SINGAPORE (Mar 18): Trade tensions between the US and China may have been dissipating in recent weeks. But market observers reckon the dispute and its impact are far from over, especially in Asia.

For one, the restriction on the Chinese takeover of US technology companies may lead it to eye its neighbours as targets. According to DBS Group Research, Chinese companies are likely to redirect their strategy of overseas technology acquisition to other Asian developed economies. This is to secure their supply of advanced technology, it says.

Japan and South Korea are probable targets because they are among the advanced Asian economies that have been open to Chinese investment in their high-technology sector in recent years. An exception is Taiwan, which has maintained “strict scrutiny”, owing to “political reasons”. As such, “Japan and South Korea are most likely to... receive a boost from Chinese [mergers and acquisitions (M&A)],” DBS economist Ma Tieying writes in a March 14 note.

Already, many Chinese companies have bought into Japanese firms. In 2016, Lenovo Group invested US$220 million in Fujitsu. The following year, the computer manufacturer invested US$200 million in NEC Corp. In South Korea, China Mobile invested US$280 million in Korea Trade Network in 2015.

Technology companies from other countries in Asia have also become M&A targets. In India, Alibaba Group Holding invested US$680 million in One97 Communications in 2015. Closer to home, in the same year, Nantong Fujitsu Microelectronics invested US$370 million in AMD Penang. Also in 2015, Jiangsu Changjiang Electronics Technology, Semiconductor Manufacturing International Corp and Chinese state-owned China Integrated Circuit Industry Investment Fund collectively invested US$1.66 billion in STATS ChipPAC.

Meanwhile, tighter control on US exports of key components and technology to China could be detrimental to South Korean and Taiwanese semiconductor companies. This is because companies such as Taiwan Semiconductor Manufacturing Co and United Microelectronics Corp act largely as contract manufacturers for US fabless companies such as Qualcomm and Nvidia Corp, it says.

“If the US were to cut the upstream technology supply, it would carry the risk of disrupting the entire electronics supply chain, and creating collateral damage on South Korea and Taiwan,” says Ma. This is despite the fact that South Korea and Taiwan are currently China’s two largest import sources of electrical machinery and equipment. They account for a share of about 20% each, according to DBS.

On the flipside, however, the competition pressures from China’s industrial upgrade may be reduced for South Korea and Taiwan. “A possible slowdown in China’s pace of industrial upgrading, as a result of technology protectionism by the US, may provide some relief for the two countries, buying them more time to move further up the value chain and maintain competitiveness,” says Ma.

Ravi Menon, managing director of the Monetary Authority of Singapore, agrees. South Korea and Taiwan seem to have benefitted as alternative suppliers of the intermediate and capital goods targeted by the US tariffs, he says. At the same time, Malaysia, the Philippines and Vietnam also seem to have gained from trade diversion, as shown by their relatively strong export growth of tariff-hit products to the US, he adds. “But already, these effects seem to be tapering off,” he said on Feb 27.

Menon also warns that Asean’s business sentiment and investment commitment will be “negatively impacted” by the US-China trade conflict. “And to the extent that growth in China slows down as a result of the tariffs, it is likely to have a larger negative income effect on Asean than any positive substitution effect from trade diversion or supply chain reconfiguration.”

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