Minimal impact on Malaysia for now

• Mar 26, 2018

RHETORICS are translating into action, as trade spat continues to brew rapidly between the world’s two largest economic juggernauts, the United States and China.

The US President Donald Trump’s move to impose sweeping tariffs on US$50bil worth of imports from China has raised concerns on the potential domino effect on other countries.

Malaysia, known as an export-reliant economy, could also be hit with unfavourable impacts, both directly and indirectly, if the trade war escalates into a global scenario.

Nomura, in a special report, projects Malaysia’s “ultimate exposure” to the United States – including via intermediate goods to China for assembly into final products destined for the United States – at 10% of gross domestic product (GDP), about half of which is in electronics products.

On the other hand, 8% of Malaysia GDP is exposed to China’s final demand.

With the United States and China being two of Malaysia’s largest trading partners, will the country turn out to be an unlikely victim of the US-China trade war?

Speaking to StarBizWeek, economists have pointed out the Malaysian economy is not expected to experience any immediate brunt on the back of the US-induced trade war.

However, in the event of further trade spat escalation between the two countries, economists warn about significant negative repercussions that may impede global growth and overwhelm smaller trading nations such as Malaysia.

In short, the real implications are yet to be seen.

Echoing a similar stance, International Trade and Industry Minister Datuk Seri Mustapa Mohamed expects the United States’ wide-ranging tariff imposition on Chinese goods to have minimal impact on Malaysia.

In a report by Bernama, he says that the move by Trump can have a huge impact on other countries.

“We are concerned that this would trigger a trade war and China will (undertake) counter measure against the decision (made) by Trump.

“This is an unhealthy development, as we have a process established by the World Trade Organisation which has to be complied with,” he says, adding that Malaysia will call its counterparts in the United States to discuss the matter.

In 2017, China was Malaysia’s second largest export destination, constituting nearly 14% or RM126.2bil of total exports in the year.

On the other hand, the United States, which represented 9.5% or RM88bil of Malaysia’s total exports, was the third largest export destination.

Malayan Banking Bhd  group chief economist Suhaimi Ilias says that Malaysia could be hit significantly if the United States and China engage in a full-scale trade war.

“The United States and China alone make up of 40% of the world’s total gross domestic product and almost a quarter of world trade. We estimate that for every 10% drop in US-China trade, it can shave up to 0.7 percentage point of the world’s economic growth.

“In the immediate term, the domestic solar panel industry will be affected as Malaysia is facing 30% tariff imposed by the United States on imported solar panel and components and Malaysia is the largest source of US imports on this,” he tells StarBizWeek in an email interview.

Malaysia’s photovoltaic cells and modules production industry is the third largest in the world after China and Taiwan, accounting for 8% of the global output.

According to the Malaysian Investment Development Authority, the country’s solar manufacturing companies’ total exports was worth nearly RM11.1bil in 2016. Up until 2015, 48 solar projects have been implemented with total investments of RM28bil, which have created more than 26,700 job opportunities.

The escalation of the trade war, moving forward, could be detrimental to the sector’s performance, which has grown robustly in recent years.

Meanwhile, Socio Economic Research Centre executive director Lee Heng Guie opines that the implications on Malaysia via global supply chains will be manageable for now, if the resulting trade US-China impact is mild.

“The industries affected will be electronics and electrical products as well as machinery. However, on a positive note, China may buy more palm oil from Malaysia if China retaliates to consume less soybean from the United States,” he says.

Asked whether Malaysia could be the United States’ next target in its pursuit of trade war, he says that the Trump administration may scrutinise the list of countries that enjoyed huge trade surpluses, which includes Malaysia.

The US government claims that the trade surpluses came about from unfair trade practices or lopsided trade agreement.

“Malaysia sits on a comfortable trade surplus with the United States although the Government has countered the trade imbalances, arguing that the discrepancies of trade surplus was due to indirect trade to the United States via entry port as in the case of Singapore,” he says.

In March 2017, the US government released a list of countries which included Malaysia, Japan, Switzerland and Germany, among others – touted as trade cheats and manipulators.

However, in a Parliamentary written reply on Nov 9 last year, the International Trade and Industry Ministry pointed out the issue has been clarified with the US government.

“Commerce secretary Wilbur Ross, had in our meeting on Sept 11, clarified that the United States wasn’t accusing Malaysia as being a trade cheat, but was referring to a discrepancy in trade calculation between the United States and Malaysia.

“Malaysian trade statistics only recorded a US$5bil trade deficit with the United States, while statistics by the United States showed that there was a US$25bil trade deficit,” it said.

US-China trade spat

The Trump administration has announced sweeping tariffs on Chinese imports, following a seven-month investigation into the alleged intellectual property violations by China.

As per the US Trade Representative’s (USTR) fact sheet, an additional 25% tariff will be imposed on a long-list of Chinese goods, which are considered to have caused harm to the US’ economy.

“The proposed product list subject to the tariffs will include aerospace, information and communication technology and machinery.

“The March 22, 2018 presidential memorandum instructs USTR to publish a proposed list of products subject to additional tariffs within 15 days,” it said.

It is worth noting that the measures have a 30-day consultation period.

While the headline-making trade skirmish is officially pictured as the United States’ stern warning against China’s alleged unfair trading and investment practices, it is also likely intended to boost Trump’s popularity profile in the United States.

An earlier Gallup poll has shown that Trump’s approval rating after being in the White House for a year, was the lowest in history at only 39%.

Trump is now seen leveraging on trade protectionist policies, which he used to rally the voters in the 2016 presidential election, to emerge more popular among Americans.

United Overseas Bank (M) Bhd senior economist Julia Goh tells StarBizWeek that Trump is either fulfilling his presidential campaign pledges, creating a distraction from his domestic political issues, taking a risky bet to make gains in the November US mid-term elections or a combination of all three.

The Asian and Australian stock markets have faced the brunt as key markets plunged, amid fears of trade war. Similarly, stocks in the US market also dropped sharply, following Trump’s announcement.

In response to the US’ unwarranted tariffs, the Wall Street Journal reported earlier that China is preparing to hit back by imposing levies aimed at industries and states which tend to employ his supporters.

According to the latest statement on its website, China’s ministry of commerce has proposed tariff hike on 128 US products, which had an import value of US$3bil in 2017.

Products such as wine, fresh fruit, dried fruit and nuts, steel pipes, modified ethanol and ginseng, could see a 15% duty, while a 25% tariff could be imposed on US’ pork and recycled aluminium goods.

Earlier before the US-China trade rift, Trump stoked concerns on March 1 after he announced that imported steel and aluminium would be taxed at 25% and 10%, respectively.

Later, the US Government announced that the European Union, Argentina, Brazil, South Korea, Canada, Mexico and Australia were exempted from the trade penalties.

Essentially, protectionist policies are regressive in nature as trade war will only reverse the benefits gained from a more open and globalised world economy over the years.

When the world’s two largest economic powerhouses try to battle each other via trade sanctions and tariff imposition, it will likely result in a cascading effect globally.

Goh believes that the US tariffs are not likely to derail the US economy’s growth trajectory, as trade does not constitute a large share of the its economy.

“Trump’s trade plan to impose US$50bil tariffs on over 100 Chinese goods could still be altered. The final impact of the tariffs may be blunted – key allies are receiving exemption from the steel and aluminium tariffs; while the tariffs on Chinese imports may be subject to a period of public comment that leads to changes.

“Our base case remains that we do not expect an all-out trade dispute but this is clearly a non-zero potential risk,” she said.

Meanwhile, Suhaimi says that the US tariffs and China counter tariffs are measured and restrained – for now.

Values of products affected by the trade spat are 10% of US imports from China and 2% of US total imports. Aside from that, only 2% of China imports from the United States and 0.2% of China total imports will be affected.

“The impact will depend on the ‘end game’ – escalation to full blown trade war or conclusion via concessions on both sides after the current skirmishes.

“China is calling for talks while US secretary of commerce suggests China buys more of US gas as one way to address current trade imbalances,” he says.

Source: https://www.thestar.com.my/business/business-news/2018/03/24/minimal-impact-on-malaysia-for-now-minimal-impact-on-malaysia-for-now-analysts-say-economy-not-expec/#zVGTUySVqvLRGgfk.99