20.

TheUS-ChinaTradeWarandProspectsforASEANEconomies

May2022
As the Biden administration enters its second year, frictions between the US and China show no sign of
abating and may even deteriorate further. Prospects for restoration of pre-trade war economic relations
between the world’s two largest economies remain dim. Other Asia-Pacific economies are involuntarily
affected by the policies of their largest trading partners. This note provides context by summarizing
relevant aspects of the US-China conflict, and explores short and long run implications for trading partners
with particular focus on spillovers to ASEAN economies.
As we step into 2023 the situations have changed considerably and many new developments have taken
place within this period.

Bilateral Conflicts over Trade—and More

Disputes over politics, human rights and cyber security are increasingly prominent features of the US-China
relationship. High-levelmeetingsbetweentheBidenadministrationanditsChinesecounterpartshaveendedwith
open disagreement on issues from Xinjiang to the South China Sea, and from state trading companies to
spyware. Senior officials on both sides have gone on record using strongly negative language to
characterize the relationship. The US-China Tensions index, a summary measure of bilateral relations, has
risen to historically high levels (Rogers,SunandWebster2021).
Bilateral frictions and rhetoric over political issues are hardly new. But so long as they remain unresolved,
Nearly all Trump-era US import tariffs and retaliatory Chinese measures also remain in place. While the
U.S. has moved ahead with relaxing steel tariffs that Donald Trump imposed on the EU and Japan, there is
no sign of a trade policy thaw with China. However with the arrival of 2023 new trade policy aimed at
China has finally been put into the talks.
The trade war has imposed significant costs on both economies. In 2018-19, US imports from China fell
by16.3% to a level not seen since 2013, and exports to China fell by11.5%, to a level last matched in 2011.
Trade (especially US exports) recovered in 2021 but imports are back only to their 2017 level (Figure
1).The two-year “Phase I” trade deal that ran from January 2020 to December 2021 imposed unrealistically
high sector-level targets on the value of Chinese imports from the US. It has fallen predictably short of
those goals despite a surge in Chinese farm imports from the US, but more importantly, this managed trade
deal does nothing to regularize or restore a stable trade partnership (Bowne 2022). In both countries but
especially in the US, politics rather than economic interests dominate policymaking where bilateral relations
are concerned. The world’s largest (and since 2000, fastest-growing) bilateral trade and investment
partnership is not itself in peril, but its continued expansion is certainly in question.

With the arrival of 2023 it is finally seen that high level talks are finally talking place in the US China trade
deal that is now expected to go through soon in a matter of months. Wall street Is finally seeing confidence
again as investors are now reinvesting money in companies that were American based but operated
primarily in the Chinese market.

However, it is safe to say that the new trade deal is still in hot water as the United States Have imposed
fresh series of restrictions on the export of chip technology to China and this ban now extends to NVIDIATM
who primarily are a GPU maker. It is safe to say that the US wants to keep its superiority over the
microprocessor industry to itself.

2023 also saw Chinese retaliation to the trade war where the CCP has put Raytheon and Lockheed Martin
into the list of unreliable entites. This essentially means that these companies cannot enter into any bid for
any project on the Chinese mainland. The first attempt to end the stalemate of this trade war occurred on
July 19’2023 when the US Secretary of State met with the Chinese premier, Xinping. However this meeting
produced results less tham satisfactory as the Chinese demanded better terms on part of the US. Further
more according to the latest news, the Chinese in a counter has begun a crackdown on the American owned
consulting firms on Chinese soil that again has raised tensions among the states.

The new tensions have led to the US vendors buying less of Chinese products and China too is trying to
increase bilateral trade with the EU and Russian agencies.

Figure 1: US-China bilateral trade, 2000-

2021.Sourceofdata:USCensus Bureau
Spillover’s to Asia-Pacific Trade
The US and China are huge trading powers with discretion to choose policies that maximize domestic gain.
But what are the consequences of this dispute for the rest of Asia-Pacific, where these countries’ actions
amount to exogenous changes in trade, prices, and investment incentives?
ASEAN countries in particular are susceptible to changes in Asia-Pacific trade. Southeast Asia has a long
history of experiencing trade ‘shocks’ from Northeast Asia leading to significant changes in regional
comparative advantage and growth. Inthe1980s,thepost-PlazaAccordboomininwardforeigninvestmentwas
the catalyst for export-oriented industrialization in the region. Subsequently, China’s “open door” growth
and trade boom induced massive increases in natural resource exports in addition to creating many new
opportunities for global value chain (GVC) participation (Cox head 2007; Phuong, Cox head and
Lain2015). The ASEAN region today finds itself vulnerable to spill over’s from a bilateral dispute that
threatens to diminish GVC activity and promote restoring, thereby weakening an important pillar of
regional economic growth.
The impacts of the bilateral trade dispute take several forms. First, China and the US together account
formorethan35% of global GDP, so to the extent that trade and investment frictions reduce growth in each,
we should expect slower worldwide economic growth (the full extent of this decline has been obscured by
Covid-related changes since 2020 and will only become clear after the pandemic has receded). Second,
China and the US are the largest export destinations for most ASEAN countries—and much of what the
region exports to China subsequently enters China-US trade after further processing or assembly
(Athukorala 2011). Therefore, bilateral trade reduction cascades back to Southeast Asia through regional
supply chains. Third, and more positively, there has been some displacement of production and investment
away from China, with the largest effects felt in regional trading partners. In 2018-20 ASEAN’s share in
thevalueofUSimportsroseby2.6%, coincidentally the same amount by which China’s share declined. Each of
ASEAN’s large and trade-dependent economies except the Philippines recorded increases in their shares of
US imports during2018-20(Figure2).

In 2023 many small Asian countries have decided to insinuate some form of economic reforms on their
own part like Thailand , Vietnam ,etc. Many economic experts are pessimistic about the veracity of these
stimulus reforms and doubt its overall impact in avoiding the negative impacts of the trade war. The
worldwide demand of semiconductors was recorded at a 12% lower than that of the previous year.

Figure 2: China and Southeast Asian country shares in the value of US imports,
percent.Sourceofdata:USCensus Bureau
 The news is by no means all bad. Vietnam is probably best-placed to benefit from trade and investment
diversion. Certainly, it has experienced by far the greatest growth in trade and FDI. Its share in US imports,
already on a rapidly rising path, jumped from 1.9% in 2018 to 3.4% in 2020. While China’s share in US
imports of telecommunications equipment (which includes mobile phones) fell from its peak of 61.5%
in2018to52.8%in2020, Vietnam’s share rosefrom5.2%to14%inthesameperiod (Figure3). From2020to2021
alone, Vietnam jumped five places in the world rankings of FDI inflows, joining the top 20 list at
no.19(UNCTAD2021).
1

Figure 3: Shares in US imports of telecommunications equipment (SITC 764).

Sourceofdata:USCensus Bureau

Vietnam may be a Southeast Asian outlier, however, as its own reforms have generated a “sweet spot” of
openness to FDI with low labor costs. It is not so clear that other regional economies can expect much gain
from the bilateral conflict. Slower worldwide economic growth will undermine investment and job growth
everywhere. Countries more closely linked into China-centered supply chains producing for the global
market are most likely to suffer, first because of the overall trade growth slowdown, and second because of
China’s own efforts to domesticate its manufacturing supply chain. For example, the Trump years saw static
Or declining values and shares of US telecoms equipment imports sourced from traditionally dynamic
exporters such as Thailand and Malaysia—as can be seen in Figure 3.ii

ImplicationsfortheLongerTerm
As US-China trade tensions persist, their impacts also extend beyond current-period flows. Strong
policycontinuity from Trump to Biden has added momentum to policy initiatives in both countries that
threaten tobake in home-market biases in procurement, contracting, and commercial practices—for example,
“Made inChina 2025,” and “Buy American” policies for federal procurement. The latter sets minimum
domesticcontent requirements for federal government procurement and is currently slated for further
strengthening(CSIS 2021; The Guardian, 2021). Made in China 2025 and its more recent expression, the so-
called DualCirculation Strategy, aim to move China from an export- and investment-led economy to one
based ontechnology and innovation and to “reduce risks tied to import dependency” (Zhang 2020). Such
reshoringpoliciesarepoliticallyappealingandarepresumablyseenineachcountryasdeliveringbenefits,inclusiveof
perceived political dividends and reduced risk, which exceed their economic costs. In the case of China,
thenew industrial policies reinforce substitution of domestic for imported inputs in the manufacturing
supplychain (Kee and Tang 2016), a move that will hurt ASEAN exporters of parts and components such
asThailandandMalaysia.
Certainly, reshoring policies in China and the US cannot be expected to increase third-country
exportdemand through international supply chain diversification. These policies create incentives to
substitutedomesticproduction forallimportsregardlessofsource.Sothird
countrieswhoseexportsaredependentonthe vigor of the Asia-Pacific trading system may find that the long-
term rollback of interdependencebetween China and the US, if it occurs, need not translate into greater
opportunities for trade with eithercountry. For so long as the US and China hold their bilateral trade
hostage to other policy goals, thedeveloping countries in their closest economic orbits will necessarily face
diminished opportunities forspecialization,andtherefore alsoforgrowth.

TRADEWARBETWEENEUROPEANUNIONANDRUSSIA:
⮚ Introduction:
● UntilFebruary2022,Russia wasone ofthemaintrade partnersofthe EuropeanUnion.
● Since1997,theEU'spoliticalandeconomicrelationswithRussiahavebeenbasedonabilateralPartners
hipandCooperationAgreement(PCA). Thetrade-relevantsectionsofthePCA
aimedtopromotetradeandinvestment,aswellastodevelopmutuallybeneficialeconomicrelations.
● Since 2012, when Russia joined the WTO, EU-Russia trade relations have also been framed by
WTOmultilateralrules.
● Since2014,theillegalannexationofCrimeabyRussiaanditsdestabilisingroleineasternUkrainehave
seriously affected EU-Russia relations. As a result, some of the policy dialogues
andmechanismsofcooperation,includinginthe area oftrade,havebeensuspended.
● Followingfurther RussianinvasionofUkraineinFebruary2022, theEuropeanUnion(together
withotherdemocracies)has adoptedextensive sanctions ontheRussianeconomy.
⮚ LatestSanctions:

▪ Tradesanctionsadopted on8April2022
These sanctions came into effect on 9 April 2022 and the trade provisions, which are set out in
CouncilRegulation(EU)2022/576amendingRegulation(EU)No833/2014concerningrestrictivemeasuresinv
iew ofRussia’sactionsdestabilisingthesituationinUkraineare:

1. Anexpansionofthecategoriesofironand steelproductssubject toanimportban.

2. Anexpansionofthecategoriesofluxurygoods,subjectto anexportban.
3. Anexpansionofthecategoriesofhigh-techgoodssubject
toanexportban,thatmightcontributetoRussia’smilitaryandtechnologicalenhancement.
 4. A new import ban on a wide range of products and commodities, including wood,
cement,chemicalsandseafoodthatgenerate significantrevenuesforRussia.
5. Anewimportbanoncoalandsolidfossilfuels.
6. Theintroductionofimport volumequotasforspecifiedfertilizers,includingpotash.
7. Anewexportbanonanextensivelistoflow-techgoods,chemicals, commodities, andmachinerythat
mightcontribute tothe enhancementofRussia’sindustrialcapabilities.
8. Anewexportbanonjetfuelandfueladditives.
9. Anew export banongoodssuited foruse in liquefactionofnaturalgas.
10. AbanonRussian-flaggedvesselsaccessingEUports.
11. AbanonRussianandBelarusianroadtransport operatorstransportinggoodswithinthe EU.

▪ Tradesanctionsadopted on3June2022
The sixth package of EU sanctions came into effect on 4 June 2022 and the major trade-related elements
ofthe package, which are set out in Council Regulation (EU) 2022/879 amending Regulation (EU)
No833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation
inUkraineare:
1. A banontheimportationofcrudeoilandpetroleumproductsoriginatinginRussia.
2. An expansion of the list of goods and technology which may contribute to the
technologicalenhancementofRussia’sdefenceandsecuritysectorandwhoseexportisprohibited.
Thisincludes80chemicals whichcanbeusedtoproducechemicalweapons.
3. Anexpansionofthelistofitemsthatgeneratesignificantrevenues forRussiawhoseimportintotheEU is
prohibited.
4. Anexpansionofthelistofmilitary-affiliatedend-user entities
inRussiaandBelarussubjecttotighterexportrestrictions.
5.
Abanonprovidingaccounting;auditing;taxconsulting;managementconsulting;andpublicrelatio
nsservices toentities establishedinRussia.
6. TheexclusionofadditionalRussianandBelarusianfinancialinstitutions fromtheSWIFT
paymentssystem.
7. FurtheradditionstothelistsofRussianandBelarusianindividualsandentitiessubjecttofinancialsanction
s.

⮚ Tradesanctionsadoptedon21July2022
The “maintenance and alignment” package of EU sanctions came into effect on 22 July 2022 and the
majortrade-related elements of the package, which are set out in Council Regulation (EU) 2022/1269
amendingRegulation(EU)No833/2014concerningrestrictivemeasuresinviewofRussia’sactionsdestabilis
ingthe situationinUkraine,are:
1. Abanonthepurchase,import,ortransferofgold,includingjewellery,ifitoriginates inRussia.
2. Additions to the lists of goods that may contribute to Russia’s military and
technologicalenhancement,orthedevelopmentofitsdefenceandsecuritysector,
whoseexportisprohibited.
3. Additionsto thelistofgoodssuitedforuseinoilrefining andliquefactionofnaturalgas,whoseexportis
prohibited.
4. The exemption from the prohibition on exports of ‘Dual-use’ and Advanced Technology
itemsintended for cyber-security and information security applications has been removed.
However, ANationalCompetentAuthority(theDepartment)mayauthoriseaderogation
forsuchexports.
5. ANationalCompetentAuthoritymayauthoriseaderogation fromthe prohibitionontheexportofgoods
that could contribute to the enhancement of Russian industrial capacities, for
 medical,pharmaceuticalorhumanitarianpurposes.
6. ThebanonRussian-flaggedvesselsaccessingEUportsnowappliestoEUlocksaswell.
 7. Additions to the list of military-affiliated end-user entities in
Russia subject to tighter exportrestrictions.
8. AdditionstothelistsofRussianindividualsandentitiessubjecttofinancialsanctions
.
⮚ EffectsonRussianEconomy:
● SinceRussia’sunprovokedandunjustifiedinvasionofUkraineinFe
bruary2022,theCouncilhas adopted six packages of sanctions
against Russia and Belarus. The sanctions are aimedat
weakening Russia’s ability to finance the war and
specifically target the political,militaryandeconomic
eliteresponsibleforthe invasion.
● The restrictive measures do not target Russian society. That
is why sectors such as food,agriculture, health and
pharmaceuticals are excluded from the restrictive
measures thathavebeenimposed.
● Although it may take a long time to see the impact on Russia
of some of the sanctionsimposed, current estimates show
that restrictive measures are already working as
expected,and thefirstresultsarevisible
throughfollowingeconomicindicators.
⮚ TheRussianeconomyisshrinking:
According to a World Bank report, 2022 will be a bad year
for the Russian
economy.GrossDomesticProduct(GDP)isexpectedtodropbyo
ver 11%.ThiswouldbethelargestdropinGDPsincethecollapse
oftheSovietUnion.

⮚ Decliningtrade,soaringinflation:

Therestrictivemeasurestargettheimportandexportofcertaingoods.Thelisto
fbannedproductsisdesigned to maximise the negative impact of the
sanctions on the Russian economy
whilelimitingtheconsequencesforEU businesses andcitizens.

The World Bank estimates that in 2022 Russian trade in goods and
services will declinesignificantly.
Accordingtotheestimates,Russia’simportsin2022willdropby35.2%
(comparedto2021)whileexportsin2022willdropby30.9%
(comparedto2021).

Theestimationshowsthattheinflation rateinRussiawillrisesharplyin2022,
reaching22%.

▪ EffectonCapitalMarket:

Chart of the MOEX Russia index – the main index of

Moscow Exchange – betweenFebruary 2022 and August
2022. The chart shows a steep drop of the index in mid-
February(fromover3600pointstoless than2200point)