US-China trade tensions may benefit South East Asia
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Hi there, I'm Ed Butler. Welcome to World Business Report from the BBC World Service. Today we are looking at growing signs of stress within the global economy. This ahead of crunch trade talks between the US and its major trading partners, some Malaysian businesses, it seems, are feeling the heat. I'm confident for my industry. But what I'm not confident is...

Trump, what he's going to do, that I'm not confident. Everybody is not confident what he's going to do when he wakes up in the morning. He will change his mind. That's the uncertainty. We don't know what's going on. Also in the show, the head of the world's largest electric car maker, BYD, speaks to the BBC and why Chinese officials are being asked to tone down their excessive partying habits. All of that to come later in the show.

Now, the meeting of the group of seven ministers meeting ends today in Canada in what has been a few stressful days, it seems, for world leaders. There's been signs of disagreement between the United States and other G7 nations over the wording of a statement on the Israel-Iran conflict.

And the longer term stresses over President Trump's proposed tariff regime also persist. This is what the president had to say, for example, on Air Force One today regarding the state of US trade talks with the European Union at the moment. Very tough over the years. You look at Europe.

What he's saying is, I don't feel they're playing fair. It's been a very tough few time over the years. They formed in order to hurt the United States on trade. And we're going to make a good deal. Either that or they'll just pay whatever we say. Those are the words of the president. Well, trade tensions continue.

also remain in other parts of the world and in front of the minds of investors. There is some more data just out this afternoon from the United States giving further clues to the mood of consumers there.

Fiona Sincotta is our markets guest today. She's the Senior Market Analyst at Citi Index. Hi, Fiona. What did we hear today then from these US retail sales data? I mean, was this a surprise?

Well, they did actually fall and they fell by the most. So, retail sales in the US fell by the most in two years. They fell 0.9% in May compared to April. Now, we were expecting a little bit of a fall, but actually that fall was greater than what we were expecting. And there are a couple of reasons for this fall. Firstly, we'd seen stockpiling in recent months. So, people spending a little bit more because they were a bit

unsure and uncertain about how the tariffs were going to impact and price potential rises that could come. But then also we've seen consumer sentiment falling recently as a result of the impact of the tariffs and signs of a slowing jobs market in the US, which has also impacted spending by consumers. And there is that concern, isn't there, or a kind of almost self-fulfilling prophecy that people are

feel or being warned perhaps by news headlines that things are going to get tighter, that tariffs might cause prices to rise, and that could drive the US into recession?

Yes, exactly. So that, you know, these are concerns that have been building recently, as we've seen the consumers getting worried about the potential increase in prices, consumers getting worried about the security of their jobs. And that does mean that when we usually see consumer sentiment deteriorate, that's when we see spending slow. And that's actually what we've been seeing exactly.

OK, Fiona, for now, thank you. Now, July the 8th, of course, is the current deadline for the imposition of much higher tariff rates on goods travelling into the United States. This is from countries all around the world, of course. Currently, they are held at a pretty much blanket 10%.

As well as China and the EU, the disruption, though, is being felt keenly in other parts of the world. Take Southeast Asia, where years of trade tensions between Washington and Beijing have already dramatically affected the mood of businesses there. I found out about this on a recent visit to Malaysia. Do you want to try something? It's like a very local drink. Yeah, let's try something. OK.

I'm in Chinatown in Malaysia's capital, Kuala Lumpur, with Joanne Kwan. She's a social media branding executive and a member of Malaysia's large ethnic Chinese population. She's noticed recently the influx of Chinese businesses into Malaysia. I think dealing business with brands that are from China, the possibility of me nailing that brand and doing that deal...

it's easier. I mean, me personally, I do see a changes where there's more Chinese from the China that they own a Chinese hot pot restaurant. I do see a changes.

And the flow of Chinese money isn't just into Malaysia, but throughout Southeast Asia. Amid must fanfare, China's electric car maker BYD opened its first factory in neighbouring Thailand last year, a move welcomed by the Thai industry minister, Pimphatra Wichaukul. This project will be BYD's new factory.

I believe that the opening of this BYD factory will be the first step towards the creation of an export hub for the whole region, to ASEAN countries and to many more beyond. This is in line with our policy to boost the economy and to achieve carbon neutrality.

But whilst the governments in Southeast Asia have certainly gained from Chinese investment in cash terms and job creation, local companies also complain of the threat that those incoming firms now pose to local enterprises. Here's Dr Suley Abdul Malik. He's head of Malaysia's Small Business Owners Association. The government has given them a lot of incentives to come in

Sometimes they come in at a very low price to get the project, but as they go along, then the price starts going up. So we have heard some cries from our members. They are losing out. You cannot give a monopoly to one company. That will always cause trouble for the consumer.

Well, we tried and failed to get an interview with any Chinese firms about the inflow of capital and cut price goods for this programme. Renishi Rechauturi is CEO of Emir Capital Partners. It's an investment firm that advises companies on the Southeast Asian region.

Chinese exports to ASEAN are actually now higher than their exports to US or Europe. You know, this is perhaps the most important hurdle to economic growth that that entire region might face.

because their companies face increasing pressure, margin pressure. We are already seeing on an average about 100 companies per month closing down in Thailand, and these come from a wide area. So these economies are between a rock and a hard place. Their domestic consumption is not really that big, which can absorb an onslaught of Chinese goods into their markets.

At the same time, because China is the big neighbor in this region, they have to maintain good geopolitical relations, and it's a really bad place for them to be in. My fellow Americans, this is Liberation Day. Waiting for a long time. The day that we began to make America wealthy again. Going to make it wealthy, good and wealthy.

Donald Trump has threatened Southeast Asia with some of the highest tariff rates of any region outside of China. Next month is the deadline for those higher tax rates to be imposed. But even for export-driven economies like Malaysia, the main risk now may not be so much avoiding those punishing export duties as maintaining relations with the two warring superpowers.

Un Kim Hung of Malaysia's Rubber Glove Exporters Association says his country should get a trade deal done with the US, but not at any price. I'm confident they will get a good deal and I'm confident for my industry. But what I'm not confident is...

Trump, what he's going to do, that I'm not confident. Everybody is not confident what he's going to do when he wakes up in the morning. He will change his mind. That's the uncertainty. We don't know what's going on. That's the main issue here. The Malaysian business executive, Oum King Hung. And you can hear more from me in Malaysia and Thailand in today's edition of Business Daily on the BBC.

Well, that's the view from Southeast Asia. How do Chinese firms themselves respond to those types of views? In a moment, we're going to hear from the CEO of BYD. We heard from them in that package a little bit. It's China's leading electric car maker. But first, here's Henry Wang. He's founder of the Centre for China Globalisation and also a former councillor to China's State Council. Is there Chinese dumping in the Southeast Asian market?

Well, I don't think so. Actually, I just received a large delegation from Indonesia in my office this morning. You know, they've been talking that Chinese investment there is really benefiting. For example, China has invested in Vietnam, in Indonesia.

Indonesia, Malaysia, Thailand, China is investing in many infrastructure projects. So they all really benefit enormously. I think there's a cliche of saying China is dumping, but I don't think. You know, it's really our market forces, market economy, and that they are really enjoying the Chinese presence there.

And then the ASEAN trade with China is hitting all time high. And I think that benefits ASEAN countries and also good for China. So and contributing GDP growth for the world. But in Indonesia, for example, there were protests last year, weren't there? There were like garment makers were saying, you know, the Chinese are producing goods at a price that's even lower than the cost of the actual fabric. I mean, they are they're selling shoes and clothing separately.

so cheap, nobody can make it that cheap, and it's driving us out of business. No, I don't rule out individual cases. But in general, you know, they hire local workers, they pay local taxes, and they register locally, provide employment, tax revenues. I think local government are happy about that in ASEAN countries. You can probably attribute that to the automation, to the efficiency, to the technology, to all those things. Not to state support, right?

Yeah, but it's a foreign government. There's no Chinese government support. Chinese also people are working very hard. And that kind of hardworking culture that maybe also mobilise local employees to work hard. So I think that does make a lot of difference. Because China basically has free access, doesn't it, to ASEAN countries in Southeast Asia, countries part of that trading bloc. And there would be the argument that...

China itself benefited from a lot of protection 20 years ago, 30 years ago, when, for example, US or European companies were trying to enter the Chinese market. They couldn't come in. They had to have joint ownerships and all of the rest that was preventing them from totally unfettered access to the Chinese market. And essentially, these Southeast Asian economies deserve equivalent protection now when up against Chinese firms.

Well, I think things are a little different, actually, than 20, 30 years ago. For example, now China and ASEAN countries

They are in the largest free trade agreement. In that agreement, there's a lot of duty-free, a lot of good movement-free, and origin of the product can be used for all the countries enjoying the local cost. So there's a lot of barriers has been knocking down through those China-ASEAN free trade agreement already. So you can't compare with 20, 30 years ago when Chinese markets barely opened. But again, even for that, there is a huge foreign investment in China like

European countries, American companies, they benefit enormously also in China. So you can say that's why 80% of Apple phone was made in China, 50% of a Tesla EV car was made in China. And when President Trump launched the trade war, first he has to give exception for 100 billion business that U.S. companies produce in China because they benefit from that and they export themselves.

What do you expect is going to happen? We've got another deadline coming up, haven't we? Well, it seems we have in a few weeks when the suspension of these higher tariff rates that Donald Trump has threatened comes to an end. Do you expect a deal to be reached between the US and trading nations such as China?

Well, I think China is already setting good examples for other of the nation countries. You know, for example, the Geneva talks, they quickly come down from 145 percent to 30 percent or 10 percent. That's a good example. And then they started London talks recently. Again, they have a framework. But I think this unilateral approach of putting sanctions on the chips, on the semiconductors,

on the visa restriction for students. It's really bad practice, you know, Yulei Lato. So China has withheld a long time not doing that.

Only until recently, China just did a little bit on the rare earth. And the U.S. company felt it was totally unbearable and then really wants China to talk. So you can see this kind of a gesture is really no good. If every country does that, then we're going to go back to the ground zero. So what I hope is that the U.S. has actually learned a lesson to say, OK, let's all relax. Let's all not go into that kind of decoupling situation.

Thoughts there of Henry Wang. He's founder of the Centre for China Globalisation. Well, that's one view. Let's hear from Chinese industry now. BYD is China's biggest car maker. It started out making mobile phone batteries 30 years ago. It now has ambitions of selling more electric vehicles, though, than anyone else.

But is it going about it fairly? Our reporter Theo Leggett has been speaking with the firm's executive vice president, Stella Li. He put to her claims from Western carmakers that it is only thriving because of unfair subsidies that it receives from the Chinese government.

It's an unfair claim because there's no fact base. If any auto manufacturer goes to invest in China, they will receive equally or maybe better subsidy from Chinese government because you contribute like a job opportunity.

The same equally here. If we bring the manufacturing here, we will receive the same incentive because we bring the job, we bring the technology here. So instead of stay here, complain, why not focus on investing R&D, focus on to bring up technology? Are European manufacturers making excuses then?

I don't know. The European Union does believe that BYD benefits from subsidies and it's imposed a very heavy tariff on imports of cars into the European Union. How is that changing your strategy in Europe?

Because BYD is a public company, our principle is to be transparent. So BYD always operates the company with honesty and transparency. But for us, our strategy is to make us a global company and also localize us.

So even without this tariff challenge, BYD will localize our manufacturing here because our principle is if the market is here, then we should produce locally. So by end of this year, BYD Hungary facility will start operation. Okay, another allegation, potentially a more serious one made against the Chinese auto industry is that in the supply chain, you've benefited from exploitation of labor, forced labor. How do you respond to that?

It's also like a nonsense claim because if you are like a world-class company, then you also build up a world-class management on the supply chain and on your whole system. So just to be clear, you have no concerns about any potential wrongdoing anywhere in your supply chain?

No, zero concern. You'll be aware of some of the claims being made about Chinese technology and Chinese cars representing a security risk. We've even had a former head of one of the British secret services saying that you could immobilise London. I mean, how seriously do you take those claims? How much of a threat are they to you?

Everybody can claim anything if they lose the game. But so what? It's not a fact. BYD pays very high standard for data security. So we use local carrier for our data. And then we have the data center in Europe. And also we use the cloud service from Google or other international companies. So

I think BYD is 10 times better than even our competition on this field. So those negative perceptions of Chinese technology, you're confident that you can turn those around? Super confident. Two years ago, barely anyone in Europe had even heard of BYD. Now you're a major player. Where do you see yourselves in 10 years' time? Do you want to be number one? Everybody wants to be number one. So this always can be the motivation for everybody working hard.

The thoughts of the BYD's Stella Lee speaking to us here on World Business Report from the BBC.

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Service.

Now, global air traffic has been disrupted, of course, following the tit-for-tat airstrikes that we've been seeing between Israel and Iran over the last five days. Airline after airline have announced...

They are suspending flights to and from various cities in the region, whilst the airspace above and around half a dozen countries is now a no-go area for commercial flights. About 650 of them to and from Europe were cancelled last week. Our transport correspondent Nick Marsh has been telling me more.

At the moment, huge swathes of airspace in the Middle East are closed to commercial airlines. So that's Israel, Iran, of course, and neighboring Iraq.

And then if you just look at the flight data, you know, publicly available information on the maps, it looks like a lot of planes seem to be avoiding countries such as Lebanon, Jordan and Syria as well, which, I mean, to put it mildly, is disruptive, shall we say, because this is a very key corridor for journeys between Asia and Europe. There's an estimated 1,400 flights currently.

crossing this airspace every single day. But because now of the dangers which are being presented to commercial flights, airlines are either choosing to avoid this area or they're being shot off completely, which is obviously meaning that planes will have to either go south of this airspace, so sort of through Egypt, Saudi Arabia kind of route,

or they go north through sort of Turkey, Azerbaijan, that kind of area. And that adds hours onto a flight and kind of squeezes the airspace around the closed off bit as well. Yeah. And I mean, I guess that adds significantly to the cost for the airlines, which, you know, we know, as you say, how much...

The closure of Russian airspace ever since the start of the Ukraine war has been a headache, let's just say, for airlines. I mean, this presumably adds substantially to those big intercontinental flights between, for example, Europe and East Asia.

It does, yeah. I mean, a flight diversion means more fuel, longer journey, greater cost for the airline and ultimately greater cost for the passenger, as well as those logistical headaches when your most convenient flight path isn't available.

So since 2022, planes haven't been able to fly over Ukraine, which is also part of that really important corridor between Asia and Europe. European airlines haven't been allowed into Russian airspace. So a flight between, for example, the UK and China can't take that more convenient route as well. You've got parts of Africa as well, which aren't open to commercial flying. If you think about Sudan and the civil conflict there,

that's going on there. Add into the mix tensions between Pakistan and India that we saw recently and now this big chunk of Middle Eastern airspace, it's becoming an increasing problem. Obviously it's adding to cost and it's adding to flight times. There is a reason, let's not forget why planes have got to avoid this airspace. I mean, I was just looking at the data recently. Six commercial jets have been shot down since 2001. So it does happen. There are also near misses. I mean, one of the most

Well known was the Malaysia Airlines flight, which came down over Ukrainian airspace during tensions between Russia and Ukraine a few years ago. So there is a good reason why planes are avoiding these big chunks of the world. But it seems that conflict, you know, these conflict spots are causing more and more problems for airlines and passengers.

The BBC's transport correspondent, Nick Marsh. Well, let's go back to Fiona Sincotta now, Senior Market Analyst at City Index. Hi, Fiona, again. Now, there has been reassurance, hasn't there, today from the International Energy Agency. This is over future oil supplies and the oil price in the context of the Iran-Iraq conflict.

I mean, first, actually, I'm going to play you this clip. This is from Toril Bussoni. She's of the IEA. She told BBC that plentiful supply in the long term should keep the lid on oil prices.

But we see global oil supply outstripping demand growth, both in the short term and into the medium term to the end of this decade. And what we're seeing is that global oil demand growth has already slowed quite significantly since the post-pandemic rebound. By 2030, we expect oil demand to peak and go into a plateau with small declines.

And then it's electrification is particular in China is a major driver of that. And change in the power sector in Middle East, oil being displaced by natural gas and renewables that are dampening the oil demand outlook. So that's the view of the IEA, Fiona. I mean, reassuring, I guess, for consumers that it's stressful time as we've been hearing already.

Yes, that's right. So news that supply is expected to remain ample is good. I mean, I think there was a caveat as long as there were no major disruptions. And obviously, we are seeing sort of a disruption currently. But it was interesting as well how they suggest that oil demand will

keep growing until the end of the decade. A sort of adoption of EV vehicles, slower adoption of EV vehicles in the US and cheaper gasoline could support US consumption well into 2029 and 2030. So it's quite interesting as well, because it was in contrast with OPEC, which actually sees consumption

growing for a longer period of time. But yeah, you know, optimism surrounding potential weaker oil prices is always good news.

All right, Fiona, thank you very much indeed. Now, finally, I don't know what your employer's policy is when it comes to business lunches and banquets, but I thought I'd share this story out of Beijing. Some government officials in China have been ordered not to dine out in groups larger than three under tightened austerity regulations. The clampdown comes after several high-profile cases of government workers dying...

from alcohol overconsumption. Yes, dying from alcohol overconsumption while attending elaborate banquets. Our East Asia regional editor, Celia Hatton, is with us to tell us more. Celia, this is extraordinary. First of all, where does this story come from? Well, this is basically, you know, coming out of China. There are very many people on social media in China, but also the Chinese state media kind of pop up.

This story that in many parts of China, officials have been warned that they could be violating anti-corruption rules if they choose to dine out and engage in elaborate banquets.

And so officials seem to be taking this to heart at a local level. So in different parts of China, certain officials have been warned that they could even be breaking the rules if they dine in groups larger than three. There have other officials have been warned not to drink alcohol at all. And

sometimes people are warned even things like having elaborate pot plants in their offices can be considered to be a corrupt practice. And so I think some people are so worried that they could be breaking the rules, government officials, I should say, that they're trying to enforce even tighter regulations themselves. Wow. So as you say, part of the anti-corruption drive, which has been going on for years and years, of course, in China, is

a sense perhaps that the party has to sort of defend its reputation at a time of perhaps consumer austerity, which has been at least for the last two or three years in China.

Yeah, that's right. There's a lot of sensitivity around perceived corruption by the government. And it all goes back to most recently to some cases. You just mentioned a case in which government officials were died because they drank too much, very expensive alcohol at a banquet.

I'm afraid we're losing you there, Celia. We're also running out of time. My thanks to Celia Hatton and to you all for listening. This has been World Business Report.