When the world’s economic giants wage a trade war, the heat is felt from Singapore to Seoul

With the world’s two biggest economies in an all-out brawl, it’s easy to miss important warning signs flashing in smaller ones.

Take Singapore and South Korea. Singapore’s economy just grew at the slowest pace in a year. The 1 per cent quarter-on-quarter growth rate between April and June isn’t alarming in itself. Yet virtually everything that could go wrong is showing up in the data: fallout from Donald Trump’s trade war, central bank tightening, a stronger dollar and rising oil prices.

An aberration? Not when you consider what’s afoot in South Korea, another open, trade-reliant nation that often acts like a global weathervane. After rising 13.2 per cent in May, exports stopped on a dime, contracting 0.1 per cent in June from a month earlier. Again, it’s not a particular number that spells trouble – it’s the trajectory as Washington and Beijing scuffle.

Consider these ominous words from Bank of Korea Governor Lee Ju-yeol last week.

“In the beginning, many thought that the US-China trade row would not escalate,” Lee said. “But now, it is spreading rapidly and heightening uncertainties in the global economy. It is hard to predict the future. But we are well aware that the clash between the two powerhouses will affect the South Korean economy and its exports.”

That clash is beginning to take down giants, too. Japan, the world’s No 3 economy, is seeing a marked downshift in sentiment. In the latest three months, the Bank of Japan’s tankan survey of big manufacturers dropped to 21 from 24 in March. The timing couldn’t be worse. This, after all, is the year Prime Minister Shinzo Abe hoped his five-year reflation plan would finally give workers a big raise.

Hints flowing out of Singapore suggest those hopes will be dashed. After surging 21.3 per cent between January and March, manufacturing shrank 0.1 per cent in the second quarter. Construction plunged 14.6 per cent between April and June. Fallout from Trump’s trade war augurs poorly for Singapore’s outlook – and the global economy’s.

Singapore is as closely tied to regional and international supply chains as anywhere, says economist Jeff Ng of Continuum Economics. He calculates that a 10 per cent drop in American or Chinese imports slashes Singapore exports by between 1 to 2 percentage points. That changes the calculus both for domestic exports and re-exports. Ng warns of “downside risks” ahead.

These numbers could prove conservative, of course, as Trump adds zeros to tariffs aimed at China. On June 6, Trump slapped US$34 billion of levies in Chinese imports. He also signalled an escalation – perhaps adding another US$200 billion of tariffs on the way to US$500 billion. This latter aspiration is the dollar amount of mainland goods that entered the US in 2017.

As China retaliates, Trump is apt to continue pushing. The trouble with this clash of the titans, as Singapore and South Korea are learning, is that neither Trump nor President Xi Jinping really understands the other. Trump’s policies are based on grievance, not logic.

Xi, meantime, is a foe unlike any Trump has ever faced. Rather than back China into a corner, Trump will find Xi’s government digging in its heels.

Any victory will be of the pyrrhic variety, of course. It means virtually everyone will lose on some level. American consumers face higher costs and diminished job prospects. Chinese officials will find duelling bubbles in credit, debt and property harder to manage and 6.5 per cent growth a reach.

It’s time, though, to fear the broader fallout. Anyone who doubts the epic nature of this trade war isn’t paying attention to the economic weather in Singapore and Seoul.

William Pesek is a Tokyo-based journalist and author. He has written for Bloomberg and Barron’s