M IdeaAsia Economics | Asia PacificThe Viewpoint: The Risk of Trade Tensions ReturningAs China’s producers continue to push excess capacity offshore, we see the risk of trade tensions reemerging. Moreover, if Republicans win the White House in the Nov-24 US elections, a potential rise in tariffs will weigh on Asia’s growth outlook. Watch for damage to the capex cycle more than trade.Morgan Stanley Asia LimitedChetan AhyaChief Asia Economist Chetan.Ahya@morganstanley.com +852 2239-7812 Derrick Y KamAsia Economist Derrick.Kam@morganstanley.com +65 6834-8272 Jonathan CheungEconomist Jonathan.Cheung@morganstanley.com +852 2848-5652 For important disclosures, refer to the Disclosure Section, located at the end of this report.Key TakeawaysChina is emerging as a deflationary force, as it continues to expand manufacturing capacity at a time when domestic demand is weakening.Now that global supply-chain disruptions have receded, we see early signs of trade tensions returning. A potential change in administration post the US Presidential elections could risk another round of rises in import tariffs.An across-the-board tariff increase across all countries will pose more damage to the growth cycle as compared to tariffs on one country. Like in the previous instance, the adverse impact on corporate confidence and capex will be more damaging than direct effects of tariffs. February 5, 2024 06:24 PM GMTM Idea2Will Trade Tensions Reemerge and Pose Downside Risks to AsiaLast week, we highlighted how deflationary and competitive pressures from China’s producers could risk reviving trade tensions, especially for economies that have very similar manufacturing bases and export baskets to that of China. For instance, we noted how the European Commission has already launched investigations into China’s auto sector. We are also monitoring the risk of the US raising import tariffs again in the scenario that Republicans win the White House in the November 2024 elections (see here and here). In this week’s note, we take stock of where Asia is in the trade cycle, how competitive pressures from China’s producers will rise over the next few quarters, the sources of potential trade tensions and implications of these developments on Asia’s growth outlook.To summarise our views, if trade tensions reemerge, we think it will pose downside risks to what would be a modest recovery in trade flows. As China continues to focus on manufacturing investments, it will exert deflationary pressures, increase competitive pressures and could raise trade tensions. As before, we are mindful that the indirect effects on corporate confidence and capex could be more meaningful than the direct tariff effect. Moreover, an asymmetric imposition of tariffs on China alone could mean that supply chain diversification efforts (i.e., friend-shoring) will provide a partial offset to the drag on growth....
