Preceding US-China trade war may help cushion COVID-19s effect on Asean

• Analysis

Preceding US-China trade war may help cushion COVID-19s effect on Asean

The COVID-19 pandemic is first and foremost a human tragedy. Measures introduced to deal with it could save lives, but are having wide-ranging economic effects and inducing economic contagion.

Disrupted supply chains will affect the manufacturing industry
Disrupted supply chains will affect the manufacturing industry Bookings Institute

There are already studies estimating the economic impact of the pandemic, but greater focus is needed on the transmission mechanisms of the economic contagion and in critiquing how assessments of the economic impacts are made, focusing on the Asean region.

The effects of COVID-19 are hitting Asean economies at a time when other risk factors, such as a global growth slowdown, were already rising.

COVID-19 is disrupting tourism and travel, supply chains and labour supply. Uncertainty is driving negative sentiment. This all affects trade, investment and output, which in turn affects growth. Tourism and business travel, as well as related industries — airlines and hotels — were the first to be affected. The conditions are worsening as more countries go into shutdown.

The supply disruptions emanating mostly from China will reverberate throughout the value chain and disrupt production. Since China is the regional hub and accounts for 12 per cent of global trade in parts and components, the cost of the disruption in the short run will be high.

The negative effects of quarantine arrangements on labour supply could also be high depending on duration and sector. Manufacturing has been hit harder than service industries, where telecommuting and other technological aids limit the fall in productivity.

All these disruptions will lead to sharp declines in domestic demand. And their impact on economic growth will further propagate these disruptions. This compounding effect can magnify and extend short-run effects into the long run.

Rolling recessions inevitable

The highest economic cost could come from the intangibles. The effects of negative sentiment about growth and general uncertainty — which is already affecting financial markets — will feed into reduced investment, consumption, and growth in the long run.

Rolling recessions inevitable
Rolling recessions appear inevitable John Le Fevre

Rolling recessions around the world now appear inevitable, despite the stimulus measures being implemented. If so, there will be sharp increases in unemployment and poverty. Some degree of decoupling from China, or de-globalisation in general, may also be a permanent reminder of this pandemic.

Among Asean countries, Singapore, Malaysia and Thailand are heavily integrated in regional supply chains and will be the most affected by a reduction in demand for the goods produced within them.

Indonesia and the Philippines have been increasing supply chain engagement and will also not be immune. Vietnam is the only new Asean member integrated into supply chains with China and is already suffering severe supply disruptions.

Given time, supply-side adjustments will alter trade and investment patterns. The main adjustment will involve relocating certain activities along the supply chain from China to Asean countries. Although the pandemic will disrupt the relocation phase, Asean countries can benefit from the new investments, mitigating overall negative impacts.

Covid-19s effect on Asean

All Asean countries are dependent on tourism flows but Thailand is probably the most dependent. Cambodia and Laos receive most of their investment and aid from China, and a marked growth slowdown in China will affect them the most.

For overseas workers the spread of COVID-19 will affect sending and receiving countries
For overseas workers the spread of COVID-19 will affect sending and receiving countries DFA Philippines

The Philippines and Mekong countries have large overseas foreign worker populations and restrictions on their movement or employment prospects as COVID-19 spreads will affect sending and receiving countries. Brunei and Malaysia are net oil exporters and the price war indirectly induced by the pandemic will hit them hard. Others will benefit from lower oil prices, as will the struggling transport sector.

In measuring COVID-19s effect on Asean it is important to separate its marginal impact from observed outcomes. This is important because the remedy may vary depending on the cause of the disruption.

This requires an analytical framework that can measure deviations from a baseline scenario that incorporates pre-existing trends. A model-based analysis, rather than casual empiricism, is required to reduce the problem.

Even before the outbreak, risks of a global growth slowdown were rising. The restructuring of regional supply chains had started, driven initially by rising wages in China and accelerated by the US–China trade war.

While COVID-19 may further hasten the pace and extent of the restructuring, it is only partly responsible for what may happen. It would be misleading to attribute all of the current disruption to COVID-19. Had the trade war not preceded it, COVID-19 may have resulted in greater disruption to supply chains.

Any assessment of impacts must recognise that the spread of COVID-19 is unpredictable, and so too the response by governments.

It is difficult to estimate the impacts of a shock that is uncertain in itself. This reiterates the need for rigorous modelling and scenario analyses. The current trend points to risks rising, often accelerating, as with previous epidemics. This uncertainty underscores the need for caution in assessing, and regular recalibration in producing assessments of COVID-19s effect on Asean.

 

 

This article was written by Jayant Menon, visiting senior fellow in the Regional Economic Studies Programme at the ISEAS–Yusof Ishak Institute, Singapore. It first appeared on East Asia Forum under a Creative Commons License and is reproduced here with its permission.

 

 

Feature photo BERNAMA

 

Related: 

  • COVID-19: Into the abyss as global recession looms (video) (AEC News Today)
  • Is COVID-19 Eroding China’s Influence in Southeast Asia? (The Diplomat)
  • Can retailers survive the COVID-19 outbreak? (The ASEAN Post)
  • ASEAN Incentives to Counter COVID-19 Impact (ASEAN Briefing)

 

 

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