Dun & Bradstreet Explore how the Asia Pacific Region has Already Been Affected by the Trump Presidency
- The upward shock to global bond yields from the US election result has been felt across Asia Pacific sovereign debt.
- US policies on trade and security over 2017-20 remain wildcards, which will promote uncertainty for Asia's diplomats and supply chains alike.
Macroeconomic impacts: early signs
In 2016, the picture for much of the Asia Pacific region was dominated by low inflation, flat or shrinking international trade volumes, moderating interest rates, expansion in services and private consumption, and swings in market responses to Chinese industrial overcapacity. The US election result's impact on bond markets and inflation expectations, and hence on emerging market currencies, has already potentially upended this holding pattern. If the avowed fiscal policy aims of the incoming US administration are credible, and do drive inflation, US short-term rates will be north of 2% by 2018 and long-term rates higher. The result has been Asian government bond yields jumping sharply - often by as much as half a percentage point - since the US election, to above end-2015 levels in South Korea, Malaysia and the Philippines.
If the post-US election trend is sustained for regional bond markets, further pressure on emerging Asia currencies will follow and could bring debt-servicing challenges for both local currency- and FX-denominated borrowing. By the end of November, the Chinese yuan had already almost touched CNY7:USD offshore, and Malaysia's ringgit had reached a low versus the dollar not seen since the Asian financial crisis almost 20 years ago. The prospect for higher US inflation and interest rates has also weakened the yen, which has not demonstrated its safe-haven status since the US presidential election, and this is likely to remain the case for the near term. The weaker yen favours Japan’s large corporations (which earn the bulk of their profits abroad) and exporters, but it harms small- and medium-sized enterprises that will have to rely on more expensive imports.
In any case, if the Fed rate rise due in December is followed by more in 2017, the easing cycle seen in the region after the policy rate cuts by Australia, South Korea, India and Indonesia since Q2 (the most recent being Indonesia's and India's in October) will be over. Meanwhile, the stabilising oil price since the OPEC deal in late 2016 will help energy sectors throughout Asia but also help to prise the lid off inflation and act to import costs for oil importers China and India.
New administration: policy impacts
US trade and security policy remain wildcards. The former has already seen a collapse of hopes for the Trans-Pacific Partnership, an ambitious, US-led 12-country pact to deepen and accelerate trade via common standards and limits on non-tariff barriers. Although China's alternative Regional Closer Economic Partnership will now make headway, in a coup for Chinese policymakers, it is a less ambitious gluing together of existing regional free trade agreements, and important players in the TPP such as Australia and New Zealand will have to invest in further rounds of trade diplomacy to reposition.
Moreover, if the US administration's intent on defending US employment over free trade is really made an immediate priority, the threat to tens of thousands of supply chains built up over almost two decades, such as Apple's – almost 75% of its more than 200 suppliers are located in China – could be existential. China’s components and raw materials suppliers throughout Asia, located in many US-allied countries, would also be at risk from a US-China trade war and 1930s-style tariffs. Even if the Trump campaign view of 45% tariffs on Chinese goods is quickly abandoned, the 266% tariffs on Chinese steel imposed by the US Commerce Department in 2016 could be replicated quickly in other areas – the Department was already considering aluminium. If broad US tariffs are unlikely, more pinpoint trade measures, for example to defend breaches of American intellectual property rights, are feasible. China will certainly not be gaining support from the US for ‘market economy’ status at the WTO in December.
What is not immediately appreciated is the scope for Chinese policymakers to respond to a trade war. Boeing and Apple have been cited as potential losers, but farm states in the US are also vulnerable. Chinese policymakers equally have their finger on the trigger to impose a cascade of anti-dumping/countervailing duties on US grain exports, which would rile the farm lobby early in the Trump administration, as well as anti-monopoly and straight-up criminal investigations. US soybean exporters are potentially already under the cosh, with a Chinese action in readiness. Meanwhile, Qualcomm’s almost USD1bn fine imposed by Chinese authorities in 2015 speaks to the levels of cost regulatory risk can impose.
Security dimension fluid, post-Obama
Meanwhile, declared enemies, rivals and allies of the US alike all face challenges – as well as some potential gains – from changes to existing US basing arrangements and fundamental security postures and philosophy. The diplomatic situation leading up to the US election was already fluid. North Korea's accelerating nuclear arms development programme is a factor, but the diplomatic situation around the South China Sea is also unstable, with a strategic realignment seeing Southeast Asian states such as Vietnam and Singapore cleaving to the US, whereas those such as Malaysia and the Philippines may move closer within China's orbit. South Korea and Japan face uncertainty in their alliance politics and cost-sharing with US forces, which could see their diplomats and leaders rotate to build relationships with other regional powers.
Australia’s decision in 2016 not to conduct naval freedom of navigation operations via areas of the South China Sea claimed by China, a disappointment to the US, is already a sign that the post-Obama security environment will be fluid and not necessarily move in favour of the US-backed status quo that the half-decade-old ‘pivot to Asia’ was meant to support. We expect a more enthusiastic and vengeful linking of political and economic issues by both the US and China to emerge in their dealings with partners and rivals, in comparison to the restraint shown in the previous two decades, and a resulting diplomatic and policy melee which, while far from disastrous, will make business planning at a strategic level more challenging.
- Expect to see a continued divergence of collection patterns for manufacturing and services sectors, and for consumer/downstream and upstream firms, into 2017
- Use a mix of credit insurance, guarantees and documentary credit and collection terms across sectors
- Expect a move in China's yuan past the CNY7:USD threshold by early 2017