The Trade Dispute Between the US and China is Benefiting Other Asian Nations

America first, has been a calling card for President Donald Trump since he campaigned for President of the United States. Over the course of his two years in office, US trade protectionism has escalated with a focus on Chinese theft of intellectual property. Tariffs have been installed that have been bi-lateral with the US levying $250 billion of tariffs on Chinese imports and China initiating $100 billion on US imports into China. The trade dispute between the US and China have had far reaching results beyond the Chinese territory in Asia.

Substitution from Other Countries

The tariffs on imports have helped some nibble Asian economies, in certain subsectors. In late 2018, Bloomberg reported that Vietnamese furniture industrials have benefited and have increased market share. They also reported that in some of the low-income countries the focus was on less expensive sectors that China has dominated over the years. For example, Cambodia is very strong in the footwear space, and Vietnam is robust in food processing.

If the US and China are in a prolonged trade war, they will eventually look for other less expensive substitutes. The companies in these countries will need to be nimble but they will have an opportunity to gain market share. For example, Malaysia will likely emerge as a country that will be able to benefit from offering electronic circuits.

Companies are Looking for Opportunities

The demand for manufactured products will have advantages over services. Globalization has allowed manufacturing to find the least expensive home. While this is beneficial in the short-run, it leads to a fragmented supply chain. Agriculture quickly found new opportunities. It did not take long for Brazil to step in and become the supplier of choice for the Chinese when the US was unable to sell soybeans at reasonable prices. It also did not take long for South Korea to shift their manufacturing of durable goods from China to both Vietnam and Thailand, allowing both countries to increase their market share. Many of the equity indices in these countries have also outperformed.

The Downside

While substitutions are helping many Asian nations take advantage of the US and Chinese trade issue, the derailment of business from China to the US has hampered the supply chain. Many Asian countries supply parts to China where products are assembled and eventually sent to the United States. China will need to find a replacement buyer otherwise this businesswhich isoutsourced to smaller Asian nations will falter.

If China is able to emerge as a stronger economy, that is less dependent on sending exports to the United States, then countries throughout Asia will be the winners as substation will allow them to benefit from increased market share and a stable business through China. If the US and China are able to resolve this dispute, then the question will be whether the lower cost substitution will revert reducing some of the gains smaller Asian economies experienced during the trade dispute.