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Asia -- the myth of trade war 'winners'

US-China dispute may divert some business but gains won't match overall losses

| China

People are often tempted to profit from others' misery, so it is no surprise that some countries are pondering whether they will benefit from the U.S.-China trade war.

Indeed, the assumption that this conflict will produce "winners" as well as losers is alarmingly popular in Asia, especially among China's export competitors. But this does not make it right. The idea is not just wrong but dangerous, because it may well make it harder for smaller Asian economies to band together and push Washington and Beijing to de-escalate.

The notion that a trade war creates winners is indeed seductive. So far this year the U.S. has placed tariffs on $250 billion worth of Chinese imports. It remains poised to hike the rates on $200 billion of those goods from 10% to 25%, assuming the 90-day truce unveiled at the Group of 20 summit does not result in a broader peace accord.

There are a number of ways trade can be diverted to other Asian economies as the U.S. and China fight it out, beginning with shifts in suppliers. An American purchaser of Chinese electronics could buy from Malaysia or Taiwan. Chinese producers could shift too. GoerTek, a specialist acoustics group that makes Apple's wireless earphones, will reportedly soon shift production to Vietnam, in anticipation of future U.S. tariffs.

A trade conflict affecting hundreds of billions of dollars of goods is bound to produce movements of this kind. Brazil's soybean exports have jumped over the last year, after China hit U.S. producers with retaliatory tariffs. In the longer term, global manufacturers could also decide to change investment decisions, building new factories elsewhere in Asia, rather than China.

Yet the idea that this might turn some countries from trade war losers to winners almost certainly confuses small, specific benefits to particular sectors with the larger, broader costs that escalating tensions will bring.

A recent analysis from Nomura cited Malaysia as the country most likely to gain as global companies hunted for new suppliers, while Vietnam would be the "clear standout" beneficiary of potential medium-term new investment decisions. Yet in Malaysia nearly half of these theoretical gains come just in one sector, liquefied natural gas, which in any case amounts to only 3% of gross domestic product.

These minor victories then need to be weighed against wider costs of trade disruption. Asia's supposed trade-war winners are its most trade-dependent nations, meaning those which are most vulnerable to the global slowdown that many economists believe a full-blown trade war would bring. Malaysia's ratio of trade to GDP hit 136% last year, while Vietnam topped 200%. It is hard to imagine any economy this open winning in an era where higher tariffs become the norm.

There is then a deeper misunderstanding about how trade disputes affect modern interconnected economies. Decades of globalization means most trade occurs in intermediate products, not final goods, like washing machines or televisions. In theory this does allow some segments of supply chains to be shifted around quickly. But it also means that trade disputes are likely to disrupt those supply chains as a whole too, with effects that are hard to predict.

Most supply chains still deliver products to buyers in advanced economies like the U.S., Europe and Japan. Any decline in consumer demand there will soon filter through to Asian producers. Companies in Asia might well gain if a portion of Chinese production is shifted in their direction, but then lose out even more if other tariff-hit Chinese manufacturers stop buying their goods.

It is of course possible that production will shift only gradually. Natixis, the French bank, suggested that both India and the Association of Southeast Asian Nations could benefit as some labor-intensive production shifts from China, just as has been happening over recent years in the face of rising Chinese wage costs.

But this will be slow going. So far there have been few examples of prominent global businesses following the likes of GoerTek and shifting large volumes of production to new suppliers elsewhere. Faced with rising trade uncertainty, multinationals are unlikely to begin bold new rounds of factory building in Singapore or Thailand. Rather they will sit on their hands, trimming investment and waiting for the trade war's smoke to clear.

The idea that entire industries in areas like electronics or smartphones would suddenly shift out of China and into nearby Asian economies is perhaps the most unlikely idea of all. U.S. companies outsource production to coastal China because of its uniquely sophisticated production ecosystem. Apple could not make iPhones in America, even if it wanted to. The idea it could quickly shift all its iPhone production to much smaller economies like Malaysia and Vietnam is equally fanciful.

There is then one final reason why the idea of trade winners is damaging: politics. The failure to agree on a final communique at last month's summit of the Asia-Pacific Economic Cooperation grouping shows how trade-war bad feeling is infecting multinational institutions, including those that should be pressuring the U.S. and China to reach a longer-term accommodation.

Were Asia to become divided into those that believed themselves to be future trade war winners and losers, it would only weaken those efforts. Speaking at the conclusion of the APEC summit, China's President Xi Jinping trotted out a familiar line: "History has shown that confrontation, whether in the form of a cold war, a hot war or a trade war, produces no winners." It is a self-serving argument but, still, governments around Asia would do well to listen.

James Crabtree is an associate professor in practice at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is author of "The Billionaire Raj."

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