Cool heads should prevail in US-China trade war

THE current US-China trade war still appears quite restrained but care must be taken to avoid further conflict.

China is not releasing its full arsenal of retaliatory measures but has called for dialogue, while the US has indicated it wants to negotiate.

Let us hope they are sincere about this as the world still needs a strong and rational US and China. Parties involved must understand within the global supply chain, for example, exports from China also include inputs from other countries whose trade will be hurt.

The continued growth of many economies are at stake. And broadbased tariffs may not address the targeted issues.

The negative impact on trade and sentiment will dent global growth; already for March, business momentum dropped in Japan and the eurozone while business confidence in Germany fell to the lowest in almost a year.

US tariffs on US$50bil of imports from China comes up to 10% of US imports from China, and 2% of US total imports. China’s tariffs on US$3bil of imports from the US makes up 2% of Chinese imports from the US, and 0.2% of China’s total imports.

The US has mentioned that China buys more US gas.

“All these suggest that the end game could be some concessions and deals by both sides, rather than an escalation of the trade war,’’ according to Maybank Investment Bank group chief economist Suhaimi Illias.

Malaysia may not be as dependent on US exports as other regional markets but given the current risk aversion, the ringgit, considered a riskier currency, is expected to weaken against the US dollar.

“The ringgit may move back above 4.00 against the US dollar,’’ says Hong Leong Bank chief operating officer, global markets, Hor Kwok Wai.

Besides the effect from trade war fears, there is another reason for ringgit weakening.

“The ringgit’s strengthening, at a time when many currencies of emerging markets were sagging, had opened up room for some slight weakening,’’ says InterPacific Securities head of research Pong Teng Siew.

Ringgit weakening would provide respite to exporters some of whom may benefit more “if China decides to buy more palm oil instead of soybeans from the US,’’ says Socio Economic Research Center executive director Lee Heng Guie.

In terms of regional currencies, there may be some weakening but the impact is mitigated by US dollar weakness from a flood in the supply of bonds.

“If US bond yields rise (due to the Fed targeting higher rates) faster than is currently envisaged, currencies of emerging markets will generally weaken against the US dollar,’’ according to Pong.

If China were to devalue the yuan, it would weaken regional currencies and spell trouble for Asian exporters as Chinese exports could become more competitive. Markets are in jitters if this emerging US-China trade war worsens.

The US and China make up 40% of world gross domestic product (GDP) and almost a quarter of world trade.

“Every 10% drop in US-China trade will knock off up to 0.7 percentage points of world GDP growth, which we currently expect at 3.8% this year,’’ says Suhaimi.

An all-out global trade war could cost economies US$470bil by 2020, according to Bloomberg Economics.

Does the Fed’s guidance of rate hikes until 2020 take into account the impact from a trade war. Right now, it is based on confidence in the growth prospects of the US economy; if a trade war erupts, “the Fed may not continue raising rates as planned’’, says Suhaimi.

Confidence issues aside, the Fed rate hikes are more of “an attempt to prepare dry powder to fight the next recession,’’ says Pong. From the near-term macro picture, Zahidi believes that the US economy will “remain relatively strong despite possible repercussions from a trade war with China’’.

Positive factors include the strength of its labour market, improvement in capital spending and weakening of the US dollar that is positive for net trade.

A low-term premium (the extra yield required by bond investors to hold on to a long-term bond) also indicates that “growth could continue to accelerate in the near term,’’ says Zahidi.

Risks that can temper US growth include setbacks from trade wars; inflation from rising wages and higher imported prices from tariff protection, and higher domestic prices due to an absence of foreign competition. The Fed will have to juggle between ensuring healthy growth and raising rates to a level that will not choke the economy, said Lee.

The US is the largest contributor to world GDP with 25%; any mis-step can cause havoc as nations are now so intertwined in business and trade.

Columnist Yap Leng Kuen hopes the boat is not rocked so hard that it overturns.