Trade Conflict and Developing Asia

The growing trade battle that broke out in early 2018 between the United States and the People’s Republic of China (PRC) means GDP could be lower by as much as 1 percentage point in the PRC and 0.2 percentage point in the United States over a period of 2-3 years relative to a no-conflict scenario, according to a new ADB working paper The Impact of Trade Conflict on Developing Asia. The study estimates the direct impact of tariffs on targeted countries, the indirect effects via trade and production linkages, and also the potential for trade redirection. The study examines three scenarios: current; bilateral escalation; and worse-case. The current scenario describes the tariffs in place as of May 31, 2019, and includes the rise in US tariff rates (to 25%) on $200bn worth of Chinese goods that took place on May 10, 2019. The bilateral escalation scenario assumes 25% tariff rates on all US imports from the PRC and all PRC imports from US. The worse-case scenario adds to this second scenario a 25% tariff on US imports of autos and auto parts and a tit-for-tat 25% retaliatory tariff from affected economies.


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The larger impact on the PRC is because the PRC is more dependent on US demand for its goods than vice versa. Global GDP could be almost a quarter of a percentage point lower if the trade conflict escalates to include autos and auto parts. The rest of developing Asia is affected in two offsetting ways. On the negative side, some economies were hit directly by some tariffs, but more importantly many countries in the region are part of “Factory Asia” and export intermediate goods to the PRC—and weaker exports by the PRC mean lower demand for intermediate inputs from the rest of developing Asia. On the positive side, businesses and firms in the US who now find it more expensive to purchase from the PRC because of tariffs will look at competing products from other countries. This trade and production redirection will benefit countries that sell these products, including electronics (many Southeast Asian and East Asian countries) and garments and textiles (some South Asian and Southeast Asian countries). The net effect can be positive for some countries like Viet Nam, or negative for other countries like Mongolia.


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The study not only examines the economy-wide impact of the trade conflict under different scenarios for 24 individual economies in the region (plus 9 economies outside developing Asia and 7 country groupings), but also looks at the impact on 35 different sectors within each of these economies. The negative impact of the trade war on the PRC cuts across many sectors, because the tariffs are on a broad range of products.


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The study also calculates the impact on exports and employment for the 33 individual countries and 7 country groupings, and for 35 sectors within these economies. The effect on global employment under the current scenario is negative, given weaker global GDP and lower trade. Escalation, if it materializes, could result in net job losses of 8.5 million in the PRC (about 1% of total employment) and 330,000 in the US (around 0.1% of total employment) over 2-3 years, relative to a no-conflict scenario.


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