If America Fights, Will Asia Suffer?
	A war in Iraq means higher oil prices and plunging Asian exports. That's why the region's best hope is a rapid replay of Gulf War I
	By Jim Frederick | Hong Kong
DAVID LONGSTREATH/AP Kuwait's oil fields aflame in 1991. Will other nations boost oil production to compensate for a possible war?

Vincent Perez is preparing for war, although his nation isn't planning on doing any fighting. As the Philippines' Energy Secretary, Perez is partly in charge of ensuring that his country can withstand any collateral financial damage that a conflict between the U.S. and Iraq might throw Asia's way. Although the Philippines has reduced its dependence on oil in favor of other energy sources in recent years, Perez knows his economy couldn't function without a steady supply of reasonably priced crude.

Under a directive from President Gloria Macapagal Arroyo, Perez has been crisscrossing the globe since early December, developing contingency plans in case events half a world away create shortages and economic calamity at home. So far, he has secured commitments from oil producers in Saudi Arabia and Indonesia to put extra barrels on the market, if necessary. Still, he worries about what could happen if the war bogs down interminably. That's why he hopes to line up pledges for emergency supplies from drillers in Russia, Australia and Brunei. "We should avoid too many surprises," he says matter-of-factly.

A similar drama is playing out among politicians, Finance Ministers and businessmen in every country across Asia as they assess the risks their economies face and prepare as best they can for the fallout of a war that many believe will begin within weeks. The ruling sentiment among them: a wary optimism for a quick resolution tinged with an almost helpless fatalism about what would happen if the conflict drags on. As they recognize, no country is truly shielded from the coming storm. "Thailand's economy is extremely open and integrated into the global [market]," says Anusorn Tamajai, a senior economist at BankThai Public Company Ltd., echoing counterparts from around the region. "What happens to us depends on the global economy."

Until recently, 2003 was predicted to be Asia's breakout economic-recovery year. Last September, the imf forecast a 3.7% rise in the global economy for 2003—with much of Asia to lead the way. China was expected to grow at 7.2%, with virtually every other country on the continent except Japan posting gains no less than 3.5%, and some hitting as high as 6%. But now all those rosy numbers are very much in doubt.

The economic impact of the war depends largely on how long the bombs keep falling. If the U.S. ousts Saddam Hussein in a short, decisive campaign and can contain terrorist retribution while ensuring a stable transfer of political power in the Middle East, the outlook is good. Consumer and business confidence would likely soar worldwide, oil prices could drop well below $20 a barrel and Asia could resume its recovery. Though that might be a tall order for the U.S. military and diplomatic corps to execute, it is the scenario that most financial minds in Asia seem to be banking on, pointing to the first Gulf War as the precedent. "With a short war of less than three months, the impact will be minimal," says Hu Sheng-cheng, a Minister Without Portfolio in the Taiwanese government and a prominent economist.

Even if the war lasts three to six months, many feel that the economic damage would be no more than a few tenths of a percentage point shaved from each country's 2003 gdp. That's because oil supplies are better managed now than at any time in history. Rattled by previous oil shocks, many Asian countries boast formidable oil stockpiles to shield them from short, irrational spikes in commodities prices. For example, Korea has 101 days' worth of oil in reserve and Japan is sitting on 173 days'.

More unsettling are the prospects for global economic growth should events take an unexpected turn. There are a host of scary scenarios: an increasingly desperate Saddam Hussein attacking Israel or the oil fields of neighbors Kuwait and Saudi Arabia; a major terror strike by al-Qaeda; escalation of the North Korean nuclear crisis into a conventional or even nuclear war. Any of these disasters would almost certainly trigger a worldwide recession, and there would be little Asia could do to hide. Korea, Japan and Taiwan, for example, import nearly 100% of their oil, making them prisoners of long-term supply disruptions.

The only Asian economy that stands to weather war healthily—even a protracted one—is China, already the region's overachiever for the past decade. "China is sort of a Teflon economy," says John Anderson, senior economist for greater China at Goldman Sachs. Still heavily reliant on its own coal production for much of its energy needs, the mainland's net oil imports amount to less than 2% of gdp, compared with 15% in Japan, 5.5% in South Korea, and 5% in both Thailand and the Philippines. At worst, Anderson predicts a 1 percentage point drop in China's growth as a result of a drawn-out war. That's a significant hit no doubt, but a much easier one to stomach when the original growth forecast is a hypercharged 7.2%.

Perhaps the most worrying issue facing Asia over the short term is not oil prices but the buying habits of the American public, whose surprisingly indefatigable consumption over the past year has been instrumental in propping up Asia's otherwise ailing export-oriented econo-mies. Somchai Jitsuchon, an economist at the Thailand Development Research Insti-tute, a think tank partly funded by the government, puts it bluntly: "The key factor is what will happen to the U.S. economy." Despite efforts by some countries to boost domestic demand since the 1997 economic crisis, America remains a critical market for electronics, computers and cars produced in North Asia and for low-tech goods such as textiles, clothing and toys from the south. Japan and the Philippines both send about 29% of their exports to the U.S. About a fifth of Thai, Singaporean, Indonesian and Hong Kong exports are bound for American ports.

The U.S. is already coming off its worst Christmas shopping season in living memory. If Americans start coming home from Iraq in body bags, many wallets in the U.S. will snap shut. Add to that a U.S. dollar that's weakening against most Asian currencies (which makes goods from those countries more expensive for Americans) and you have the ingredients for a dismal economic outlook for most of Asia. Except, of course, for China. The mainland exports about a fifth of its goods to the U.S. but its currency is still pegged to the dollar. Should a war weaken the dollar further, China's already low-priced export goods stand to become even cheaper compared with those of its Asian rivals. Who will win Gulf War II? It might be China.

—With reporting by Robert Horn/Bangkok, Joyce Huang and Don Shapiro/Taipei, Mike Meyer and Huang Yong/Beijing, Nelly Sindayen/Manila and Jason Tedjasukmana/Jakarta

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