Asia's small, export-driven economies look most vulnerable to the threat of a deeper U.S. economic slump, which could materialize even if Washington manages to avert a debt default.
China's exports to the United States easily dwarf those of its regional neighbors, but as a percentage of its vast economy the exposure is much smaller than it is for Taiwan, Malaysia, Singapore or Hong Kong.
Economists widely expect the United States will strike an 11th-hour deal to increase its $14.3 trillion borrowing authority, averting disaster. However, there is evidence that months of political quarreling has already damaged the world's biggest economy and could do more harm in the coming months.
Deutsche Bank economists estimated that the uncertainty surrounding the debt debate was enough to shave a few tenths of a percentage point off third-quarter U.S. growth.
U.S. consumer confidence fell to a nearly 2- year low in early July, according to the Thomson Reuters/University of Michigan's index of consumer sentiment. The unemployment rate resumed rising in April after four consecutive months of declines. Retail sales barely grew in June.
A downgrade of the U.S. credit rating, which a majority of economists polled by Reuters thought looked likely, would add to borrowing costs and become another drag on growth. Ironically, the best hope for avoiding a downgrade -- a sharper cut in government spending -- could weaken the economy even more.
The sluggishness in advanced economies has begun to take its toll on Asia. Surveys on factory activity showed a broad-based slowdown that began in May and deepened in June. An early July reading on China's manufacturing showed it contracted for the first time in a year.
The region faces a plethora of risks right now, the vast majority of which are unfavorable, said Robert Prior-Wandesforde, an economist with Credit Suisse in Singapore.
To get a sense of how a drop in Western demand might hit Asia, Prior-Wandesforde examined how countries in the region fared when trade collapsed following Lehman Brothers' bankruptcy in 2008. Taiwan suffered the biggest blow, with exports dropping 24 percent during the worst phase of the global recession in 2008 and 2009.
Tiny Singapore and Hong Kong are exporting giants, so not surprisingly they also rank high on the risk list. Exports amounted to 178 percent of Singapore's GDP in 2010, and 169 percent of Hong Kong's. Malaysia may suffer as well. Exports added up to 89 percent of its GDP in 2010.
QUALITY OVER QUANTITY
What sorts of products a country exports might matter more than simply how much.
Goldman Sachs economist Michael Buchanan said Taiwan and Korea may be in a better position because they concentrate on high-tech goods such as smartphones that would still be in demand even if U.S. growth falters.
Goldman Sachs economists recently cut their U.S. growth forecasts for the second and third quarters, and put the fourth quarter and 2012 under review.
But one part of the U.S. economy that has remained particularly strong is corporate profits, so businesses can afford to keep investing in information technology, which plays to Taiwan's and Korea's strength.
Buchanan argued that Singapore, the Philippines and Malaysia looked more vulnerable because they ship a lot of relatively lower value-added electronics.
As for China, its exports to the United States are worth more than twice as much as those of Taiwan, Singapore, Malaysia, Hong Kong and Korea combined. Yet its risk looks smaller.
Credit Suisse's Prior-Wandesforde ranked China behind only India and Indonesia among those least vulnerable to a demand shock from the United States or the euro zone.
Part of the reason is China's sheer size. Its export exposure to the United States amounts to a relatively modest 4.9 percent of gross domestic product. Even a drop of 10 percent in U.S. demand would inflict limited damage, and China has the means to cushion the blow.
Goldman Sachs's Buchanan pointed out that a moderate worsening of external conditions could be absorbed fairly easily in many countries simply by slowing down the pace of tightening monetary policy.
Inflation remains a serious threat across most of Asia, but if global demand drops dramatically it would crimp growth and reduce the need for interest rate hikes or other tightening measures.
The response may be more about the pace of recalibration, Buchanan said. Our baseline forecast is for China to take its foot off the brake modestly during this quarter.
(Editing by Vidya Ranganathan)
(The following story was corrected in the penultimate paragraph to say rate hikes)