US-China trade war – cautiousness maintained


THE US administration recently agreed to a ceasefire in the ongoing trade war with China and stated that additional tariffs will not be imposed. However, it is still too early to assume that trade tensions have subsided after the recent G20 truce, given past developments.

Trump administration maintains that the US has been a victim of unfair trade agreements that benefitted its trading partners at the expense of its own economy.

US President Donald Trump prefers bilateral trade relationships with individual countries that promote US industries, protect American workers’ welfare and raise their wages – which triggered him to withdraw from the Trans-Pacific Partnership (TPP) Agreement as soon as he won the presidential seat.

Through the non-participation of the United States in TPP, the country has now asserted the rights to impose unilateral trade sanctions in the form of increased tariffs against many of its trading partners – not only China but also Japan, Mexico, Canada, and Germany, which the United States previously had friendly relations with.

Deal or no deal?

Since mid-2018, the concerns and uncertainties about US-China trade war continue to persist. Prospects of a quick resolution between both countries seemed to be unlikely until Trump and Chinese President Xi Jinping proceeded with negotiations during the G20 summit recently.

Both presidents agreed to put off the new tariffs; and to let American companies sell products to the tech giants in China. In return, China, the fourth largest agricultural export market for the United States, agreed to buy more US farm goods.

However, Trump will only consider the resolution of Huawei issues depending on the conclusion of the negotiations, with no compromise to the US national security. Though both presidents have yet to reach a final deal, Trump’s previous threat of imposing an additional US$300bil tariffs on remaining China imports, would pose downside risks towards the global economic outlook due to weaker global trade activities. Issues so far

US tariffs imposed on Chinese imports was up 25% of around US$250bil, with the potential of an increase of up to US$300bil worth of goods, affecting almost all Chinese goods entering the United States.

In retaliation, China has also slapped tariffs on US$60bil worth of US goods – mainly clothes, farm products and electronic products and reiterated that it would only agree to a deal if the US removed all punitive tariffs on China, leaving little room for compromise.

These tit-for-tat responses by the world’s largest economies prior to the negotiations added to the global headwinds. This had resulted in a large decline in trade with the US imports from China, contracting 13.0% year-on-year (y-o-y) while Chinese imports from the US contracted 29.7% y-o-y year-to-date (YTD) April.

This clearly shows that reaching a no-deal could potentially pose a significant threat to both the countries’ economic growth on the back of a weakened global trade performance.

Notwithstanding, the US-China resumed negotiation is expected to curb the trade and investment barriers while preventing them from a trade “break-up” in terms of both goods and services.

Who are the winners?

In response to the previous threat and tariffs imposed on Chinese imports, research sources show that US importers were already switching to alternative suppliers in Asia such as Vietnam, Taiwan and Korea (electric apparatus, automotive parts); Malaysia (semiconductors), as well as Korea and Mexico (motor vehicle parts).

Of the top 20 US listed companies in the S&P 500 with net sales in China, 12 of them are electronic companies, with combined revenue of USD144bil in 2018. Having said that, if the US were to follow through with the 25% tariff on the remainder of its imports from China, a large share of it being electrical components, a major relocation of global value chain is predicted.

If the US-China trade war were to resume, analysts predict that the share of US imports of electronics from China would halve, while the share of US imports of electronics from the rest of Asia, Canada and Mexico would increase.

In the global value chain of the electronics industry, the world’s semiconductor companies and other suppliers could reduce component shipments to China and increase shipments to new burgeoning hubs like Mexico.

Favourably, some reports say that Malaysia emerged as one of the largest beneficiaries, gaining 1.3% of its total gross domestic product (GDP) (roughly RM18bil of 2018 GDP) from trade diversions, attributed towards the electrical and electronics (E&E) sector. The gains were particularly seen in the production of integrated circuits (0.2% of GDP) as well as semiconductor devices and light-emitting diodes (0.2%).

Again, if the US follows through on the threat of imposing tariffs on the remaining Chinese imports, Malaysia’s E&E sector may benefit further on increased demand for semiconductor components from China.

On the other hand, the key Malaysian products that benefitted from China’s tariffs on the United States were waste and scrap alloy (0.4% of GDP), natural gas (0.3%) and benzole (0.3%).

However, Malaysia’s exports contracted by 0.9% y-o-y in the first quarter of 2019, indicating that external demand remains subdued.

Despite emerging as one of the beneficiaries of trade substitution, the expected substantial growth on our export demand has yet to materialise – leaving a mixed view on the impact of US-China trade war on Malaysia’s trade growth.

Cautiously optimistic about the global growth

Prior to the G20 summit, the International Monetary Fund (IMF) pointed out that US-China tariffs could eventually wipe out USD455bil worth of global GDP and cut global growth by 0.5% in 2020.

Furthermore, World Trade Organization (WTO) projected global trade to expand by 2.6% in 2019 – lower than the prior forecast of 3.0% growth in 2018 largely due to retaliatory measures affecting widely traded goods across the world.

We must remember that there have been a lot of negotiations between the US and China but no conclusions were drawn after. The ongoing negotiations remain a concern despite optimism around the recent trade talks in the G20 summit.

Despite both US and Chinese governments having confirmed that they do not plan to levy any new tariffs against each other’s product for the “time-being”, it is still possible for Trump to hit China with more punitive tariffs if he is not convinced with China’s commitment to buy more US foods and agriculture products.

Though a ceasefire was agreed to slightly ease tensions in the market, those tariffs that have already been implemented are holding back the global economy. Adding to that, unresolved issues, such as US’ demands on China and what China is prepared to concede, continue to cast great uncertainty on the future outlook.

Trump has threatened that more countries would be added into his sphere of protectionism policies, in order to protect the interests of his country and people. This threat of further escalating US protectionism is real evidence with America’s withdrawal of preferential access for Indian products in early 2019 and imposition of new financial sanctions on Iran recently.

In fact, the United States is now considering imposing additional US$4bil of tariffs on European Union (EU) goods. This is in response to harm caused by EU aircraft subsidies, potentially worsening the trade friction with the bloc.

The latest actions by the United States could dampen hopes that the US is starting to scale back its trade disputes against its major trading partners.

Nevertheless, the US and Mexico negotiators were able to reach a deal on immigration enforcement with the indefinite suspension of 5% tariffs imposed on Mexican goods. This shows the willingness of Trump to (re)-negotiate with his counterparts if it defends his interests.

However, in the case of a full blown trade war assuming a no-deal, tariffs will unlikely reach the historical high, as witnessed back in 1930s. It is worth to note that the Smoot-Hawley Tariff Act which imposed 59.1% tariff on the goods entering the United States in 1932 (1929: 38.1% and 1920: 16.4%) slashed down the global trade by an average of 66% between 1929 and 1934.

The scenario of a full blown trade war is still unlikely but we expect it to drag longer than expected. We foresee that one of the two giants would yield to the demands of the other side for a harmonised trade deal, and signed in pursuit of a “calm” negotiation.

Manokaran Mottain is the chief economist at Alliance Bank Malaysia Bhd. The views expressed here are solely that of his own.


   

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