This article first appeared in The Edge Malaysia Weekly on September 24, 2018 - September 30, 2018
THE trade war between the US and China is escalating, clouding the economic outlook for a trade-dependent country like Malaysia. The question on everyone’s mind now is how long will it be before the two nations reach a compromise.
Just last week, Jack Ma, China’s richest man and co-founder of tech giant Alibaba Group Holding Ltd, told people to be prepared for the trade frictions between the US and China to last for 20 years.
According to Lee Heng Guie, executive director of the SocioEconomic Research Centre of the Association of Chinese Chambers of Commerce and Industry Malaysia (SERC), the trade war will only scale back when the US trade deficit with China improves.
“President [Donald] Trump is demanding a fair trade deal with China to recoup billions of dollars lost in technology licensing practices and Chinese high-tech imports,” he told The Edge last Thursday via text messaging.
Last year, the US trade deficit with China reached an all-time high of US$375.58 billion, according to the US Census Bureau of the Department of Commerce. US imports from China amounted to US$505.47 billion while exports to China were only US$129.89 billion.
This trade imbalance between the two countries has not subsided, rather, it has even increased. Up to July this year, the trade deficit amounted to US$222.56 billion, up from US$204.68 billion in the same period last year, an increase of 8.74%.
It took 30 years for the trade deficit between the US and China to reach its current level. Will it take another 30 years for trade between the two economic giants to rebalance? Until then, what will happen to the world economy?
While 30 years is such a long time that anything could happen, what is certain is that Trump faces re-election in 2020, and he may take pages out of his 2016 campaign playbook of “Make America great again” and “bring jobs back to the US” as his re-election platform, trying to retain the support of working-class Americans.
According to Dr Yeah Kim Leng, director of the economic studies programme at the Jeffrey Cheah Institute of Southeast Asia of Sunway University, the continuing tension could remain for the rest of Trump’s presidency, or until the US economy faces a downturn as fiscal stimulus runs its course.
“The risk of a full-blown trade war is low at this juncture but we should remain vigilant given the unorthodoxy and unpredictability of the US President’s actions,” says Yeah, responding to The Edge’s questions via text messaging.
He adds that the trade war will only end or simmer down when the threshold for pain is reached, both in the US and China.
“Consumers and businesses, especially in the US, will then exert sufficient pressure on the administration to ease off or face economic turmoil. Since higher tariffs mean higher prices, demand in both countries will be lowered and this in turn will have supply-chain effects,” says Yeah.
Recalibration of supply chain not immediate
In the case of lower demand for intermediate goods and services in both countries, will American and Chinese importers seek to diversify their import sources? Will this recalibration of the global supply chain benefit Malaysian industries?
Yeah says some Malaysian industries will benefit from trade diversion. However, this change in supply chain depends on the firms’ ability to ramp up production or to offset an increase in logistics and other trade-related costs.
“Palm oil may be a beneficiary but it may not be able to substitute for all the soy-related products in China, such as animal feed and soy food products.
“While substitution opportunities exist for selected industries and firms, we should nevertheless brace for a slowdown in global demand and encourage exporters to push more strongly to penetrate non-traditional markets in other regions,” he says.
At the same time, Yeah says Malaysia should also welcome and compete for Chinese and American firms looking at diversifying their production bases to this part of the world as part of their strategies to beat tariffs.
In a survey on the impact of the tariff war on American companies in China, conducted by the American Chamber of Commerce there, 30.9% of 430 respondents say they are planning to source components and/or assembly from outside the US, while 30.2% planned to do so from outside China.
Nearly one-third of the respondents to the survey say they are considering delaying or cancelling investment decisions. However, nearly two-thirds say they have not relocated and are not considering relocating their manufacturing facilities out of China.
For those who are considering moving out, Southeast Asia and the Indian subcontinent are the most favoured destinations for them to set up manufacturing facilities, to circumvent the additional tariffs.
As many as 18.5% of the respondents say they plan to relocate to Southeast Asia, while 6.3% say they will consider the Indian subcontinent to locate their manufacturing facilities. Only 6% of the respondents say they plan to relocate to the US.
Southeast Asia stands out as the preferred relocation destination for American companies in areas such as consumer products, technology and telecom hardware, automotive and chemicals, while the Indian subcontinent is more favoured among aerospace companies, the survey found.
It is not yet certain how long the trade war will last, and if it means that Malaysia and other Southeast Asian countries will benefit from a relocation of US and Chinese companies. One thing is clear — it is that the trade friction, if it drags on, will disrupt global trade.
“A truce in the trade friction is of outmost importance to avoid disrupting global trade activities and tempering the global economy, which is already experiencing challenges such as rising US interest rates, tighter liquidity conditions and foreign exchange pressures in high-risk rated emerging markets,” says SERC’s Lee.
Economists have warned that the tariffs imposed by Washington and Beijing on each other will shave off a chunk of Malaysia’s gross domestic product.
According to Julia Goh, senior economist and senior vice-president at Global Economics & Market Research of United Overseas Bank, the US-China trade dispute could affect around US$21 billion of Malaysian exports directly and indirectly. That is equivalent to 6% to 7% of GDP, and this preliminary estimate by UOB only takes into account the current state of the trade war, which involves tariffs on US$250 billion worth of Chinese products and US$50 billion worth of American goods.
“[Malaysia’s] exports of electrical machinery and equipment, minerals, fuels and oils, rubber, plastics and chemical products are among the key items vulnerable to US-China trade tensions,” she tells The Edge via email.
Judging from the statements from the White House and the Great Hall of the People, the trade war is far from over, as the US has made it clear that the 10% tariff on the US$250 billion worth of Chinese goods will increase to 25% come 2019.
US President Donald Trump has also said that if China retaliates and aims tariffs at US farm products, the US will impose tariffs on the rest of the Chinese goods imported into the country. If this is the case, there will be bigger repercussions for global trade and economic growth.
UOB’s Global Economics & Market Research has come up with the best, base and worst-case scenario on the trade war (see above).
The base-case scenario, which includes tariffs on US$250 billion of Chinese goods and US$60 billion on American products, in addition to the original US$50 billion of goods on both sides, will lead to a long negotiation process well into 2019, before reaching a resolution.
UOB assumes that there is a 65% chance that the base-case scenario will happen. This means that the trade war will continue well into 2019, and depending on the negotiation process, might last another year or two after that.
While the base-case scenario could be the most plausible outcome, there is always a risk of the trade war being dragged on by escalating and sustained trade actions, including blanket tariffs, restrictions on technology transfer and other measures by the world’s top two economies.
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