WASHINGTON: With President Donald Trump and his Chinese counterpart Xi Jinping expected to meet at the G-20 summit in Osaka, there’s growing evidence that the trade war is eroding not just short-term growth but also longer-term prospects.
Global trade is slowing, and countries directly exposed to the trade war are showing a marked deceleration. China’s export growth has slowed from 11.7% year on year in the third quarter of 2018 to 4.1% in the three months through May 2019. Exports from Taiwan and Korea are contracting.
More worrying, there are signs that weak exports combined with uncertainty on the policy outlook is starting to pass through to weaker capital spending and manufacturing employment -- dealing a blow to longer-term prospects.
Beyond the mounting evidence of a hit to the short- and long-term growth outlook, there’s another important takeaway from the data: the supposed winners from the trade war -- the US and Asian countries that could pick up the slack from China -- aren’t doing very well.
As a starting point for thinking about the impact of the trade war, we used data from the Organization for Economic Cooperation and Development on Trade in Value-Added to show which economies are most exposed.
Unsurprisingly, China tops the list, with the U.S. not far behind. China’s near neighbors -- economies like Taiwan, Korea, and Malaysia -- face significant exposure through integration into Asia’s electronics supply chain.
Looking at the top 10 economies in terms of trade exposure -- from China with 3.9% of GDP tied up in U.S-China trade to the Philippines with 0.5% -- all of them have seen export growth drop.
In the third quarter of 2018, when the initial tranches of tariffs were imposed, China’s exports rose 11.7% year on year.
In the three months through May 2019, they averaged just a 4.1% gain. Eight of the other most exposed countries - including the U.S. - now have exports contracting.
An important point to note -- for some, the dismal performance in the period since tariffs kicked in continues a downward trend.
The combination of weak exports and policy uncertainty is also a drag on investment and employment. Looking first at capital spending, eight of the 10 most exposed economies have seen a drop in capital-spending growth since the third quarter of 2018.
Korea, Malaysia and Singapore now have capital spending contracting. In most other countries, expansion is in low single digits. China has seen manufacturing investment slow to 1.3% annual growth -- below the replacement rate of capital.
The picture on employment isn’t much better. Looking at employment PMIs, from September 2018 through May 2019, eight of the 10 most impacted countries have seen readings fall. In some cases, that’s an indication of fading momentum; in others, a sign that factories are letting workers go.
China, Taiwan, Korea, Thailand, Vietnam and the Philippines now face a contraction in their manufacturing employment, according to the business surveys.
In addition to the evidence of a drag on short- and long-term growth prospects, the data points to another important conclusion -- countries that are meant to be winning the trade war are not actually doing very well. The U.S. entered the conflict with the promise of restored manufacturing vitality.
In fact, capital spending and manufacturing employment are both suffering. Vietnam has seen exports to the U.S. accelerate, but not by enough to drive a pick up in overall exports, or offset a slide in manufacturing employment. - Bloomberg
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