By Aaron Puthan
As we’ve witnessed over the last four years, the White House holds considerable sway over foreign economic and trade policies, making this election particularly consequential for markets in Asia. Three areas that will likely be impacted the most are trade, supply chains, and tech.
The Phase One trade deal could come under renewed focus under a re-election scenario. Despite tensions rising across all facets of U.S. and China’s relationship, trade has been a relatively stable anchor in recent months. However, the U.S. trade deficit with China is reaching new highs as fiscal stimulus provides a boost to household income and Chinese factories reopened earlier than the rest of the world. Meanwhile, China is very far from meeting its purchase targets under the deal (see Chart 1). The trade deal has so far remained intact as neither side has wanted tariffs to derail the economic recovery. But in a second Trump term, fewer restraints and China’s lack of progress toward its agreed targets could move focus back onto the trade deal and raise the risk that tariffs come back to the forefront.
Renewed political tensions could accelerate ongoing supply chain shifts, which would likely benefit some Asian economies. Supply chains are not repatriating to developed markets but rather shifting to less developed countries. This could continue to benefit Vietnam, Taiwan, and to an extent, India. Korea could also benefit singularity from increased market share in the network equipment market, due to potential limitations in Huawei’s ability to continue manufacturing 5G network equipment. Limiting the potential benefit, however, is the risk of protectionist trade policies against other Asian economies, particularly those running trade surpluses with the U.S. According to the Trump Administration, the large deficit that the US runs with China illustrates dishonest trade practices by the country, which is why they are in pursuit of protectionist policies.
The Technology Sector
The pace of technology sector decoupling could continue. Both the U.S. and China recognize that a competitive edge in high-tech sectors which not only offers potential economic gains such as increasing a country’s economic clout and influence, but also can allow one to set international standards (which in turn feed into a dominant technological and economic preposition). This could have two offsetting effects. First, one of the benefits of foreign direct investment (FDI) is thought to be technology diffusion and transfer. The Trump administration policies make that harder for China, raising the risk that reduced access to technology could reduce China’s trend GDP growth. As an example, ending sales of semiconductors to Huawei could delay 5G rollout plans, impacting productivity and the overall growth outlook. Second, to offset this, China could increase R&D spending and overall investment in its domestic tech-heavy sectors. While semiconductors have shown to be a bottleneck with difficult barriers to entry, increased investment in other sectors, such as agriculture and transportation could boost growth and bring productivity benefits, albeit with lag.
Semiconductors will likely remain a focal point. This is a sector of particular importance to East-Asian economies as they are leaders of the market. U.S. restrictions on U.S. chipmakers supplying to Chinese enterprises would force China to resort to its own domestic suppliers. While this would likely negatively impact China’s potential growth and form significant inefficiencies in import substitution (i.e., China will need to recreate an existing supply chain, which could divert spending away from more productive uses, reducing overall productivity). Yet, for the rest of Asia (and the U.S.), this import substitution push could lead to substantial foregone revenues. For example, China accounts for 65%, 60%, and 46% of Korea’s, Taiwan’s, and Singapore’s semiconductor exports, respectively.
What’s the implication for markets in Asia?
Overall, Asian markets could be negatively impacted by heightened geopolitical risks, particularly currencies. Trade remains the biggest market mover for Asia. The likelihood of a resurgence in trade tensions will be a key risk to watch, and countries with large trade surpluses with the U.S and currencies of export-oriented economies looks to be the most sensitive. India, Indonesia, and the Philippines could emerge as relative beneficiaries due to their lower U.S. trade exposure.
A potential continuation (or escalation) of the tech sector between the US and China would likely be a headwind to markets and companies with large exposure to the global tech supply chain while benefiting those that can gain market share through import substitution. In this respect, Chinese domestic firms could benefit, while those relying on Chinese demands could suffer. Supply chain uncertainty could boost automation efforts, providing tailwinds for robotic firms. □
- Image source
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