By Jason Douglas
In a global trade conflict, the big players might not be the
biggest losers. Instead it might be smaller, open countries caught
in the middle, such as Hungary, the Czech Republic, Taiwan,
Singapore and South Korea.
What these places have in common is they are heavily integrated
into global supply chains -- importing raw materials and components
from other parts of the world before combining them in their own
factories into new products they then sell abroad.
Nestled within the web of economic links joining country to
country, such economies face an outsize hit from the higher import
costs and weaker demand for exports that would likely flow from an
escalation in protectionism.
Though big economies such as the U.S. would also face
turbulence, they produce a lot of parts and raw materials at home
and are fueled by domestic consumption, offering a partial shield
to a downturn in global trade.
"If you are a small, open economy that depends on trade, you are
more vulnerable," said Amit Kara, head of macroeconomic forecasting
at the National Institute for Economic and Social Research, a
nonpartisan London think tank.
The U.S. has imposed tariffs on imported steel, aluminum, solar
panels and washing machines, in addition to $34 billion in Chinese
imports and has said it could widen China tariffs to hit $500
billion in imports while also slapping new charges on imported
cars.
In all threatened tariffs reach nearly $900 billion worth of
goods imported into the U.S. China and others have retaliated and
say they will respond in kind to any U.S. escalation.
An analysis by Pictet Asset Management of World Trade
Organization data estimated small countries' vulnerability to trade
conflicts based on their participation in globe-spanning industrial
supply chains.
Among those least vulnerable are economies focused less on
adding value to exports through manufacturing or services and more
on producing raw materials, such as Saudi Arabia, Argentina and New
Zealand.
Taiwan, Hungary and the Czech Republic topped the list of
vulnerable countries, followed by Singapore and Korea. WTO data
shows that between 60% and 70% of these countries' exports are used
in global supply chains, where different stages of production are
located in different parts of the world, exposing them to
disruptions in global trade.
Their economies were hit hard after the financial crisis in 2007
and 2008, which sank global trade. Hungary's economic output
contracted 6.6% in 2009, while the Czech Republic's output
contracted 4.8%, according to the International Monetary Fund.
Taiwan suffered its worst recession in decades.
In Ireland, another small economy that's high on the list, Eoin
Gavin, managing director of logistics firm Eoin Gavin Transport
Ltd., handles imports and exports between Ireland, other parts of
Europe and the U.S.
Mr. Gavin said his business and the wider Irish economy is
heavily reliant on foreign investment and trade, especially with
the U.S. He said he has five shipping containers of aluminum and
steel parts languishing in warehouses after Mr. Trump imposed
tariffs on the metals in May.
"If there's going to be tariffs on goods, it's going to have a
massive impact on our business," he said.
Some of these countries are already big losers in the eyes of
investors. South Korea's Kospi stock index is down 7.5% so far this
year, while Singapore's Straits Times index is down 3.7% and
Hungary's BUX index is down 10.8%. Malaysia, also on the list, is
down 2.1%.
"Nobody wins in a trade war," Pictet said in a recent
report.
Hungarian Prime Minister Viktor Orban was Europe's first head of
government to endorse Mr. Trump and his America-first foreign
policy. His country could be among the biggest casualties if trade
tensions escalate.
Hungary draws in components from Germany, Russia and the U.S. to
make computer equipment and automobiles that it sells back to
Germany as well as Italy and the U.K.
The auto industry accounts for 29% of Hungary's annual
manufacturing output, according to the Hungarian Investment
Promotion Agency, making it especially vulnerable to Mr. Trump's
proposed tariffs on EU auto imports. Firms including BMW AG and
Daimler AG have production facilities in the country, fed by more
than 700 domestic suppliers.
The International Monetary Fund estimates growth in developing
European economies will slow to 3.6% in 2019, from 4.3% in 2018 and
5.9% in 2017.
Some small integrated open economies are better placed to
weather a trade war than others.
Luca Paolini, chief strategist at Pictet, which manages $193
billion of assets, said investors seeking shelter should consider
not just the level of a country's exposure but also its political
and financial stability, its debt rating and its level of foreign
reserves.
Though Argentina scores lower than Germany on integration, for
example, "it everything goes terribly wrong, you would probably
still prefer to be invested in Germany than Argentina," he said.
Other, more insulated markets include Israel, India and Indonesia,
Mr. Paolini said.
--Drew Hinshaw contributed to this article.
Write to Jason Douglas at jason.douglas@wsj.com
(END) Dow Jones Newswires
July 22, 2018 08:14 ET (12:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.