Trade conflict impact lessened by rise of Asean+3 demand: study

With structural shifts in regional value chains, the Asean+3 region -- including the 10 Asean countries as well as China, Japan, and South Korea -- has itself become a key source of final demand for the region, which should also cushion it from external trade conflicts such as that between the United States and China, said the Asean+3 Macroeconomic Research Office (AMRO) in a Jan 21 policy issue note.

Drawing upon the latest trade in value-added figures released by the Organisation for Economic Co-operation and Development, with data updated till 2015, AMRO noted that demand from within Asean+3 acccounted for 45 per cent of total exports by the region's economies in 2015, up from 35 per cent in 2011.

"The implication of such structural demand shifts is that the downside risks and spillover effects from U.S. trade protectionism through the GVCs (global value chains) on the regional economies are much lower than before," said AMRO chief economist Khor Hoe Ee and senior economist Anthony Tan in a blog post on the report.

This was particularly the case for several manufacturing exporters such as Vietnam, Thailand, Korea, Cambodia, and Malaysia, which saw a rising proportion of regional final demand. However, for commodity exporters Brunei and Indonesia, the share of foreign final demand from the rest of the world has increased significantly from 2011 to 2015, indicating diversification in export markets.

Based on the 2015 figures, AMRO estimates that China's exposure to US trade actions targeted directly at China's exports, excluding potential auto tariffs, has increased to 3.3 per cent of GDP, from 2.6 per cent in 2011. However, the corresponding export exposure of regional economies excluding China amounts to at most 1 per cent of their respective GDP. This is around 1 percentage point lower than that in 2011, estimated at 2 per cent. This includes both direct effects and the indirect effects via global value chains.

This demonstrates how the restructuring of global value chains and structural shifts in demand -- particularly increased consumption by a rising middle class -- have underpinned expansion in intra-regional trade, in terms of final demand within the region, said the AMRO economists. "These longer term trends toward greater regional integration can enhance resilience against shocks by reducing the spillover effects from trade protectionists' actions by Western economies," they concluded.