Trump tantrum no threat to Asia

IFR Asia 985 - April 1, 2017
5 min read
Asia

Fears about the implications for Asia of a Trump presidency, which reached maximum intensity soon after his election, have subsided. It seems to me that the anxiety was probably misplaced all along.

Indeed, chances are the executive order tearing up the Trans-Pacific Partnership on the new president’s first Monday in office will go down in history as a colossal mistake.

To my mind that decision had all the logic of a strategic move from Austin Powers – Mike Myers’s comic interpretation of an international man of mystery, with all the style but zero substance.

And to keep the analogy going, the “bad guys” of Asia, who might feature as menacingly giggling stooges in the movie franchise, can be justified in their glee.

All that will happen now, following the effective vaporisation of the TPP – no signatory will seek to plough ahead with the agreement absent America’s participation – is that the rag-bag of trade partnerships anchored by China and known as the Regional Comprehensive Economic Partnership will be the default back-up.

There were high hopes in Asia that the TPP would give a massive boost to the economic growth of its regional signatories – Japan, Australia, New Zealand, Singapore, Malaysia, Vietnam and Brunei. Something of a socio-economic revolution was also promised via the pact, including stricter labour laws and intellectual property protection.

Yes, it may have looked a difficult pact to police, but economic pundits estimated it would add around US$300bn to global trade annually, as well as pouring around US$80bn into the US’s own trade coffers. And if President Trump’s shredding exercise is the prelude to a trade war with Asia, then good luck with that.

The US needs Asia just as much as Asia needs the US – if not more so. Indeed, the RCEP is a sign of the momentum of the past 15 years: that of Asian countries trading among themselves. If the US tries to carry a big stick via tariffs on Asian imports, Asia can respond nimbly with import substitution of US-produced goods across a range of industrial sectors, from aircraft to agriculture.

The momentum that China has built on the infrastructure and green finance front is breathtaking. The Silk Road project, which seeks to revive the ancient trading route between China, Europe and the Middle East, is already at turbo speed.

I can testify to that anecdotally. Some friends of mine in Singapore who are in the marble business report that Chinese exports via the overland route have become a no-brainer versus the cost of bringing the stuff over in a container ship from Italy, as they have tended to do in the past.

Think of that logistical advantage over US exports, which necessarily must proceed via sea or air.

I have been sceptical in this column about the inherent dangers of project finance in China, given the potential for an asset class bubble in the Silk Road product, which is rapidly gaining traction as a discrete asset class. But there’s no doubting the potent symbolism of the project – the world’s most ambitious infrastructure endeavour since the rebuilding of Europe under the post-World War II Marshall plan.

Trump’s various efforts since he assumed office, including withdrawal from the TPP and climate change denial, might chime with his base of core supporters, but the truth is they render China the veritable hare to America’s tortoise. The fable has it that in a race between the two animals the tortoise wins in the end. When it comes to China, or for that matter Asia as a whole, I suspect that the hare will prevail.

Global capital allocation seems likely to favour Asia in this race, not only because the region’s infrastructure contractors are master price undercutters and therefore provide a more attractive proposition for sponsors and capital providers versus the same in America, but because the Asia yield premium remains in place.

Asia’s primary debt markets will also gain more momentum from the growing depth of institutional capital within the region, thanks to its burgeoning pension and life insurance industries. Long gone are the days when the US bid was needed to get a G3 new issue from Asia across the line.

Meanwhile, the bid for green finance products to fund renewable energy is growing exponentially. As more investors align their fiduciary duties along ESG principles globally, the more we will see divestment from the “brown” energy sector which is so favoured by President Trump.

He may yet surprise, of course, by slapping tariffs on Asian goods. That would be another move worthy of an Austin Powers parody, and its repercussions disastrous for America.

I suspect he will try to enhance his reputation as the master of the deal with an attempt at bilateral trade treaties with the US’s major trading partners. Britain, in its rather desperate post-Brexit state, will be first in line. I suspect Asia, for the reasons given above, will not.

Jonathan Rogers_ifraweb