- Asian countries' exports are potentially vulnerable to the U.S.-China trade war on two fronts: changes to global supply chains and slowing Chinese domestic demand.
- The importance of China's direct demand for goods has grown significantly, according to Oxford Economics.
- A key question for Asia is how much China's efforts to shore up its economy will stem possible weaker demand, economists say.
That's one way the region may be dragged down by the conflict, but there could be more at risk.
Another important factor, experts said, is a potential slowdown in China's domestic demand for goods from other Asian countries. In fact, Chinese consumption has become increasingly important for its regional neighbors, according to Louis Kuijs, head of Asia Economics at Oxford Economics.
"For most Asian economies, exports to meet Chinese domestic demand have risen much more rapidly than indirect exports via supply chains, with the former now exceeding the latter," Kuijs said in a report Thursday.
"The significant amount of Asian exports used in China's own economy means that in assessing the impact of a U.S.-China trade war, we should expect the effect via China's domestic demand to play a key role," he added.
And while Chinese policy responses to support domestic demand — as well as the relocation of some manufacturers to Southeast Asia — may mitigate some of the negative effects, other Asian economies are unlikely to avoid being hurt, he said.
"In any case, given the significance of its impact on most or all Asian economies, the U.S.-China trade war is likely to remain negative for the region over the coming two years," Kuijs said.
Citi, meanwhile, said in a recent report that concerns about China's economy along with continued strength in the U.S. dollar and pressures on global trade form three "major risks" to growth prospects for emerging markets, with Chinese policy tweaks unlikely to be of much help.
"Even if recent stimulative measures improve the outlook for China, we suspect the floor this puts under the rest of (emerging markets) will be less robust than has been the case historically," the U.S. bank said, without specifying regions.
Not all economists, however, see the situation as negative.
Steven Friedman and Chi Lo, both senior economists at BNP Paribas Asset Management, said the "conventional wisdom" that the tariff conflict will hurt emerging markets misses the full picture. Exports from those economies, they said, could end up getting a boost from a combination of Beijing's domestic stimulus and the U.S. shifting its purchases to make up for fewer transactions with China.
"Higher-value" items such as electronic equipment and machinery, they added, could be sourced from South Korea.
"The combined trade diversion and Chinese demand effects will help offset some of the collateral damage on the region that the Sino-U.S. trade conflict will bring," they said.