Trade wars: Risks and opportunities for Asia-Pacific economies from US tariffs

Working paper22 May 2019

What do trade tensions between the United States and China, the two largest trade partners of Asia-Pacific economies, mean for regional economies? This paper offers views on the implications for the rest of Asia and the Pacific from protectionism in the United States that focuses on exports from China. Many economies in the Asia-Pacific region have deeply integrated with China through trade and production linkages. For them, China has been their export platform and has increasingly become a market provider. Meanwhile, the United States remains an invaluable economic partner. Value added in Asia-Pacific economies makes its way to the United States either directly or indirectly via China. As a result, the escalating tensions between the two economic giants can cause unease. However, multinational corporations will adjust their investment strategies to allow them to maintain and grow their shares in the US market. Therefore, there will be import substitution and production relocation when the United States blocked imports from China. Using trade in value added between Asia-Pacific economies and the United States, we develop indices to identify countries that face highest risks, and countries that possibly benefit from the ongoing tensions between the two largest economies. The results confirm that opportunity sharing between regional economies will follow their specialization, and possibly even small economies can become winners in certain industries.