing states like Michigan and Wisconsin, most of those fleeing China are landing elsewhere in low-cost Southeast Asia.
Cambodia appears to be the latest beneficiary of the US-China trade war, joining the already exhaustively profiled Vietnam among the countries enjoying increased exports to the US as tariffed Chinese goods open the door for other cheap suppliers.
Latest US government data show annual imports from Cambodia rising significantly since the start of the year, with the US$1.8 billion registered from January-May a roughly 20% increase on the same period last year.
Like Vietnam, Cambodia has duty-free access to American markets under the Generalized System of Preferences, a trade program designed to promote economic growth in the developing world. Trade represented 125% of Cambodia’s gross domestic product (GDP) in 2017, according to the World Bank.
In 2018, the bulk of Cambodia’s goods exports to the US were clothing and footwear, with the Office of the US Trade Representative listing the top four sectors as knit apparel ($1.8 billion), woven apparel ($628 million), leather products ($390 million), and footwear ($329 million).
Cambodia’s 2018 trade surplus with the US was $3.4 billion — which, though relatively-small compared with Vietnam’s near-$40 billion for the same year — will continue to rise this year as Cambodia’s exports to the US surge.
Parsing the numbers for a direct trade war link is not as clear-cut as it may seem, however, with both Vietnam – where trade represented 188% of GDP in 2018 – and Cambodia expanding their commerce with the US since before the start of the tariff war.
There are also allegations that Chinese or China-based foreign manufacturers have moved their goods briefly through neighboring countries to mask their production origin and evade China-specific tariffs. Vietnam has already pledged to crack down on the practice, though not before Trump imposed a 400% levy on its steel imports.
“It seems there is some re-routing, more than relocating, of production,” said Irene Cheung, senior strategist for Asia at ANZ Research.
Other Southeast Asian countries are also seeing bumps in exports to the US, early indication of what UK-based Capital Economics describes as “an offsetting boost as US demand has shifted away from China towards alternative suppliers.”
Export-oriented Malaysia, where trade is equivalent to 132% of GDP according to the World Bank, appears to be another regional trade war beneficiary.
The nation’s Finance Ministry recently stated that “the expansion of both exports and industrial production signal that the Malaysian economy is resilient in the overcoming external disruption, while benefiting from the ongoing trade war through business relocation, as well as trade and investment diversions.”
In Malaysia’s case, however, the boost in exports appears to be related more to Chinese tariffs imposed on US goods, rather than the other way around, according to Maybank Kim Eng’s senior economist Chua Hak Bin.
For instance, Nomura Research recently noted an increase in Malaysia’s exports of scrap alloy and natural gas to China.
Elsewhere, however, the impact of increased exports to the US appears to be offset by a countervailing reduction in imports to an economically slowing China and an old downturn in electronics due to a mix of slowing demand for chips, already-full inventories and falling prices.
That downturn has no doubt been exacerbated by the trade war’s related “tech war” that has seen the US attempt to blacklist worldwide Chinese mobile phone giant Huawei, in an apparent attempt to strangle at birth China’s nascent 5G leadership.
Indonesia, where trade represented 43% of GDP in 2018, and the Philippines (76%), the two biggest countries in Southeast Asia by population, are both more domestic demand-driven and hence less-exposed to the trade war than their more export-oriented neighbors such as Singapore (326%) and Thailand (123%).
But, according to recently-published data by Maybank Kim Eng, the Philippines has seen a contrarian rise in electronics exports, which make up over 50% of its total shipments, to the US, while Singapore has also enjoyed increased exports to the US in recent months, likewise in electronics.
Still, Singapore’s economy has slumped since the start of 2019, as exports to China dropped by around 25% year on year, suggesting that the city-state is highly dependent on Chinese markets and exceptionally vulnerable to global demand cycles.
“It’s not just the trade war, overall the global electronics sector is down,” said ANZ Research’s Cheung. “Singapore has been feeling the pain of a slowing tech sector for some time,” noted HSBC in a recent report on Singapore’s economy.
The research wing of Dutch bank ING notes that “electronics exports have been on a steady declining streak since December 2017, led by semiconductor exports which make up nearly half of the electronics cluster.”
That’s also hit Thailand, where exports were down 6.2% year on year in May are have dipped nearly 3% in the first half of this year. Electronics have contributed over 30% of the kingdom’s exports in recent years. Tourism, considered an export for national accounting purposes, is also starting to slide as Chinese arrivals dip due to its trade war-hit slowing economy.
While China will likely remain the focus for the US government’s punitive trade policy aimed at reducing deficits, the Trump administration has also served lighter notice that Malaysia, Singapore and Vietnam are being watched closely for alleged currency manipulation, another Trumpian bugbear.
Thailand and Indonesia, meanwhile, could lose their GSP status due to persistent allegations of intellectual property breaches in the case of Indonesia, and foreign worker rights abuses in Thailand’s.
For Cambodia, a fast-widening trade surplus with the US could lead to a further deterioration of already tense diplomatic relations stemming from an anti-democratic crackdown and close ties with China.
Vietnam’s exports to the US rose by 40% from the start of the year to May compared with the same period in 2018, leading Trump to recently label Vietnam as “almost the single worst [trade] abuser” in sight of its growing surplus.
Trump’s tongue-lashing came despite the fact Vietnam’s gains have largely been China’s losses in the trade war. Vietnam has long had a huge trade surplus with the US, a fact that drew Trump’s attention before his run for the presidency. Geopolitics could play a role in which nation Trump sanctions next.
Unlike Cambodia, Vietnam has a fractious relationship with China, centering around the countries’ overlapping claims to the South China Sea. Cambodia, however, has typically supported China’s claims to the sea, which the US says contravene international law.
With the passing last week of the Cambodia Democracy Act, Cambodian officials could face American trade sanctions, including a removal of GSP privileges, over the crackdown on the country’s opposition.
If the several unconfirmed recent reports that Cambodia has given China, by far the biggest source of foreign investment into Cambodia, access to naval base on the Gulf of Thailand coast, Cambodia’s trade is even more likely to be targeted.
Last year, boosted by growing exports, Cambodia enjoyed what the World Bank in May described as “better-than-expected growth” of 7.5% – a continuation of a boom that has run for well over a decade and helped the government stave-off unrest.
As for other regional countries, the prospect of a widening and deepening trade war threatens to cause at least as many problems as opportunities.
Should the recent “truce” declared by the US and China at the G20 meeting in Japan falter, and the US moves ahead with a threat to raise tariffs on the rest of its imports from China, the fallout for Southeast Asia could be hard to predict.
“Exports of electronics and consumer products will see the biggest falls, as the coverage of the remaining China goods are increasingly consumer products, including handphones and laptops,” said Maybank Kim Eng’s Chua.
Further disruption of China-centric supply chains and the threat of a further slowdown in China’s economy could more than offset any benefits accruing to Southeast Asia from shifts in global production, analysts say.
“More open [Southeast Asian] economies like Singapore, Thailand and Malaysia will be the worst impacted,” if Trump goes ahead with additional tariffs, said Chua.