trade warcollateral effect

Japan, South Korea keep wary eye on Trump’s war with China

US president's unpredictable trade tactics may unintentionally pull politically-divided Beijing, Seoul and Tokyo closer together

September 6, 2018 12:55 PM (UTC+8)
US President Donald Trump's trade policies have had a serious impact on South Korean President Moon Jae-in. Photo: AFP/Saul Loeb

Japan’s economy minister, Hiroshige Seko, has an intriguing idea about how to tamp down global trade tensions: send Donald Trump back to school.

Seko didn’t say that explicitly – after all, his boss Shinzo Abe is arguably US President Trump’s only chum among world leaders. Prime Minister Abe is loath to unfriend Washington amid mounting threats from North Korea and China’s military rise. And yet Seko made it painfully clear in a recent interview that Trump seemed to skip Economics 101.

“We have to keep trying to explain our message,” Seko told the Associated Press. “We have been working to open our markets to avoid such misunderstandings, especially in the bilateral trade with the US.” Japanese automakers, for example, “are a major contributor to the American economy,” Seko says. “If the Japanese auto industry is weakened, it will not be able to invest in the US,” which would actually cost America jobs.

Trump, Seko explains, tends to view Japan through a 1980s lens, back during the height of Washington’s “Japan-bashing” days. “Things,” Seko says, “are totally different now.”

Similar noises are coming out of South Korea. Trump’s uninformed viewpoint explains why he thought it wise to reopen a 2012 Korea-US trade deal to extract bigger concessions from a smaller economy. Or why Trump thinks it’s fair to use America’s security blanket as trade leverage.

Over the last two months, Korean Trade Minister Kim Hyun-chong and Finance Minister Kim Dong-yeon furiously worked to school White House officials and members of Congress. Much of the pitch involves educating Trump on how a vibrant and capitalist Korea benefits US interests in Asia.

Such is life for two vital allies suffering collateral damage from Trump’s trade war. China may be the Japan of Trump’s 1980s memory, but today’s Tokyo and Seoul – despite their democratic polities and military alliances with Washington – are guilty by association as big Asian exporters. Trump appears to view trade in zero-sum terms, meaning competitors to be vanquished, no matter the cost.

Collateral damages, rising costs

Those costs are rising fast. Earlier this year, Abenomics bulls agreed that 2018 is the year the five-year-plus reflation scheme would gain traction. Surely, finally, the bulls said, Japan Inc. would use rising profits to hike wages, kicking off a virtuous cycle that ended deflation once and for all.

All bets are off as Trump’s tariffs on steel (25%), aluminum (10%), and 25% levies on $50 billion of Chinese goods disrupt Asia’s 2018 (he threatens to go as high as $500 billion). Trump’s proposed 25% tariffs on imports of cars and parts, though, would hit Japan Inc. squarely in the face.

Tokyo just downgraded its export outlook for the first time in three years. As of late August, foreign investors had sold nearly $35 billion of Japanese shares, putting Tokyo on course for its biggest rout since – wait for it – the late ‘80s.

The worry: Japan’s 0.5% growth rate in the second quarter, following a 0.2% contraction in the first, means Abe’s team has little cushion against Trump’s trade assault. That’s an unwelcome development ahead of a Sept. 20 Liberal Democratic Party election – and Abe’s designs on becoming Japan’s longest-serving prime minister.

South Korean President Moon Jae-in’s hopes of retooling Korea’s economy also are being upended with each passing day. Korea’s nearly 3% growth rate would seem to offer President Moon a bit more of a cushion than Abe. Yet not when you consider Korea’s 9.2% youth unemployment rate, rising public and media criticism of the economic doldrums, tepid wage growth – and the extent to which the “Trump Effect” is bearing down on Seoul.

Part of Moon’s problem was a political calculation he made when he took office in May 2017. His mandate was to rebalance the economy away from giant family-owned exporters. Instead, Moon went all-in with peace negotiations with Kim Jong-un. Against this background, Moon is in no position to criticize Trump, whatever his true feelings: He is reliant upon Trump’s goodwill to continue this very delicate process.

But the headwinds slamming Samsung Electronics tell the story. Korea’s flagship family-owned conglomerate, or chaebol, is being squeezed at the top of the economic food chain by the US and Japan and by scrappier, cheaper Chinese technology at the other end of it. Samsung’s net income of $9.8 billion fell well short of analysts’ estimates in the three months ending June. Between Apple’s iPhones and smartphones from China’s Huawei, Xiaomi and others, Samsung’s Galaxy line is having a hard time competing.

Just like Moon’s $1.7 trillion economy. If the chaebols aren’t thriving, Moon has less latitude for painful efforts to shift power to small-and-midsize companies. The greater the uncertainty Trump creates, the less space Seoul has to modernize Asia’s No. 4 economy.

And collateral damage from China’s suffering is real, given that Beijing is Seoul’s leading trade partner.

Hyundai Research Institute reckons that each 1 percentage point drop in Chinese growth results in a 1.6 percentage point drop in outbound shipments from Korea – or 0.5 percentage point less economic growth. Such guesstimates could be too conservative, though, given the ways in which the fallout from Trump’s tariffs travels widely.

Kang Sung-cheon, Seoul’s deputy trade minister, made the same point at a July US Commerce Department hearing. He warned Trump’s tariffs would “fundamentally undermine the benefits” of the two countries’ trade dynamics. Cho Chul, deputy director of the Korea Institute for International Economic and Trade, cautions that the losses for Korea from US sanctions against China “would be big.”

Regional, global supply chains at risk

To economists at Deutsche Bank, the risk is to the value-added side of the economy. When, say, a finished iPhone leaves China for the US, that device is carrying skills, labor and technologies from Korea, Japan and Taiwan, too.

“Trump’s tariff actions may destroy global supply chains,” says Uwe Bott, chief economist of The Globalist Research Center. “These have been built into the DNA of large manufacturing firms. However, way beyond just benefiting the ‘biggies,’ they also provide jobs in many small firms that are an integral part of these supply chains.”

Such worries have editorial writers indignant. Here’s a retort from Japan’s Mainichi newspaper: “What is most worrisome is that Washington’s hard-line protectionism could spread confusion to the world.”

University of Tokyo professor Junji Nakagawa, meantime, is amazed at how Trump’s trade approach has devastating implications for America’s clout to win short-term gains. “By doing so, officials in Beijing may claim themselves responsible leaders of the global economy and the world trading system.”

Trump storms in where Abe and Moon fear to tread

Even so, these developments have fueled a bull market in mixed feelings.

Tokyo and Seoul watched with fascination (and no doubt, some quiet elation) as Washington took on China’s own zero-sum trade policies. Since joining the World Trade Organization in 2001, Beijing craftily bent commerce to its whims, killing more jobs in Japan and Korea than it creates.

Schadenfreude abounded as Asia hoped Trump might bring Xi Jinping’s government to heel. Ask any Japanese or Korean executive – off the record – and they’ll tell a horror story about China’s  multiple non-tariff barriers and the difficulty of being a foreign business entity in the Middle Kingdom.

These factors include: dubious joint-venture schemes; leveraged partnerships; technology leakages; unfair competition with state-subsidized locals; entry restrictions in sectors ranging from media to entertainment; bizarre corporate structures; navigating politically-connected billionaires; unscrupulous municipal leaders. And more.

Korean CEOs have had a particularly rough two years. Beijing has been retaliating economically against Seoul over a political issue: The nation, under threat from North Korean weapons, has hosted US-built Terminal High Altitude Area Defense, or THAAD, systems. Beijing ginned up public boycotts of Hyundai Motor vehicles, cancelled K-pop concerts, scrapped package tours for mainlanders and slammed Lotte Group, which donated the ground for the THAAD battery.

Yet while Seoul and Tokyo may secretly applaud Trump as he looms over the Great Wall with his big stick aloft, they are unable to evade the related economic damage. Neither Japan nor Korea has gone toe-to-toe with Trump for fear of direct conflict with this erratic White House. No one wants direct, bilateral US sanctions aimed their way – or becoming a target of Trump’s early-morning Twitter rants.

An emerging alliance of frenemies?

Trump’s maneuver may yield an unexpected result – pushing Beijing, Seoul and Tokyo, three capitals that are politically divided, closer together.

In May, in Tokyo, China, Japan and Korea held their first trilateral summit in more than two years. Not much came out if it, but the talks were wide-ranging and the format holds massive promise. There’s talk of more in the months ahead as Asia seeks a united front.

Asia’s frenemies may have freer rein to do just that as Trump blows off two big summits in November – one of the Association of Southeast Asian Nations, one of the Asia-Pacific Economic Cooperation forum.

The region is wise to take a strength-in-numbers approach against a US leader for whom size is everything. China, Japan and Korea going the frenemies route also creates a kind of support-group mechanism. Behind closed doors, leaders may well be counting the days – 868 to be exact – until America has a president who views Asia more as a market than a punching bag.

 

 

 

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