Changes in government leadership following an election can often lead to some uncertainty, but Oxford Economics lead Asian economist Sian Fenner does not expect President-elect Joe Biden’s administration to be a game-changer in the region. If anything, a departure from US president Donald Trump’s more erratic and confrontational approach to diplomacy could provide a positive tailwind to Asia’s economic recovery while supporting regional currencies.
“With Joe Biden set to become the next US president in January 2021, it removes some of the downside risks to our Asia’s economic outlook. A Donald Trump victory would most likely have led to an even more protectionist stance, with new tariffs imposed on Chinese imports and somewhat unpredictable actions to decouple both economies,” writes Fenner in a report on 11 November 2020.
Fenner expects less uncertainty over US trade policy towards China and a more multilateral approach to trade under Biden, reducing volatility and boosting investor sentiment. The risk of punitive tariffs being used as an instrument of negotiation will likely be lower than under Trump, though the Democratic President-elect is likely to be cautious about rolling back Trump’s trade and investment restrictions. Tariffs are likely to remain in the short-run, but Fenner sees Biden eventually rolling back 25% steel tariffs and 10% aluminum tariffs.
A change in government could also see a possible reinstatement of Indian and Chinese exports under the US Generalised System of Preferences. “We estimate the economic benefits to Asia of such concessions would be modest because affected exports account for less than 1% of total GDP or goods exports . However, it would be positive in terms of international relations and generally conducive to stronger global business sentiment,” Fenner explains.
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Risk-averse businesses and investors will also be cheered by a less confrontational and predictable US foreign policy, which could boost investor sentiment and foreign investment. A fall in trade uncertainty and a potentially weaker US Dollar under Biden would also support regional currencies. In fact, as markets began pricing in a Biden win in October, says Fenner, Asian currencies began to regain strength vis-a-vis the greenback in anticipation of his victory.
“With less trade uncertainty next year under Biden, we expect higher real yields in countries such as India and Indonesia to underpin an appreciation in their currencies against the USD. Trade-dependent currencies, and those more sensitive to China’s yuan, such as the Singapore dollar, are also likely to find support as exports continue recovering next year amid a normalisation of global activity,” adds the economist.
But the US’s hard line against China is likely to remain under China, Ferrer warns, with trade and technology decoupling and the removal of Hong Kong’s preferential trade status likely to persist. While China remains a key global manufacturing hub and destination for foreign investment, continuing tensions will likely see a diversion of global supply chains. Rising labour costs in China, a growing need to meet rapidly growing domestic demand in Asia as well as the Covid-19 pandemic will also contribute to a shift out of China for some businesses.
Asia ex-China economies are likely to benefit from this realignment due to favourable labour dynamics, rapidly improving infrastructure and supportive investment policies. Export-oriented FDI will continue to favour Asia in the medium-term, with Vietnam likely to be the main beneficiary of this diversion due to its proximity to China and strong control over Covid-19. Trade diversion from China saw Vietnamese exports to the US rise 29% in 2019 and 11% y-o-y in the year to September despite the US falling into recession in 2Q2020.
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Fenner also does not expect Biden to rejoin the Trans-Pacific Partnership (TPP) he helped create under the Obama administration as some in the business community hope. Having now expressed opposition to the TPP as initially put forward, an unlikely US return to the deal will involve long-drawn re-negotiations including stronger measures to protect intellectual property rights, as well as introduce tough environmental and labour standards.
Adding the US to the grouping will not negatively affect any of the existing 11 members. In fact, US membership is likely to boost the exports of the participating countries by about 1.5% a year in the long-run. This amounts to an annual 0.1% gain in GDP or US$150 billion ($201.9 billion).
“In all, a reduction in trade uncertainty is likely to be a positive tailwind to the Asian economic recovery we forecast for next year. But while uncertainty may be lower, in the absence of the US rejoining the CTPP, we don’t expect a Biden win to significantly alter the playing field for Asia,” Ferrer concludes.
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