Growing domestic spending a potential buffer against any trade war shocks – Nikkei Asian Review

Inside a mall in Manila (Simon Roughneen)

International commerce, foreign investment are declining in importance for the region

JAKARTA — Rising domestic spending across Asia is making many countries in the region less reliant on trade and foreign direct investment, providing them with a buffer against external shocks such as the ongoing tariff spat between Washington and Beijing.

While goods imports to and exports from Asian countries rose 14.2% and 11.2%, respectively, in the five years through 2017, they declined relative to the wider economy due to the region’s continued world-beating growth, which hit 5.6% last year, according to new data from the United Nations Conference on Trade and Development.

Fernando Cantu, senior statistician at UNCTAD, said the trade openness index (which measures the sum of exports and imports as a percentage of gross domestic product) in the Developing Asia and Oceania region declined to 25% last year from 35% in 2005.

“This trend can be explained from the fact that external merchandise trade, while still increasing, grew at a slower pace than GDP,” Cantu said, adding that the region is shifting from externally-driven to domestic growth.

The World Bank projects that private consumption will continue to support economic growth. Half of China’s growth through 2020 will come from private consumption, the global financial body said in an October report. In Indonesia, higher spending related to Indonesia’s general election next year and recovering credit will boost consumption, and Malaysian consumers will benefit from adjustments to the consumption tax system and fuel pricing mechanism.

“China’s growth is structurally slowing and the society is becoming more prosperous. It should naturally imply that Chinese consumers will progressively reduce their spending on goods and increase spending in areas like recreation, medical expenses and other services which are non-tradables,” said Sanjay Mathur of ANZ Research.

While the rise in domestic spending reflects higher incomes and greater consumer purchasing power across Asia, many governments are attempting to steer their economies away from external drivers beyond their control.

“While this is a more balanced growth strategy and makes the countries more resilient to changes in external demand or the volatility of export prices, the transition entails many challenges,” Cantu said, citing the need to promote domestic support services such as banking and financing. Large, developing Asian economies often include tens of millions of unbanked people, while regional stock markets are nascent compared to established economies.

Countries with large populations tend to rely less on trade. According to World Bank figures for 2017, China showed a total goods and services trade-to-GDP ratio of almost 38%, with India and Indonesia at 41% and 40%, respectively.

In the Philippines and Vietnam, two countries of roughly 100 million people where trade-to-GDP ratios are higher than in the three giants, domestic consumption makes up 70% of their economies, according to the Organisation for Economic Co-operation and Development.

Even so, external factors such as trade and investment remain important to the region’s growing economies, and many countries are concerned about the longer term prospects for cross-border commerce as the U.S. and China remain in an uneasy tariff truce.

The region’s smaller economies, which typically have relatively small domestic markets, show higher dependence on international commerce. Cambodia has a trade-GDP ratio of 125%, while the figure rises to 200% and 326%, respectively, for Vietnam and Singapore.

But trade deals such as the revamped Trans-Pacific Partnership, which comes into effect this month, and the Regional Comprehensive Economic Partnership, could in time give another boost to regional trade. For example, Vietnam’s GDP will receive a 3% boost over the decade following the implementation of the TPP, according to estimates from the Peterson Institute for International Economics.

The picture for foreign direct investment is almost as varied as it is for trade. The longer-term value of FDI stock against GDP varies widely across the region, ranging from 12% in China to 15% in India, 24% in Indonesia, 414% in Singapore and 576% in Hong Kong.

The 10-country Association of Southeast Asian Nations received record inward FDI of $137 billion last year, according to the bloc’s annual investment report published last month, while inward FDI into developing Asia saw an overall rise to $478 billion last year from $409 billion in 2012.

But FDI is also declining relative to developing Asia’s overall economic weight — down to 2% now from around 3.5% of regional GDP a decade ago, according to UNCTAD.

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