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Asia shares the blame for its export slump

Better late than never, exporting economies should boost domestic markets

The days of easy export-driven growth are over.   © Reuters

A moment of reckoning for Asia's exporters is a time for somber reflection and for bold action.

Since Jan. 1, the region's advanced economies reported export drops thanks to U.S. President Donald Trump's trade war. First came news that December overseas shipments by South Korea fell 1.2% from a year earlier. Then it was Taiwan down 3%, Singapore down 8.5%, and now the biggest collateral-damage victim -- Japan down 3.8%.

To no surprise, China also had a rough December. Exports slid 4.4%, the steepest decline in more than two years. Asia's biggest economy is, of course, the main target of Trump's protectionist jihad. But as China's neighbors sustain blows, they must accept some of the blame for their difficulties -- and make urgent adjustments.

For years now, Asian leaders from Korea's Moon Jae-in to Japan's Shinzo Abe claimed to be addressing the export addictions that left them vulnerable to U.S. zigs and zags.

The urgency increased after the 2008 "Lehman shock," but so did complacency. Instead of doing the heavy lifting to catalyze innovation and startups and recalibrate engines from exports to domestic demand-led growth, these advanced Asian economies pivoted to China.

A logical move, in many ways. Over the past decade, proximity to China seemed like a winning lottery ticket. What is there not to love about 1.4 billion mainlanders looking to get rich, buy cars, electronics and the latest fashions, and to holiday in Niseko, Jeju and Hamilton Island?

As 2019 begins, though, Asia's biggest exporters are paying the price for choosing the easy road to growth instead of the hard grind. China's gross domestic product grew at the slowest pace since 1990 (6.6% in 2018), and the 12 months ahead look decidedly gnarly. Drops in domestic demand, fixed-asset investment and purchasing manager orders portend more pain to come. Case in point: mainland auto sales went into reverse in 2018 for the first time since the 90s.

What Michael Dunne, CEO of auto advisory firm ZoZoGo, calls the "first sustained downturn in memory" is really a microcosm of Asia's year to come. It exposes the dangers of neighbors pinning all their hopes on a vast potential-packed economy that is also an unbalanced, debt-plagued and geopolitically vulnerable developing nation. Many Asian governments will soon be wondering where the road went.

It hardly helps that U.S. policymakers are reverting to developing-nation tactics. Trump's 25% taxes on more than $250 billion of Chinese imports is the stuff of Venezuela, not a Group of Seven power. So is a government shutdown now into a second month. The latter is an economic own-goal that may even push the U.S. into recession.

Bank of America analysts warn that the lost consumption "may not be fully made up once the shutdown ends as we find the consumer more cautious in their spending habits." This is bad news for Toyota Motor, Samsung Electronics, Taiwan Semiconductor Manufacturing Co. (TSMC), Singapore Airlines and other household Asian names.

Last week, the World Bank observed that Asia's "deep regional and global integration" makes it "vulnerable to external shocks." Global supply chains on which Asia relies heavily are under assault.

Trump might not be finished. Any day now, may make good on threats for a 25% levy on car and auto part imports and a weaker dollar. At the same time, China's days of growing 10% are long over. Chinese imports, including from the rest of Asia, plunged 7.6% in December from a year ago.

Asian officials may think they need another deep-pocketed patron for their exporters. Yet what they really require is a new model.

While there is no one-size-fits-all remedy, Japan and Korea face some similar challenges. Both are chronically top-down systems that serve giant, decades-old exporters, not scrappy startups that rekindle innovation, raise productivity and create higher-paying jobs.

Tokyo and Seoul share something else in common: both governments know what to do to revitalize growth, but demur in the face of powerful vested interests.

Abenomics cannot put all the blame on Trump for missing a 2% inflation target or stagnant wages. Had Team Abe worked harder to deregulate the economy, Japan might not be stumbling into 2019. Had Abe used high approval ratings in the first half of his six-year tenure to loosen labor markets, level the tax and regulatory playing field for entrepreneurs and curb bureaucracy, Japan might not be skirting recession.

Had Abe relied less on Bank of Japan stimulus and a weaker yen, company executives might work harder to raise their game. Had he done more to raise competitiveness, CEOs might be more confident to raise wages. Had his governance reforms come with more teeth, the Japan Inc. brand might not be taking big hits from scandals at Kobe Steel, Nissan Motor, Takata and Toshiba.

Korean President Moon has only been on the job for 20 months, 53 fewer than Abe. But that is ample time start curbing excesses of family-run conglomerates dominating Asia's fourth-largest economy. It is enough of a window to make inroads supporting small companies, modernizing Seoul's tax regime and addressing 8.6% youth unemployment. It is enough time to begin addressing Korea's pitiful gender-empowerment rankings -- something that Japan, too, should have done long ago.

Southeast Asia has even bigger problems. Economies like Indonesia, Malaysia, the Philippines and Thailand all risk falling into the "middle-income trap." Of the four, Malaysia is closest to the $10,000 per capita income threshold, in nominal terms, at which many developing nations stall. New risks abound as the star at the center of Asia's economic orbit dims.

Central bankers from Jakarta to Manila have been hiking interest rates to support wobbly currencies. So, governments must act nimbly, using fiscal levers early and decisively to safeguard growth. Equally important, Southeast Asia must accelerate efforts to improve infrastructure to attract factories leaving China. Healthier business environments are needed to woo long-term investment. Greater spending on education and training would prepare young populations for the information-age economy.

China's slowdown means the days of easy export-driven growth are over. That is doubly true with Trump stamping on trade. Asia should have diversified growth engines long ago. Yet there is no time like the present to devise a new model that generates growth from within.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.

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