Asia — Manufacturing on the rise, but risks to global trade remain high

World trade volumes—down as much as 18% year-on-year in May 2020—have declined by less than initially feared. According to CPB World Trade Monitor data, the trade downturn has been broadly similar to that experienced during the 2008-09 Global Financial Crisis (GFC), even though the 2020 recession is much larger (Chart). This relative resilience largely owes to the nature of the current crisis: restrictions on consumers and businesses caused domestic services to be hit harder than goods trade. World trade is also rebounding more quickly than after the GFC. By July, world trade had recovered about three-quarters of this year’s losses.

Manufacturing gauges in Asia show ongoing improvement in production through the third quarter, pointing to continued recovery in global trade. China’s factory output expanded at its fastest pace in nearly a decade in August and Taiwan’s production is growing. Japan and South Korea both saw output contract at the slowest pace in six months in August.

However, the risk of a resurgence in COVID-19 infections could dent business confidence and stymie the recovery in world trade. At the same time, the unevenness of the trade recovery, most notably in China and the US, risks further stoking US-China geopolitical tensions. China’s goods exports have surged to levels last seen before the US-China trade war escalated, surpassing imports in July and August by a large US$60 billion. And US policies to lift demand have had the side-effect of raising imports and causing the US merchandise trade deficit to increase to US$80 billion in July—the highest on record. As of July, China is just above 25% of the way to meeting its 2020 goods purchase commitments from the US under the Phase One trade deal. Escalating geopolitical and trade tensions could again weigh on business confidence and the weak global economy.