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Global Trends by Martin Khor

Monday 16 July 2018

Trade war – Malaysia should prepare its response

The escalating trade war poses a major threat to world trade and the global economy, with Malaysia one of the most affected countries. It is time to respond and speak out.

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The trade war initiated by United States’ President Donald Trump is a very dangerous game that will engulf the whole world if it escalates and is prolonged.

It is not just a tit-for-tat fight between two giants, the US and China.  The US has also increased tariffs against the European countries, Canada, Japan, South Korea, among others.

Countries like Malaysia that are involved in the regional and global supply chains will also be affected.  Some could suffer more damage than the direct protagonists.

For example, Malaysia exports components to China, such as electronics.  They are used to make products such as mobile phones and computers, some of which are exported to the US. 

If the extra US tariffs reduce Chinese production, there will be less demand for components exported by Malaysia to China.

Similarly, some Malaysian exports to the US are used as parts in its exports to China and Europe.  If the latter two retaliate against the US, Malaysian exports to the US will drop.            

 

A study done by Pictet Asset Management of 45 countries show that Malaysia is around the sixth most vulnerable country to a trade war.  Malaysian exports are about 60% dependent on global supply chains, while the rates are about 48% for China and 40% for the US.   Taiwan, Korea, Singapore, Hungary, are a few of the countries more dependent than Malaysia.

Another study by DBS shows that a trade war could cause Malaysia to lose 0.6 percentage points of economic growth in 2018, with the impact double that in 2019.   In Asia, South Korea, Malaysia, Taiwan and Singapore are most at risk from a trade war, based on trade openness and exposure to supply chains.  Growth reduction in 2018 would be 0.4 percentage point for Korea, 0.6% for Malaysia and Taiwan, 0.8% for Singapore, and double these rates in 2019.   

A Reuters report using OECD data to calculate value-added embodied in Chinese exports by its source countries shows that the most exposed Asian countries to a reduction of Chinese exports would be Taiwan (8% of its GDP value is embodied in Chinese exports), Malaysia (6%), South Korea, Hong Kong and Singapore (4-5%). 

These are significant losses indeed.  Thus, we cannot afford to be mere spectators of a US-China trade war.  We should study how the country will be affected, and prepare for the effects. More importantly, we should examine who is fault, and speak out and act.

It is clear to all that the US is the initiator and provocateur.  Its tariff hikes are unilateral actions, against the rules of the World Trade Organisation and the global trading system.  Complaints have been filed against the US at the WTO, including by China, the EU, Russia and India.  Malaysia should join in as a complainant. 

The US actions threaten the very survival of the trade system.  If moves and counter-moves keep taking place, there will no longer be any predictability for any country’s exports.  The EU remarked at the WTO last week that the trading system is facing now acute “stress and uncertainty.”

The uncertainty and the reduction of trade will hit the whole world, but most affected will be export-dependent countries like Malaysia.

This is also the worst time for a trade war.  It comes on top of the increasing shakiness of the world financial system, now on the verge of a new crisis.  Already foreign funds are moving out of developing economies like Malaysia, and their currencies are weakening, increasing inflationary pressures and making it more expensive to service external loans.

The Trump administration has been planning to launch the trade war for some time and now they are putting it into action.  It started in January with a 30% tariff on solar panels and components, and 20% tariff on washing machines. Malaysia is affected as it is among the three top countries exporting solar panels to the US.

Then came tariffs of 25% on steel and 10% on aluminium on all countries, except a few that are exempted.  The US used Section 232 of its domestic trade law for this action, citing it was done for “national security”.  But this is clearly a disguise as the move is for commercial and not security reasons, and most countries affected are close US allies.  China and others retaliated by raising tariffs against imports from the US.

Then on 6 July the US imposed 25% tariffs on US$34 bil worth of Chinese goods with another UD$16 bil coming.   This time the US invoked Section 301 of its trade law, accusing China of pressuring American companies to transfer technology.  Section 301 is deemed by almost all countries and experts to violate WTO rules.

China immediately retaliated with tariffs on US$34 bil of its imports from the US. It accused the US of launching the “largest trade war in economic history.”

US tariffs will hit China’s exports of electrical, telecom and transport equipment, engines and motors, farm machines.  Chinese actions will affect US agriculture goods especially soybeans, autos and aquatic products.   

Angered by China’s retaliation, the US on 10 July announced it would slap a 10% tariff on another US$200 billion of Chinese imports, again invoking Section 301.  China said it is shocked by the US’ behaviour and vowed to retaliate.

Trump has calculated the US will win the trade war because in 2017 the US imported US$506 bil from China, while China imported US$130 billion of US goods.  He thinks China would soon run out of retaliation capacity as it does not have much more US imports to slap tariffs on.

The Chinese however could still retaliate by taking other measures, such as setting more conditions for US firms based in China, not giving access to US companies in various sectors, or not implementing WTO obligations on intellectual property.  

Trump will probably go into a rage and raise more tariffs against China, thus escalating the war further.   This will provoke even more actions from China, which has vowed to stick to its rights and not to retreat.

The US is also examining imposing tariffs on automobiles and parts. Trump has threatened to place a 20% tariff on all European cars, according to a 5 July report.  This would have dire consequences, warned German leader Angela Merkel.

 

In short, the world is on the brink of a Trump-induced global trade crisis.  It will have spill-over effects on exports and GNP growth in developing countries, and secondary effects on policies of banks (which may increase the price and volume of credit) and on the financial markets (with effects on stock prices and the outward flow of funds).

Malaysia should join with other countries to speak out against the unilateral measures of the US and to take or join other initiatives to stop the trade war from escalating into a very big crisis that neither the world nor the country can afford to have.

 


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