Asia has a few trump cards in the global trade war

The rate increases with double digits imposed by the Trump government of the United States have bent Asia on his knees. Markets have plummeted, the costs have risen and the outlook on the economic future of the region are rapidly approaching the gloomy. There is no doubt that the size of these rates was greater than expected. But the United States are only one player in this game, and Asia also has a few Trump maps.

The US, China and the rest

The US who runs shortages has been an important part of the global trading system for more than 50 years. These deficits have been prevented from exceeding that are run by different countries over the years. In the past 20 years, the most important counterparty for American deficits has eventually become the surplus of China. American deficits and Chinese surpluses coincide very closely, as can be seen in the graph below. This creates two main players in the global economy: China produces and consumes the United States.

This system works as long as both parties agree to continue to play this game. For the United States, this means the use of their deep financial markets to borrow from the world and then to repay the world in exchange for the goods that other countries produce. Continuous increase in the American deficit and in the American debt have been the result.

For every other country this would probably have resulted in a crisis much, much earlier. However, the United States have an “exorbitant privilege” as a result of the global hegemon of the shortage: they can borrow without any real costs. China who comes in when the largest producer has helped in many ways. The United States no longer has to deal with rising and falling excess counterparts – only China acts as a stable stream of capital to the US

The rest of the world remains important in itself, but in the global economy their role as an intermediary between the United States and China is demonstrably more critical. The rest of Asia in particular plays this role. Here, East and Southeast -Asia combine China to create a wide ‘factory -Asia’. South -Asia plays a different role. South Asian countries act as a slight intermediary of Chinese trade, but more importantly, their consuming households ultimately act as an intermediary of capital.

This has been the crucial reason why, even when China has reduced their direct loans in the United States, there was not really a result for the global system. All surpluses that China owns must eventually go somewhere. And regardless of who receives the capital directly from China, the end point is still the United States. Nowhere else offers such safe returns at good interest.

Factory Asia is a clear path for this mediation. The Chinese capital has flowed over time in the rest of East and Southeast Asia and has built up the factory capacity within these countries. Trade then flows from these countries to the United States. Even South Asia plays a crucial role here, especially because they have much larger service economies than factory -Asia -and capital cycles through them back in the larger deficits of the United States.

Which card does China play and the rest of the Asia factory?

If China, supported by the Asia factory, is the clear counterpart of the American deficits, then every action that the United States takes to reduce that shortage will have a heavily influence on China. The card that the US has now played is that of rates. For a world with two main players, whatever China does, so far – so far, performing his own rates – will make up almost as much as the American rates.

Factory Asia has two main cards that can play it, although neither is a certain gamble. On the one hand, Asian countries can choose to double their production economies and flood the world with cheaper goods. The last time around, this is what they finally did. That helps a lot for every consumer in the world. However, this damages other producers – and especially those who want to be producers.

On the other hand, Factory Asia can choose to sit down, close a few factories, to convince a few households to consume more and try to do it within the region itself. Such a huge restructuring of the economy will almost certainly have political and social costs at home. For the rest of the world, this would create a scenario in which the cheap import they are used to are no longer used.

Anyway, what China and the Asia factory ultimately do in response to the cards that the United States have played, the world economy will have to do with the wrinkle effects. After all, there is no shortage without the Chinese surplus.

Will the consumers of South Asia have new maps to put down?

South Asia does not really have factories. Any delay in global trade is more likely to influence the countries of South Asia instead through weaker services. If the factories of East and Southeast Asia start closing, it may mean that the economies of South Asia have to look for a better hand to play. However, if the Asia factory decides to export more, the households of South Asia can ultimately be much more important for the world.

This is a fairly new place for South Asia to be in. Especially when the Asia factory starts pumping cheap goods all over the world, it makes it much more difficult to be a producer in South Asia. However, cheap import and cheap capital also have an advantage: they can really push the growth. When China sustained its production from the mid-2000s, it pushed a large growth cycle for South Asia. An emerging South Asian consumer is not out of the picture here, especially when the deficits of the United States begin to close. Someone else may have to get up.

If the Asia factory closes, the costs for South Asia are different. The current across the South Asian coasts could no longer act in the same way, and to support the service industries that have helped support the South Asian consumer. What would they do in such a context? Historically, South Asians have left their home country, found jobs elsewhere and returned money for their families to spend. Will there be such jobs in a world without factory -Asia?

Keep playing the two big hands, and the world will look

In the coming months it seems increasingly likely that the world will play a whole new game. In a corner, the United States claim that the deficits are a problem. Rates are the card with which they started. China is the other major player – you can’t play the game without them. What are they going to do? Which card will they play if none of their options are great? These two hands will be the most important movers who will have to keep looking the world.

How does the rest of Asia go in such a difficult context?