We recently updated our Asia Game Theater—which helps guide our understanding of security and trade-related issues within the region—to reflect the change in the United States presidency.
Within this theater, China and the United States are the two dominant players competing for economic and geopolitical influence against each other and among other Asian countries.
Risks emerge when either of the dominant players escalates its use of sticks on each other or when one of the less influential players does something that prompts a strong response from the dominant players.
As these players jockey for influence, they use carrots and sticks related to trade and security. Risks emerge when either of the dominant players escalates its use of sticks on each other (as we saw during the last two years of the Trump administration) or when one of the less influential players does something that prompts a strong response from the dominant players (as North Korea did early in the Trump administration).
Trade and Security—Stable
During the next three to six months we expect a fairly benign environment in terms of the risk emanating from this game theater.
The trade situation seems stable. After an extended period of trade negotiations, which have included both escalatory tariffs and two large regional trade deals, attention will likely pivot to the “digestion” phase of those deals. We do not expect to see a lot of further movement one way or the other on trade; the focus is likely to be more on domestic policy and self-reliance.
From a security standpoint, the situation is also stable. In terms of U.S. powers, as we think about their influence on the game, we expect a little bit lower risk tolerance going forward and a little higher degree of coalition power.
One change we are making to the theater is adding India as a player and removing Vietnam. India is just entering the main stage, and doing so somewhat reluctantly, because we see the quad alliance (of India, the United States, Japan, and Australia) playing a more prominent role as a containment force on security issues.
Based on that, this looks to us like a bit of a relatively benign environment going forward.
Meanwhile, concerns about less influential powers rocking the boat are relatively dormant now, with the status quo being maintained in regard to the South China Sea, Taiwanese independence, and, to some extent, Hong Kong.
We view the jockeying strategy of the dominant powers is a relatively positive influence for several Association of Southeast Asian Nations (ASEAN) markets and currencies, especially Vietnam. Vietnam remains a small house on a big block; one that is able to leverage trade with all the partners, including the dominant powers.
The currency jockeying is negative for the United States, China, and Taiwan, where we see some mild headwinds, particularly in the IT sector, as it relates to more explicit isolation on national security grounds.
All things considered, over the next three to six months, especially during the lame-duck period in the United States, incentives appear aligned for a period of more limited engagement on trade issues while domestic issues take a front seat.
Aaron Balsam, CFA, is a senior analyst on William Blair’s Dynamic Allocation Strategies team.