Impact of trade war on the Malaysian economy

OVER the period of 2018 to 2020, Malaysia’s export risks will decline by 0.08 percentage points as a result of the US-China trade war, while the country’s gross domestic product (GDP) could decline by 0.02 percentage points.

The estimate is based on the assumption that almost 50% of Malaysia’s exports are incorporated into China’s final products, which are then exported to the US.

To date, the US has imposed additional taxes on US$250bil Chinese imports and China has since retaliated with levies on US$110bil worth of imports from the US.

The Economic Outlook 2019 cautions that the impact of the ongoing trade spat on Malaysia would intensifiy, if the trade talks fail and cause hostilities to escalate.

Currently, China is Malaysia’s largest trading partner, constituting 13.5% of total exports in 2017. The US is the third largest export destination, representing 9.5% of Malaysia’s total exports last year.

A worsening trade war could drag down global output by 0.4 percentage points by 2020. This means, the Malaysian economy could in turn lose up to 0.7 percentage points.

The report also pointed out that a 10% drop in global growth would reduce Malaysia’s GDP by a whopping 14%.

“The trade conflict between the US and China will have global repercussions, not only will it inhibit global trade and growth but there will also be disruptions to supply chains, impacting businesses, jobs and consumers.

“Moreover, greater-than-expected inflationary pressure may also spur faster-than-anticipated monetary tightening by the US Federal Reserve, which may further hurt investment and global restocking demand,” it said.

However, it was also noted that the trade war between both economic juggernauts may present new opportunities to other countries, particularly the emerging economies.

The report said that large trade gains could be made as both the US and China substitute their demand for imports to other emerging markets as well as relocation by multinational corporations seeking to bypass these trade tariffs.

“However, the latter will take time to materialise as firms will require greater certainty over the duration and significance of the trade war,” said the report.

Malaysia’s strong trading networks and diversified sectors are expected to enable domestic companies to navigate the trade disruptions and seek new opportunities in alternative markets.

The report stated that Malaysia’s commitment to engage and pursue new trade initiates will help the country to weather potential impact from the trade war.

Among the free trade agreements (FTAs) in the pipeline are the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Asean-Hong Kong FTA, Regional Comprehensive Economic Partnership Agreement and Malaysia-European Free Trade Association Economic Partnership Agreement.