Asia’s Double Nightmare: Brexit and President Trump

 
 

Brexit has already rattled Asian financial markets, but “President Trump” could escalate the economic risks to a whole new level, according to analysts.

In a recent report entitled “Trumping Asia,” Japanese brokerage Nomura Holdings has warned that the region would feel the negative effects should Republican nominee Donald Trump win November’s U.S. presidential election.

“A Trump presidency would no doubt hurt Asia’s GDP [gross domestic product] growth and could ultimately drive cost-push inflation, impart smaller trade surpluses and looser macroeconomic policies,” lead author Rob Subbaraman said in the report.

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“The knee-jerk reaction to a Trump victory by Asia’s financial markets would almost surely be to sell off as investors price in a greater risk premium to U.S. policy uncertainty, protectionism, and regional insecurity.”

According to the report, the Philippines and South Korea would be “among Asia’s most vulnerable in terms of both economic and geopolitical channels,” while India and Thailand would be the least exposed and China would only face a limited impact.

For South Korea, a Trump presidency brings the prospect of changes to a 2012 free trade deal, which the American businessman has criticized for costing “almost 100,000 American jobs” but has helped boost South Korea’s U.S. exports to 5 percent of GDP in 2015.

The independent-minded candidate has also vowed to force South Korea to meet the full cost of security guarantees provided by Washington, or risk facing a withdrawal of U.S. forces that would “dramatically increase geopolitical risks,” Nomura said.

The Philippines could face immigration restrictions that might drain the flow of remittances back home. According to Nomura, the United States hosts 35 percent of Filipinos working abroad, which account for around 31 percent of total worker remittances, a key source of foreign currency earnings.

The Southeast Asian nation also could face a loss of jobs in its business process outsourcing sector should Trump successfully bring such work back to the United States. According to Nomura, the sector may generate around 9 percent of Philippine GDP over the next two years, or the same amount of total worker remittances.

Among Southeast Asian nations, the Philippines has the biggest export dependency on the United States, which receives around 15 percent of Philippine exports, followed by Thailand and Indonesia at around 11 percent and Malaysia and Singapore at less than 10 percent.

A Nomura survey found that 77 percent of respondents expected Trump would brand China a “currency manipulator” and 75 percent predicted he would impose tariffs on exports from China, Japan, and South Korea.

According to June 2016 U.S. Census Bureau data, the Asian countries most at risk of a U.S. trade policy shift include China, currently the United States’ second-largest trading partner, fourth-ranked Japan, sixth-ranked South Korea, ninth-ranked India and 10th-ranked Taiwan. China supplied 20 percent of U.S. imports in the first six months of 2016, making it particularly vulnerable.

The U.S. trade deficit with China amounted to $161 billion in the year to June 30, making it a standout compared to the $33 billion deficit with Japan, its second-highest deficit. The United States posted trade surpluses with Asia-Pacific economies including Hong Kong, Australia, and Singapore.

Trump has already pledged to withdraw the United States from the Trans-Pacific Partnership (TPP) pact. Under U.S. law, the president could also impose punitive duties of up to 15 percent tariffs for a maximum of 150 days without prior Congressional approval in cases where the nation has a “large and serious” trade deficit, such as China.

Chinese industries most at risk would include chemical products, steel, and textiles, but also potentially higher value-added products, Nomura said. Declaring Beijing a currency manipulator could trigger further trade restrictions, potentially spurring China to weaken the yuan, it added.

However, the brokerage said the impact on China would likely be more limited, since “China and the U.S. have more common interests than conflicts in the region. Furthermore, China is relying more on domestic demand and less on external demand…which makes it less vulnerable to foreign shocks.”

India, Asia’s fastest growing major economy, faces the risk of curbs on immigration and on Indian workers’ remittances from the United States.

However, the news might not be all bad for New Delhi: “Higher tariffs on Chinese imports could also present Indian exporters with an opportunity, while [Trump’s] foreign policies, particularly with respect to Pakistan, suggest closer foreign ties. Thus, we view the overall impact on India as a mixed bag.”

Meanwhile, Trump has caused concern in Tokyo with his comment that if the United States was attacked, all Japan would do is “sit home and watch Sony television” due to Japan’s pacifist constitution.

He indicated that U.S. allies including Japan and South Korea would be expected to shoulder more of the fiscal burden for U.S. military protection.

“They have to pay… because this isn’t 40 years ago. It’s got to be a two-way street,” Trump has said.

“It could be that Japan will have to defend itself against North Korea,” he added, although saying he did not think it would be necessary for the United States to “walk” away from its commitments.

However, Japan’s Mainichi newspaper has pointed out that Japan currently pays around 75 percent of the cost of hosting U.S. military bases, compared to the 40 percent paid by South Korea. Germany pays around 30 percent and Italy about 40 percent, according to Japan’s Ministry of Finance.

Asian Outlook Weakens

Worries over Trump have added to the economic uncertainty facing Asian economies in the wake of Brexit. According to the Japan Center for Economic Research (JCER), Britain’s decision to exit the European Union will “depress growth through trade and the financial markets as the withdrawal approaches,” weakening the outlook for the region.

JCER expects China’s economy to continue decelerating this year, while it sees the four major Southeast Asian economies of Indonesia, Malaysia, the Philippines, and Thailand as “treading water” this year due to reduced growth in China.

According to JCER, China’s real GDP growth rate will slow from 6.9 percent in 2015 to 6.5 percent this year and 6 percent in 2017, while the “ASEAN4” will see their collective growth rate remain steady at 4.6 percent through to 2017. Among them, the Philippines is expected to post the fastest growth at 6.4 percent this year and next, while Indonesia is projected to expand from 4.9 percent in 2016 to 5 percent in 2017.

However, Malaysia is expected to remain steady at 4.1 percent this year and next, while Thailand could drop from 3 percent in 2016 to 2.9 percent in 2017. Malaysia is also seen as the most exposed to Brexit due to having the largest credit exposure from British banks and the most direct investments in Britain.

As previously reported in The Diplomat, Brexit could also hit exports and business investment in the region, as well as putting upward pressure on “safe haven” assets such as the Japanese yen.

But with exports to Britain only accounting for an estimated 0.7 percent of Asia’s GDP, the elephant in the room remains Trump and his potential impact on U.S. trade and investment flows. Asian policymakers remain hopeful that the Republican candidate’s statements are more for domestic political gain than signifying any major policy changes, however.

“We are all discovering Donald Trump, as he is himself: there is a stream of consciousness approach to policy pronouncements,” Singapore’s Deputy Prime Minister Tharman Shanmugaratnam said in April. “One can only hope that it evolves toward addressing the strategic interests of the United States in the world.”

But after the shock of Brexit, Trump is another headache that Asia could do without in the Year of the Monkey.

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