[SCMP Column] Trade war impacts on Hong Kong

July 16, 2018

When journalists pressed Hong Kong’s trade and finance secretaries last week on how Hong Kong will be affected by the onset of trade war, both ducked.

They were right to do so – the trade war has only just been launched, few of the tariffs are yet in place, and precise impacts are unclear. We don’t know exactly what the retaliations will be, nor the counter-retaliations. Nor how long they will fight. For economies like ours, caught in the cross-fire, estimating the likely harm is doubly difficult.

While Edward Yau and Kenneth Chan may be right to duck at this stage – they don’t after all want to lend official authority to any form of alarmism, especially after Beijing has told media to avoid talk about trade war – that does not mean some serious “back of the envelope” assessments are not urgently needed.

I am particularly reminded of July 1 1997 – not the first day of Hong Kong’s return to Chinese sovereignty, but the day the Thai Baht crashed, starting the Asian Financial Crisis that roiled our region for the next two years.

At that specific moment, Hong Kong was supine, even complacent. As countries like Thailand, South Korea and Indonesia fell off a precipice, crushed by massive and unpayable foreign currency debts, the mood in Hong Kong was quietly superior. Our companies were not overly-burdened with debt. Nor were our banks financially stretched.

By early 1998, all that complacency had gone. Our economy was facing its worst crash in decades. Property prices fell through the floor. Unemployment soared, and it was a decade before wages recovered to 1997 levels.

Why had one of Asia’s best-managed economies emerged as one of the financial crisis’s worst casualties? The answer was “flows”.  Hong Kong, having few resources and little manufacturing of its own by 1997, essentially lived off the flows linked with the region’s fast-growing trade and investment. We managed trade flows and financial flows. We provided legal and accounting services to the companies managing these flows. And when the flows stopped, Hong Kong stopped.

That is why, almost exactly 20 years later, we need to be very afraid. A serious and protracted trade war will above all else hit trade flows, and that makes Hong Kong as vulnerable as any in Asia.

We have over 100,000 trading companies. Many of them are tiny, but they still employ more than 800,000 people. They often depend on a single relationship with a single manufacturer exporting from the Mainland. An estimated 70,000 Hong Kong-owned manufacturing plants operate in the Pearl River Delta region, most of them in export processing. Not without reason, Edward Yau noted: “The common worry is what happens next is going to hit us harder because it covers more consumer goods such as textiles, garments, food and electronics.”

While we do not yet know which of these factories and their products will be hit, what we do know from 1998 is that the services underpinning all of that trade – the financial, legal, accounting, logistics services and so on – are directly in the firing line of any sustained tariff war.

Much will depend on how buyers and sellers respond to the tariffs. As the attached table illustrates, it is still unclear how they will react, and what the consequences will be. If buyers decide they need the imports no matter how high the tariffs, then they will swallow the cost, China’s exporters will be unaffected, and US consumers will pay a swingeing price.

But if they stop buying, assuming the trade war will quickly be settled and tariffs quickly dismantled, then our Pearl River Delta manufacturers will see a sharp crash in orders (after a short surge ahead of July 6 as buyers stocked up before the tariffs came into effect).

If buyers decide this is not a short, sharp problem that will quickly be resolved, then more radically damaging shifts may occur. Buyers may try to turn to other sources away from the Pearl River Delta. They may try to build more factories in the US. This would have radical and long term impacts on Hong Kong as a trade management hub.

Not only would the 800,000 people working in trading companies be impacted, and the foreign-owned factories across the Pearl River Delta, but also the port (still the world’s fourth busiest, despite decades of quiet decline in favour of other PRD ports like Yantian), and our massive logistics industry, which together account for around 190,000 jobs.

So at the very least, the US-China trade spat has the potential directly to impact the work of around a quarter of our 4m labour force. In so far as it impacts the foreign sales of the 70,000 Hong Kong-controlled factories in the PRD, then it will hurt Hong Kong-based headquarter staff in these companies. So too the financial, legal and accounting services to these companies. The potential for harm in Hong Kong is large.

Of course, it is possible that all will blow over quickly and life will return to normal. In which case, these alarming indicators can be ignored and Edward Yau’s caution in reaching any conclusions will be amply justified.

But surely there is a warning on the wall? Whatever the precise impacts of trade war, some long term consequences are already clear. China will aim to rely more for growth on its domestic economy, and less on exports – which means Hong Kong’s long-term value as a manager of trade flows will decline. We need to get more heavily involved in China’s domestic economy, even if our pivotal long-term value remains as China’s main conduit to global markets.

Also, over time, global supply chains will shorten, with countries like China pulling more of the jobs along the supply chain into the Mainland. This too points to long-term decline for the huge trade in components and sub-assemblies at the heart of business through Hong Kong into the PRD’s export processing factories.

Even if the trade war is short, many consequences are likely to be long-term, and have powerfully negative implications for large parts of Hong Kong’s export-management economy. New flows need to be found.
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own.

[ Back ]