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Moody’s Investors Service says that Asia continues to rely on merchandise exports to generate economic growth, with its manufacturing-based economies and two trans-shipment hubs- Singapore and Hong Kong, most reliant on trade. As the trade and technology dispute between the US and China continues, the region is exposed to slower trade flows and heightened uncertainty weighing on investment.

“The region’s rising intra-regional trade linkages will increasingly define trade patterns in Asia, while the integration of the region in the global economy also shows in rising foreign direct investment (FDI), especially in manufacturing” says Marie Diron, Moody’s Managing Director for Sovereign Risk in Asia.

“Since the global financial crisis, Asia’s exports to the US and EU have remained largely flat as a percentage of GDP, but intra-regional trade has, by contrast, grown strongly,” says Diron.

“China is more and more at the center of Asia’s trade activity, in part shaping the region’s supply chains and increasingly a source of demand for final goods from Asia, especially for consumption goods,” says Joy Rankothge, a Moody’s Vice President and Senior Analyst.

“Accordingly, the region is vulnerable to a further escalation in tensions between the US and China over trade and technology transfers. Additional US restrictions on Chinese exports, investment and purchases of technology supplies would have an impact the rest of Asia through supply chains,” adds Rankothge.

Moody’s conclusions are contained in its just-released report, “Evolving trade patterns – Asia: Exports still drive growth, as intra-regional links increasingly defines how Asia trades”.

In terms of vulnerability to an escalation in the dispute between the US and China, Asia’s electronics sector is most exposed to further US actions. Taiwan, Malaysia, and South Korea are most exposed given their economies’ reliance on exports of these products and components to China; Hong Kong and Singapore as major trade hubs would likely be impacted too.

Exports account for over 50% of GDP for a quarter of Asia’s economies, highlighting their importance in generating economic growth across the region.

Asia-China trade linkages are more and more central to how Asia trades, as China’s merchandise imports from Asia rose by more than six-fold between 2010 and 2017.

China’s investments (FDI stock) in Asia also increased significantly to USD757 billion in 2015 from USD224 billion in 2010.

In contrast, Asia ex-China’s exports to the US and EU have largely flat lined since the global finacial crisis. However, these economies — through direct exports and also through intermediate goods exports within Asia, where US and EU will be the ultimate destination for those goods — will continue as important sources of final demand for Asia’s exports. They also remain key sources of FDI for Asia.