Simultaneously, the reemergence of countries which have suffered from protectionist and nationalist policies similar to those currently promoted in the West is going unnoticed. Earlier this year, Myanmar elected its first democratically-run government, looking to reopen the country to the world following decades of limited external partnerships. India and Indonesia are continuing to reform investment parameters to remove bureaucratic red tape that hinders foreign capital. China is also looking to implement market reforms in line with international standards, having seen the negative impact of inefficient capital allocation.
Embracing trade leads to net gains as countries exchange goods and services for which they have a comparative advantage and surplus. Historically, tariffs are installed to prevent potential abuse. But as new trade agreements aim to harmonize commercial standards and practices, such as the Trans Pacific Partnership (TPP), tariffs are reduced and eventually removed because the product of the whole becomes larger than sum of the parts.
Any new efforts to obstruct or revoke trade agreements would hinder world growth, which remains vulnerable to external shocks. Intuitively, countries that have a higher percentage of trade relative to the size of their economies would fair worst, with Asia appearing to be vulnerable. But changes to the global manufacturing landscape might suggest otherwise.
First, trade dynamics have shifted as companies move away from concentrated supply chains in favor of diversification, increasing foreign content. This phenomenon helps partially explain the limited impact on trade even as most Asian currencies have depreciated this year, as the terms of trade advantages are offset by rising production costs in local currency terms. While the entire supply chain would see static growth under protectionism, Asian exporters would perform no worse.
Second, given trade agreements among Asian neighbors and the prominence of China as both a manufacturer and consumer of end demand, most of Asia’s exports remain in the region. According to data from Morgan Stanley Research, 51.1% of Asia Ex-Japan (AXJ) exports are traded to other AXJ countries, rising from 46.3% in 2006. Over the past decade, evidence of decoupling between Asia and the West has taken place. AXJ exports to the US and EU, which made up 17.0% and 15.7% respectively in 2006, has fallen to 14.4% and 12.8%.
The rise of the protectionism tenet elevates global anxiety during this time of fragile world economic climate. It is therefore somewhat reassuring that some of Asia’s largest economies, as well as its fastest growing nations, are more reliant on domestic demand and intra-regional trade. The case is evident in Southeast Asia, particularly India, Indonesia and the Philippines, where the economy is domestically driven. China’s further transition towards greater consumption would bode well for the region.
Asia’s small and medium sized companies would perform better, given that they predominately focus on domestic markets compared to larger corporations which are often multi-national. As the summer season approaches, the political tone will remain heated. While protectionism would be negative for global trade, Asia’s domestic demand provides a strong basis for growth. But the ripple effect caused by protectionism rhetoric will be felt by everyone.
Assistant Fund Manager - Asia