Gauging the Impact of the China-US Trade War 

The increasingly intense rhetoric of economic “decoupling”, or even a new “Cold War”- between the United States and China has become the mainstay of the conversation about the future of the world economy and East Asia.

The United States frames its policy towards China as a “strategic competition” and seeks to limit your dependency on China to protect its industrial base, decrease its reliance on imports in critical sectors, and mitigate the potential for weaponization of interdependence by Beijing.

Meanwhile, the Chinese leadership it states that the US aims to “contain, encircle and suppress” China and similarly seeks to lessen its dependence on the US market and technologies, pursuing its own form of disassociation.

These developments suggest a reconfiguration of the global and regional economic order, which could prove particularly detrimental to the economies of East and Southeast Asia. Like many analysts and Policy makers have pointed out, a regional economic order beset by the breakdown of commercial ties, and business rulesbased on spheres exclusive to the great powers, would take significant economic costs and undermine development strategies of East Asian states that depend on regional manufacturing production networks.

However, the rhetoric of decoupling masks the fact that the United States and China play very different economic roles in East Asia and possess very different sources of economic power that can be used to shape the regional economy and influence regional politics. . A nuanced assessment of these differences suggests that the potential depth of decoupling is limited as long as economic rationality and the well-being of their East Asian neighbors and partners remain a factor in the calculations for China and the United States. Both great powers should remain key partners for the East Asian economies.

An immediate and decisive decoupling from China remains unlikely, as China remains a key hub in East Asian production networks and an increasingly important source of value added even for US allies and partners.

One way to measure China’s role is to assess its “hubness” in trade, which represents the relative proportion of the region’s trade dependence on a given economy. This measure shows that China overtook the European Union and the United States as the top trading center for the Association of Southeast Asian Nations (ASEAN) and Northeast Asia during the 2008 financial crisis, and East Asia’s dependency on Chinese trade has continued to deepen. Since then.

An equally important story is the rise of China in regional production networks, especially in electronics manufacturing, where the share of Chinese value-added is increasing and China’s position in production networks is growing. going forward. Manufacturing electronics without Chinese parts and components is increasingly unrealistic.

This means that the economies of Southeast Asia are becoming more dependent on Chinese inputs and commercial ties for their development. Many factories in Southeast Asia source components from Chinese suppliers and supply their own components and products to factories located in China.

At the same time, the importance of China in regional production should not be exaggerated. Chinese suppliers are still positioned in a regressive position in the value chains, while the United States, Japan, South Korea and Taiwan occupy the advanced positions.

A forward position means that these economies produce and export parts, components, and technology that are used in the production of other countries and are then re-exported, indeed often back to the United States or Europe. A backward position means that the country in question is using imported parts, components, and technologies to produce goods that are exported. Therefore, China and most ASEAN economies remain dependent on inputs from developed countries for their exports.

The situation is similarly nuanced when assessing the revealed comparative advantages of regional economies. In simple terms, this index shows whether a country is exceeding its weight in exports of certain products. Data disaggregated by sophistication of the products exported from CHELEM database organized at the CEPII French institute for international economics show a remarkable division of labor in East Asia. China’s advantage in low-tech manufacturing is declining, while its advantage in medium- and high-tech products is increasing, meaning that it is competitive among various levels of product sophistication, but not overly competitive at any of them.

ASEAN, meanwhile, is strong in exporting high- and low-tech products. Japan is dominant at the high end of “intermediate” technologies, while South Korea is highly competitive in both intermediate and high-end goods. This means that the strengths and weaknesses of the regional economies in exports are balanced and quite complementary.

The United States remains a key market and funder

Financial power is one area where China’s rise has drawn a lot of attention, but some of this attention is misplaced. Although China has become the largest developing country in the world creditorand their policy and developer banks play an increasingly important role in infrastructure development in Southeast Asia and beyond, private companies from the United States, the European Union and Japan remain the largest investors in the real economy .

In recent years, the US has remained by far the largest source of foreign direct investment (FDI) flows, and consequently US-registered companies remain the largest holders of shares in FDI in Southeast Asia, according to the ASEAN Investment Report. Similarly, the US, the EU and Japan are the most important destinations for investment capital outflows from ASEAN. Given the slow pace and political constraints of financial liberalization in China, these patterns are unlikely to change significantly in the medium term.

The FDI inflow is a key determinant of a country’s participation in international production networks. In other words, China-centric value chains in East Asia are held together by American, European, Japanese, and increasingly South Korean and Taiwanese capital and technology.

An even more important component of the trade and production-based development strategies of the East Asian economies is access to large markets for their exports. According to ASEAN Statistic yearbook, ASEAN trade with China reached $669 billion in 2021, while the corresponding number was just $364 billion for the United States. China’s share of ASEAN trade stood at 20 percent, while that of the United States was just 11 percent. However, ASEAN nations ran a $146 billion surplus with the US and a $107 billion deficit with China.

However, the gap between the importance of the US and Chinese markets is not that great. The raw trade data does not consider that the production-centric nature of East Asian trade results in many back-and-forth transactions of parts and components between regional economies, inflating regional trade values ​​and obscuring where goods are consumed. final products.

A more meaningful measure of market access is how much of a given economy’s value added ends up being consumed in China or the United States, reflecting where East Asian countries’ demand for exports ultimately resides. According to the OECD’s Trade in Value-Added database, the balance of value-added incorporated into final ASEAN demand was a $14 billion surplus with China and a $56 billion surplus with the US. for the latest available year (2018). South Korea is the only major economy in the region that is generally much more dependent on Chinese final demand than US final demand.

Therefore, despite ASEAN’s apparent trade deficit with China, it is becoming more dependent on Chinese demand. On the other hand, the US market is still much larger than China’s. the part of private consumption relative to Gross Domestic Product it is 38 percent in China and 68 percent in the United States. Even in the face of recent US policies aimed at limiting reliance on manufacturing imports and Chinese policies seeking to prop up domestic demand, US market power remains unmatched.

The limits of separation

These different roles that the US and China play in the East Asian economic system are a result of the different fundamentals of their national economies. China has followed a growth model based on production and investment in recent decades, while the United States is a heavily financialized post-industrial economy, sustained by high consumption and its central position in the global financial order. These fundamentals will prove more difficult to shape than unilaterally altering trade policies.

On the one hand, this means that attempts to isolate China are limited by economic realities. “Friend assignment”, “close locating”, and newfound industrial policies in the US (and Europe) could very well lead to diversification of US imports, lessen perceived national security risks associated with import dependency and provide economic benefits to ASEAN. shifting part of China’s manufacturing activity to Southeast Asia. However, these policies are unlikely to fundamentally challenge China’s central position in regional trade and production networks in the medium term. like Apple’s you fight By diversifying iPhone production, China-centric production networks are not easy to replicate in other countries, as Chinese logistics and suppliers possess significant advantages.

On the other hand, while China is undoubtedly becoming more important to regional economies as a market and source of financial capital, the United States and its developed allies remain the main providers of demand, capital, and technology to the region, including China. . Stepping up regional integration through the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) would mitigate the costs of potential loss of the US market, but these frameworks could only provide an alternative if they also provide more demand and capital.

At the same time, US security interests vis-à-vis China can only be ensured with its regional allies and partners, countries that would suffer severe economic losses in the event of a decisive decoupling, even in the face of limited benefits. -Shoring would provide. As regional leaders pointthey need both great powers to remain committed to East Asia, and economic realities suggest they would do well to do so.

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