For investors, a more predictable relationship between the U.S. and China will help to further support Chinese assets, as well as sentiment on other emerging markets in Asia.
- A Biden presidency will likely focus on rebuilding alliances, U.S.-China relation to be set in a multilateral context, implying less policy uncertainty, but the relationship will remain highly competitive, particularly around technology.
- Under a Trump re-election scenario, the Phase One trade deal will be back in focus, with continued pressures on the global supply chain, technology de-coupling to accelerate.
- For the rest of Asia, this election will have particular impact on the tech sector in Asia, the trade-oriented economies of North Asia, as well as the U.S. alliance with India and Southeast Asia.
- For investors, a more predictable relationship between the U.S. and China will help to further support Chinese assets, as well as sentiment on other emerging markets in Asia. On the other hand, a resurgence in tensions could put more pressures on growth as well as asset market performance in Asia. Countries with large trade surpluses with the U.S. and currencies of export-oriented economies look to be the most sensitive.
With less than a week to go, we look at how the U.S. elections could impact Asia. Over the last four years, U.S. foreign polies have had significant economic and market impact in Asia, making this election particularly consequential for Asian investors. This report starts with potential policy differences between a Biden presidency and a second Trump administration. We also look at how the elections could impact individual Asian economies, before concluding with investment implications.
1. What does a Biden presidency mean?
Should former Vice President Biden win the election, he will face an Asia-Pacific region that has changed dramatically since he held office during Obama’s presidency. As trade and technology decoupling between the U.S. and China is arguably underway, a range of tariffs, export controls, and market access restrictions are fundamentally reshaping the relationship between the world’s two largest economies. A Biden administration would also inherit a Phase One trade deal—which he would have to decide how to pursue—and a trade relationship with the rest of Asia that has been shaken up by blanket tariffs (on items such as washing machines) and Trump’s 2017 decision to pull out of the Trans-Pacific Partnership. We think a Biden presidency will focus on rebuilding alliances and taking a multi-lateral approach with it comes to U.S.-China policies. It could help to stabilize relations from the current pace of deterioration, but the undercurrents of rising competition will likely remain.
An (initial) focus on domestic priorities
We think a Biden Administration would likely initially prioritize pressing domestic issues, such as the ongoing pandemic, high unemployment, and questions around fiscal policy. Along these lines, we expect higher fiscal spending under a Biden Presidency, possibly through another sizeable tranche of COVID-19 relief. We expect the overriding priority in the initial months of such a presidency to be strengthening responses to the COVID-19 pandemic and supporting the economic recovery, most likely by boosting household income. Since the U.S. is the largest end-consumer in the global trade system, healthy U.S. consumers are a key growth driver for export-oriented economies in Asia and for global growth in general. Other than that, the former Vice President has expressed an agenda focused on increasing domestic investment in healthcare, renewable energy, and infrastructure. Economies and businesses that play a role in the global supply chains of these sectors could see a boost.
The bigger picture: Rebuilding alliances, and a multi-lateral approach to China relations
On relations with China, Biden and former Obama-era White House advisors will likely differ from the Trump administration in two aspects—(1) taking a multilateral approach to China rather than a unilateral “American First” approach, and (2) a focus on competing, rather than confronting and containing. A focus on competition could result in more assertive U.S. industrial policy, aimed at boosting advanced manufacturing activity and securing supply chains for semiconductors, 5G networks, and other critical inputs for military and sensitive civilian applications.
We see three shifts in policymaking and priorities could occur under a potential Biden presidency:
- First, a multilateral approach to put collective pressure on China. This could actually increase pressure on China by coordinating global efforts. However, multilateral cooperation naturally forces moderation on more extreme policy options. In this respect, issues around market access, intellectual property rights, and bilateral investment could be coordinated more effectively, but marshalling the efforts of allies ultimately results in a more moderate policy agenda.
- Second, policymaking could become more transparent and orthodox. The last four years have seen tensions around bilateral trade, cross border financial flows, and technology interdependence rise up simultaneously and independently—resulting in an unpredictable policy agenda that dramatically increased tensions. A Biden White House will likely have a more considered and coordinated approach that, at a minimum, could reduce uncertainty and volatility.
- Third, the bilateral dialogue with China could become a higher priority after falling off in recent years, both at the working level, as well as the more senior political levels. For the sake of managing tensions, more communication is always better than less.
But there are things that may stay the same. Regardless of who is in the White House, consensus has moved towards a view that confronting China is the right policy choice. Based on recent surveys, this view is held broadly across both political parties, the broad electorate, and elements of the private sector. These views will influence the future president’s agenda regardless of who occupies the White House. Technology competition and partial decoupling are increasingly viewed on both sides of the Washington D.C. aisle and both sides of the Pacific, as the new normal. Many of the drivers of U.S.-China tech competition predate and will outlast these past four years. These include the fear that Chinese companies could dominate some technology sectors and a need to maintain domestic supply for critical technology infrastructure. Lastly, Congress has taken a more assertive role in recent years over aspects of foreign policy and their priorities will likely continue.
However, some more specific policies may see changes. The case of specific export restrictions could be reviewed in order to better reflect the commercial cost and benefit for U.S. businesses. The alleged ineffectiveness of tariffs as a foreign policy tool is always an issue. While they are unlikely to be rolled back without concession, a Biden White House may be less inclined to use them, at least not unilaterally. Lastly, a Biden White House could place more emphasis on human rights.
2. What does a Trump re-election mean?
As we’ve witnessed over the last four years, the White House holds considerable sway over foreign economic and trade policies, making this election particularly consequential for markets in Asia. So how might policies change or stay the same under a continuation of a Trump Administration? We identified three areas that will likely be impacted the most: trade, supply chains and tech.
The Phase One trade deal could come under renewed focus under a re-election scenario. Despite tensions rising across all facets of the relationship, trade has been a relatively stable anchor in recent months. However, the U.S. trade deficit with China is reaching new highs as fiscal stimulus provided a boost to household income and Chinese factories reopened earlier than the rest of the world. Meanwhile, China is very far from meeting its purchase targets under the deal (see Chart 1). The trade deal has so far remained intact as neither side has wanted higher tariffs to derail the economic recovery, but in a second Trump term and with fewer restraints, the trade deal and China’s lack of progress towards its agreed targets, could move back into focus and raise the risk that tariff threats come back to the forefront.
Renewed geopolitical tensions could accelerate ongoing supply chain shifts, which would likely benefit some Asian economies. As we pointed out in "Are rising U.S.-China tensions hurting supply chains?", supply chains are not repatriating to developed markets, but rather shifting along existing supply chains. This could continue to benefit Vietnam, Taiwan, and to an extent, India. Korea could also benefit singularly from increased market share in the network equipment market, as we discuss below, due to potential limitations in Huawei’s ability to continue manufacturing 5G network equipment. Limiting the potential benefit, however, is the risk of protectionist trade policies against other Asian economies, particularly those running trade surpluses with the U.S.
The Technology Sector
The pace of technology sector decoupling could continue. Apparently both U.S. and China recognize that a competitive edge in high-tech sectors which not only offers potential economic gains (which increase a country’s economic clout and influence), but also can allow one to set standards (which in turn feed into a dominant technological and economic position). This could have two offsetting effects. First, one of the benefits of foreign direct investment (FDI) is thought to be technology diffusion and transfer. The Trump administration’s policies make that harder for China, raising the risk that reduced access to technology could reduce China’s trend GDP growth. As an example, ending sales of semiconductors to Huawei could delay 5G rollout plans, impacting productivity and the overall growth outlook. Second, to offset this, China could increase R&D spending and overall investment in its domestic tech-heavy sectors. While semiconductors have shown to be a bottleneck with difficult barriers to entry, increased investment in other sectors could boost growth and bring productivity benefits, albeit with a lag.
Semiconductors will likely remain a focal point. This is a sector of particular importance to East-Asian economies. If the U.S. seeks to enforce restrictions on foreign chipmakers supplying to Chinese enterprises, it would force China to resort to domestic suppliers. On one hand, this would likely negatively impact China’s potential growth and form significant inefficiencies in import substitution (i.e. China will need to recreate an existing supply chain, which could divert spending away from more productive uses, reducing overall productivity). On the other hand, for the rest of Asia (and the U.S.), this import substitution push could lead to substantial foregone revenues. For example, China accounts for 65%, 60%, and 46% of Korea’s, Taiwan’s, and Singapore’s semiconductor exports, respectively.
3. What does it mean for individual Asian economies?
Biden will inherit President Trump’s Taiwan policy legacy—a closer bilateral relationship and more arms sale. It is unlikely that a Biden presidency will immediately change that. After all, bipartisan support for Taiwan in congress has also increased in recent years. But in the context of an overall more stable and less confrontational U.S.-China relationship, a Biden presidency will likely be better able to allay China’s concerns and lower the chance of accidental conflict.
From an economic perspective, Taiwan’s tech sector will remain central to the global 5G race and stands to benefit from a stronger cyclical recovery in the global economy in 2021. But the strong flow back of business investment (from China) will likely moderate if overall U.S.-China relations stabilize, although it is unlikely to completely stop or reverse. Taiwan’s exports to the U.S. have also benefited from slower China-U.S. trade, this outperformance may also ease if bilateral tariff rate between China and the U.S. are lowered.
A Biden presidency will likely have a stabilizing effect on the relationship between the U.S. and South Korea for two reasons. Firstly, a Biden presidency will be very interested in mending relations with allies, as well as relations between allies, and so will attempt to bridge the differences between Japan and South Korea on issues such as trade. Secondly, Biden will likely return to a more orthodox, and hence predictable, U.S. policy with regard to North Korea, centered around deterrence. South Korea’s tech sector has made meaningful advance in recent years and will continue to do well in the coming year, but a stronger growth recovery requires a more sustained turnaround in the global economy.
Former Prime Minster Abe has had a strong personal relationship with President Trump. This has acted as a stabilizing influence in Japan-U.S. relationship, even as the two sides have not been able to make more progress on bilateral trade. A new prime minister will bring a new dynamic. In this sense, both a Trump re-election as well as a Biden Presidency brings with it its own set of challenges. In particular, Japan will remain interested in pursuing a broader regional trade pact with the U.S. in it. From a macro perspective, Japan’s macro policies are pushing the limit to lift growth—but it is doubly difficult when the U.S and Europe are also easing on an unprecedented scale. It is also still coping with lingering COVID risks. So outside some select sectors, Japan’s growth recovery will require strong global growth and some difficult choices on reforms.
Prime Minister Modi and President Trump has established a strong personal relationship over the last few years. This is helped by a stronger shared interest in deterring China. The recent stand-off between China and India along the borders, and India’s actions to ban Chinese apps have added further geopolitical and economic dimensions. A re-elected President Trump may herald continuity. But the implications of a Biden presidency are less clear. How Biden will act with regards to Kashmir is also unclear. That said, India will likely remain one of the primary regional allies from a strategic perspective. From a macro perspective, India’s economy has been bad hit by COVID-19 and the economy continues to struggle, given insufficient public health infrastructure and limited policy space. From a growth perspective, it will likely take India longer to fully recover from the COVID-19 recession than many of its Asian peers.
Neither President Trump nor Vice President Biden has said much on foreign policy when it comes to South East Asia. And over the last four years the impact of U.S. foreign policy has largely been felt through the trade war as well as the tensions with China in the South China Sea. Broadly, these have had negative economic impact (although there are some beneficiaries, for example, Vietnam has benefited from an acceleration of foreign direct investment, mostly from China). A more stable U.S.-China relationship will help to reduce uncertainty for South East Asian economies. However it remains to be seen whether the U.S. will take a more active approach, such as joining regional trade pacts.
Broadly, the region has had varying degree of success in the fight against COVID. Singapore has contained the pandemic well, followed by Malaysia and Thailand (although Thailand has seen renewed domestic political tensions as well). Meanwhile, Indonesia and the Philippines have struggled. In addition, every economy in the region has been hit by the slowdown in global trade as well as the drying up of tourist incomes. While there is room for further policy easing to support growth, a full-fledged recovery will need to wait until the global economy recovers strongly, and a medical solution becomes available.
4. What could all this mean for investors?
Under a potential Biden presidency, larger fiscal support from the U.S. should be a reflationary tailwind for the cyclical recovery in the U.S. and the global economy. Meanwhile, a more stable relationship between the U.S. and China, even if it remains highly competitive and at times confrontational, can still be positive for markets, thanks to reduced unpredictability. We have been positive on the Chinese economy for a while now, arguing that the economic recovery is sustainable. A more predictable foreign policy with less direct confrontation on trade could support further strength in Chinese assets. This could also be a positive catalyst for emerging markets across Asia. The trade-oriented economies along China’s supply chain (e.g., South Korea and Japan) could benefit from stronger trade flows. Meanwhile, the rest of Asia should benefit, to various degrees, from stronger global growth, a weaker USD, and more positive investor sentiment.
With a re-elected President Trump, Asian markets could react negatively towards heightened geopolitical risks, particularly currencies. Trade remains the biggest market mover for Asia. The likelihood of a resurgence in trade tensions will be a key risk to watch, and countries with large trade surpluses with the U.S. and currencies of export-oriented economies look to be the most sensitive. India, Indonesia, and the Philippines could emerge as relative beneficiaries due to their lower U.S. trade exposure. A potential continuation (or escalation) of the tech war would likely be a headwind to markets and companies with large exposure to the global tech supply chain, while benefiting those that can gain market share through import substitution. In this respect, Chinese domestic firms could benefit, while those relying on Chinese demand could suffer. Supply chain uncertainty could boost automation efforts, providing tailwinds for robotics firms.
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