How the US-Sino Trade War Affects ASEAN Economies

Trade wars disrupt supply chains and can hurt the global economy. On the other hand, they may also redirect investments and thus benefit certain national economies.

The US-Sino trade war has made headlines throughout the year 2018, and most economists have considered it a negative global development. However, some countries might benefit from it. Southeast Asian’s “ASEAN” nations, for example, are often touted as a winner of the trade war.

Investment and manufacturing shifts from China to Southeast Asia

ASEAN is the world’s fifth-largest economic bloc, comparable in size to the U.K. and India. Labour costs are low, especially in Vietnam and Cambodia.

As manufacturing costs in China have been increasing over the past decade, international manufacturers have already started to shift their production from China to neighbouring ASEAN countries.

Satish Shankar, managing partner for Southeast Asia at Bain & Co., explains that global manufacturers are moving to ASEAN for two reasons: “One is that the process is already underway, and the experience companies are having in places like Vietnam and Thailand have been positive. Second is, it's just good business practice to ensure that you are diversified and you don't have concentration risk with things like your supply chain," says Shankar.

The trade war could accelerate this trend. Companies that have so far hesitated to make the move might now have another compelling reason to do so.

A trade war will test ASEAN’s political resilience

The trade war is not just an opportunity for ASEAN – it also poses a risk.

ASEAN began as a cold-war grouping of capitalist states aligned with the US’ quest for global dominance, running up against the former Soviet Union. As tensions between the US and China are increasing, ASEAN could get trapped in the middle, having to pick aside.

Cambodia, Laos, and Myanmar are likely to keep close ties with China because this is where their economic interests lie. Vietnam is more likely to stay loyal to the US. Indonesia, Thailand, Malaysia, and Singapore would lose either way.

Contracting economic and political loyalty within ASEAN could throw the alliance into disarray. On the bride side, they also put ASEAN’s inner strength to the test, which could result in a stronger partnership in the long term.

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