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ASEAN and China grow closer on trade - Macro Macchiato 22/07/19

July 22, 2019

The American president’s trade war with China is beginning to have clear benefits for America’s competitors in the Far East. China has released trade data that show trade between China and ASEAN nations has grown to a level where ASEAN has overtaken the US as China’s second-largest trade partner. Chinese customs data show a 10.5% rise in trade with ASEAN in the first half of 2018 to RMB 1.98 Trillion (USD 288 Billion). This compares with a fall of 9.0% in China’s trade with the US in the first half of this year to RMB 1.75 Tn (USD 254 Bn).

 

China’s Belt and Road Initiative continues to spread its influence in the region. Of particular note is the growth in trade between China and Thailand, which grown from a bilateral total of USD 50 Bn to USD 80 Bn in the last ten years. Wichai Kinchong Choi, senior vice president of Thailand's Kasikorn Bank tells China’s Xinhua news agency that, “More and more Chinese companies came to Thailand to build factories, do business. They bring new technology, investment, experience here while Thai companies, encouraged by Thai government, kept exploring the Chinese market." That’s helpful for Thailand which has seen an overall fall in exports and imports in recent months while GDP growth has been at a four-year low.

 

China reported yesterday that it imported 5 Mn T of crude oil in Jan-June this year via its pipeline from Myanmar, an increase of 2.7 per cent on 1H18. That’s about 19 VLCCs worth. Since the pipeline opened in 2017, it has pumped more than 19 Mn T of crude oil and more than 20 Bn cubic metres of natural gas into China. Myanmar and China have agreed on duty-free economic corridors over their border at use and Chin Shwe Haw in the northern part of Shan State and Kan Pite Tee in Kachin State. It is hoped that these will boost employment and investment in Myanmar.

 

Meanwhile Malaysia’s deputy minister for international trade and industry, Ong Kian Ming, is not surprised that ASEAN has surpassed the US as China’s second largest trade partner. He notes that ASEAN economies are growing faster than the US while ASEAN and China’s supply chains are increasingly interdependent. He also notes “the effects of trade and production diversion due to the trade tensions.” In other words, US tariffs on China have rerouted Chinese manufactured goods via new assembly sites in ASEAN nations.

 

That relocation has benefited Indonesia in particular. A report by the ASEAN+3 Macroeconomic Research Office (AMRO) released in May suggested the Southeast Asia region has become the main destination for investment relocation from China. A survey by the US Chamber of Commerce revealed that nearly a third of US companies operating in China are planning to outsource or assemble outside both China and the US, with ASEAN nations among their top choices for investment. 

 

But ASEAN is not solely focused on being an entrepot for Chinese exports to the US. ASEAN is increasingly being drawn into China’s orbit.  Data released yesterday show that foreign direct investment (FDI) to Bangladesh increased 33% in the 12 months to June 2019 to USD 3.8 Bn after a 69% increase for calendar 2018 on the back of Chinese investments in Bangladesh’s Dhaka Stock Exchange and in a Bangladeshi mobile financial services company.

 

A key element of ASEAN’s trade policy is the Regional Comprehensive Economic Partnership (RCEP). This is a proposed free trade area comprising the 10 ASEAN members plus China, Japan, South Korea, Australia, New Zealand and India. Regional ambitions do not stop there. Oh Ei Sun, principal advisor of Malaysia's Pacific Research Center, suggests that some sort of coordination mechanism should be set up between the BRI and the ASEAN Economic Community with an ambition of eventually broadening and deepening the China-ASEAN Free Trade Area into possibly a China-ASEAN Economic Community.

 

 

The Take Away

 

 

There is concern among specialists in South-East Asian economics that trade tensions between the US, China, Korea and Japan could infect the wider region and reduce overall trade growth.  But there is also clear evidence that regional nations can take advantage of the US-China trade spat in the short term, while long-term planning is clearly focused on expanding free trade between China, India and their geographically smaller neighbours. The effects on shipping will be mixed. Increased use of pipelines, rail, and possibly new canals to create alternatives to traditional shipping routes may all have negative effects on shipping demand. But these are likely to offset growth, not to replace growth, for shipping.

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