South-East Asia’s trade-dependent economies have been unsettled by the escalation of trade tensions between the US and China. It is clear that a few deals here and there will not be enough to restore a global trading environment that can support the region’s growth as it did in the past.
As both sides are now more conscious than ever of the dangers of depending on the other, there will be a big push for self-reliance involving industrial policies and trade restrictions. The global trading system will therefore remain stressed.
Even with a fairly benign outcome, the region’s prospects for export growth will be weakened. At the other extreme, however, if there are misjudgments made by either party, we could get a full-blown trade war between the US and China, which would depress world trade and cause immense dislocation to supply chains.
Strategies for survival
Those hoping for collective action by the Association of Southeast Asian Nations have been disappointed. Amid wide divergences in the levels of economic development and geopolitical leanings within the group, there is no consensus on the way forward. Each country will therefore have to craft its own strategy for survival in a more troubled global economy.
This is not the time to upset currency, bond and equity markets with radical policies
There are, however, a number of factors that will differentiate the winners from the losers.
First, sound monetary and fiscal policies will help countries weather the storm. This is not the time to upset currency, bond and equity markets with radical policies. Economies that can pursue monetary easing and fiscal stimulus without arousing concerns in financial markets will tend to do better.
Second, institutional capacity is needed for the adept and creative trade diplomacy that will be vital to securing good trade deals with the US, China and other major trading partners. It is also required to craft long-term economic development strategies to cope with a rougher global environment.
Third, economies that are able and willing to remain open, with strong connectivity to trading partners through high-standard free-trade agreements and economic partnerships, will probably perform better. Such openness will bring in the foreign investment, talent and technology needed to maintain steady economic development.
Vietnam will almost certainly be one of the star performers in the coming years
Finally, countries that are politically stable should also do better. If political elites are too distracted by internal feuding to pursue sound, long-term policies, then the country will be at a disadvantage.
Forward thinkers
Every country in the region has its strengths and weaknesses but three stand out in particular. First, Vietnam is politically stable with a new leader who has been willing to follow through with tough decisions such as downsizing government agencies and implementing painful reforms needed to secure free-trade agreements. The workforce is young and hungry, and foreign investment is likely to continue flowing in. As long as the government adheres to rigorous monetary and fiscal policies, Vietnam will almost certainly be one of the star performers of the world economy in the coming years.
Singapore, meanwhile, has built a reputation for successful development strategies and a highly effective government that can deal with shocks well – as seen in how the city-state overcame the Covid-19 pandemic shock. Its global manufacturing and financial hubs have the critical mass and supportive government policies that can help see it through turbulent times.
Malaysia has secured relatively better trade terms with the US than others
Finally, Malaysia’s openness to foreign investment and its credibility in monetary, fiscal and economic development policies have made it a favourite of foreign investors, resulting in clusters of globally competitive manufacturing. Like Vietnam and Singapore, Malaysia has also secured relatively better trade terms with the US than others.
The stakes are high for everyone in the ongoing tussles over trade. Failure to resolve their differences will result in heavy economic costs for both the US and China. The most likely scenario remains one where the two big powers work out an accommodation despite the heated rhetoric.
While regional economies have been relatively resilient this year, the downside risks are growing. It will be countries that mobilise an effective policy response that will be better placed to weather the storm.
