In trade, nothing can replace the US consumer. Still, Asian countries look to each other
How will the US assault on trade affect geopolitical relations within Asia? Will nations turn to China and seek protection by trading with each other?
The happy snaps a week ago of the trade ministers of China, Japan and South Korea shaking each other’s hands over progress on a trilateral trade pact suggested that possibility.
The three, from nations with deep historic antipathy towards each other, said an agreement would create ‘a predicable trade and investment environment’, and they promised to speed negotiations.
There had been no discernible progress on the proposed trilateral deal since negotiations were launched in 2012. That this was the first ministerial meeting since 2019 points to the challenge ahead.
Asian nations have been active—some would say hyper-active—in pursuit of trade deals. The Asian Development Bank counts 77 preferential trade agreements among the nations of the Asia-Pacific region (including Australia) and a further 109 agreements signed with nations outside the region. Its research shows the agreements provide little help to export volumes.
About 56 percent of Asia-Pacific trade is within the region, which is only slightly less than the internal trade of the European Union. However, the intra-regional trade share has shown no growth since 2005 and has in fact slipped since 2020, despite the spread of trade deals.
Asian nations hit by US tariffs will certainly seek sales elsewhere. However, the first link in the supply chains that bind together enterprises across the region remains China’s subsidised manufacturers while the prize market remains the ravenous appetite of the US consumer.
There have been big changes in Asian trade patterns over the past decade. China has become more self-sufficient, particularly since 2018, when Donald Trump launched his first round of tariffs.
China’s President Xi Jinping responded in 2020 with his Dual Circulation Strategy, under which China would remain open to world markets but would seek economic self-reliance and import substitution in strategic sectors.
An analysis by Hinrich Foundation shows the success of this import-substitution drive. For every $100 of GDP growth over the past decade, China has had to import only $12.50 of goods and services, whereas in the decade to 2013, it needed $21.50 of imports for every $100 of GDP growth.
China’s imports are increasingly concentrated among a handful of countries, led by Russia, Vietnam, Brazil and Australia. Hinrich estimates that countries representing less than 10 percent of the global economy have supplied two thirds of China’s import growth over the last decade.
China sought, in particular, to become less dependent on the United States as both a market and as a supplier. The US share of China’s exports fell from 20 percent in 2018 to 12 percent last year, while the US share of China’s imports dropped from 8 percent to 6 percent.
While China’s direct trade with the US has fallen, its trade with Southeast Asia has increased. China’s share of Southeast Asian exports rose from 12 percent to 16 percent over the past decade, while its share of the region’s imports went from 16 percent to 24 percent.
Rather than exporting finished goods to the US, China is selling components to such countries as Vietnam, Cambodia and Malaysia, which then sell finished goods to the US.
The US has provided most of the growth for Southeast Asian exporters, with its share of their sales rising from 9 percent to 15 percent over the past decade.
There has been no growth in the US share of Southeast Asian imports, which has held steady at around 6 percent for most of the past 20 years.
The US has also become much more self-sufficient over the past decade as a result of the surge in its oil and gas production following the development of fracking technology.
However, US imports of manufactured goods have continued to rise. Estimates by Council on Foreign Relations fellow Brad Setser show the US trade deficit in manufactured goods has almost doubled since the 2008 global financial crisis to about 1.3 percent of global GDP.
In the same time, China’s manufacturing surplus has almost tripled to 1.7 percent of global GDP. Other Asian countries have become intermediaries in the flow of manufactured goods from China to the US but have not replaced it.
There is no other market like the US consumer. US household spending in 2023 reached $19 trillion, double the level of the European Union and almost three times that of China.
The huge imposts on US imports from China, Vietnam, Cambodia, Thailand and Indonesia will increase the cost and slow the flow of goods to US consumers, but there are no obvious markets to replace them.
Whether the tariffs act as the catalyst for the reindustrialisation of the US—an objective of both Republicans and Democrats—remains to be seen.