US’ trade protectionism agenda is causing more problems than solutions for many of its trade allies – and the rest of the world.
As one of the strongest and most influential economy, its new global trade policies and sanctions have rippled across the world, with its impact felt most by emerging markets (EM). Malaysia is not spared from this.
From heightened tariffs on products imported from China, Turkey, Canada and the European Union, into the US, to trade sanctions on Russia and other countries, the effects, while mild for Malaysia’s trade, could be felt in its equity markets from the fluctuation of foreign investments wary of the current changes in the global market.
Looking back at the start of this brewing storm, trade frictions first began when US President Donald Trump pledged to uphold the ‘Made in America’ movement as part of his election campaign by limiting imports into US and encouraging local manufacturers to return their operations into the US to improve job employment in the country.
Since coming into office, Trump has questioned ‘liberalised’ trade deals and the idea of ‘globalisation’ in the trade order. He has seen touted ‘fairer trade deals’ by renegotiating several important trade agreements across the world.
This sparked a growing number of tit-for-tat measures thrown by other countries to counter US’ trade protectionism policies and subsequently, it has thrown the global markets into disarray as investors flee in favour of safer havens.
Analysts and economic experts have generally expressed concerns on this growing trade tension and have warned US’ government on the consequences of its trade policies.
“In the current economic environment characterised by subdued potential growth and anti-globalisation rhetoric, the risk of “beggar-thy-neighbour” trade policies has risen.
“This was highlighted by the recent failure of G20 economies to renew their long-standing commitment to free trade and pledge to resist all forms of protectionism at the last Finance Ministers meeting in March 2017.
“An increase in within-country income inequality during the period of rapid globalisation has fuelled an intense debate about the benefits of trade liberalisation and immigration in many advanced economies.
“Ongoing structural changes in the multilateral trading system and the international communities’ response to them will be crucial in shaping the future dynamics of trading relations.
“If these changes are accompanied by an upward spiral of beggar-thy-neighbour protectionist measures, they could result in the erosion of efforts during decades of trade liberalisation and the corrosion of the multilateral rules-based system that’s been under construction since the mid-1940s,” the World Bank Group had warned in its ‘The Global Costs of Protectionism’ research paper.
It added, “While politically attractive in the short run, protectionist measures can have large negative repercussions. Such an increase in global protectionism is likely to have wide-ranging, economy-wide consequences not only for consumers, but also producers (firms), government, investment and trade flows.”
Undermining confidence, derailling growth
Echoing this, the International Monetary Fund (IMF) Economic Counsellor and director of Research Maurice Obstfeld in his address during the release of IMF’s ‘World Economic Outlook 2018’ report pointed out that the prospect of trade restrictions and counter-restrictions threatens to undermine confidence and derail global growth prematurely.
While some governments are pursuing substantial economic reforms, Obstfeld said trade disputes risk diverting others from the constructive steps they would need to take now to improve and secure growth prospects.
“That major economies are flirting with a trade war at a time of widespread economic expansion may seem paradoxical – especially when the expansion is so reliant on investment and trade.
“Particularly in advanced economies, however, public optimism about the benefits of economic integration has been eroded over time by long-standing trends of job and wage polarisation, coupled with persistent sub-par growth in median wages.
“Many households have seen little or no benefit from growth,” he said.
“Governments need to rise to the challenges of strengthening growth, spreading its benefits more widely, broadening economic opportunity through investments in people, and increasing workers’ sense of security in the face of impending technological changes that could radically transform the nature of work.
“Fights over trade distract from this vital agenda, rather than advancing it.”
Closer to home, EMs, including Malaysia, have likely benefitted the most from the trade hyper-globalisation seen before Trump’s era.
“The abundant and competitively priced labour supply in these countries, together with free trade, led to large foreign direct investment (FDI) inflows, allowing these countries to export their way up the development ladder,” Phillip Futures Sdn Bhd’s senior product specialist David Ng, said in a column to The Borneo Post.
However, he stressed, “Intuitively, this suggests that these countries should also be more vulnerable to a rise in protectionism.”
He added, “The fragile sentiment in EMs is underlined by the market response to the removal of steel and aluminium tariff exemptions for NAFTA partners and the EU.”
Ng further pointed out: “The main risk to the US and globally, in our view, is that individuals, businesses, and financial markets have underestimated the desire of the Trump administration to re-orient trade flows and that further steps to implement tariffs will lead to a reduction in confidence, a slowdown in hiring, and a correction in equity markets.”
With that, BizHive Weekly takes a look at the rising trade worries and how it affects Malaysia’s markets:
Countries embroiled in growing trade conflicts
US ↔ China
The trade tensions between US and China began when US President Donald Trump came into office.
As part of his election pledge to boost US’ economic position, Trump has called out China countless times for what he deems as “unprecedented and unfair trade practices” which he believes are one of the main causes of what he views as US’ stagnant economic growth.
Frictions between both economic powerhouses escalated further when Trump announced his plans to impose heavy trade tariffs on steel and aluminium imports, excluding Argentina, Australia, Brazil, Canada, Mexico, and the European Union.
Based on reports by Reuters, China had retaliated by increasing tariffs by up to 25 per cent to 128 US products which saw Washington announcing a proposed 25 per cent tariffs on 1,300 industrial technology, transport, and medical products from China worth US$50 billion.
In response, China had once again threatened to impose a 25 per cent additional tariffs on 106 US’ goods worth US$50 billion including signature products such as soybeans, cotton, planes, cars, beef, tobacco and whiskey.’
US had then, threatened another round of tariffs on US$200 billion of China’s goods if China strikes back for the second time.
Since then, leaders and representatives of both countries have met several times to establish an agreement that best fit both countries.
However, no deal has been struck between the two countries until today.
In the latest update on the friction between the two, US now threatens to impose a another trade tariffs on US$200 billion of Chinese goods this month.
Two of the world’s largest and most influential economies now looked locked in an intensifying trade war, with no resolution in sight.
US ↔ Turkey
The row between US and Turkey soured further when earlier last month, US says it was reviewing Turkey’s duty-free access to its markets, after Ankara imposed retaliatory tariffs on US goods in response to American tariffs on steel and aluminum.
The move could affect US$1.7 billion of Turkish exports.
Turkey’s lira plunged to historical lows which gave rise to the question on Emerging Markets’ (EM) vulnerabilities towards the current global trade wars raised by US.
US ↔ European Union
Further west, US has also sparked trade worries with its closest ally; the EU region. Along with China, the US government had threatened the region’s leaders with hefty trade tariffs unless it lowers its trade barriers with US.
EU leaders had proposed to remove tariffs on industrial products, including cars, to prevent a potential trade war, earlier this year.
However, on the tail of US’ move to impose more tariffs on China and other countries, EU responded by imposing duties of 25 per cent on 2.8 billion euros of US imports in response to US tariffs imposed on EU steel and aluminum.
This caused US to threaten Europe with a 20 per cent tariff on all US imports of cars assembled in the EU.
According to Reuters’ reports, the US currently imposes a 2.5 per cent tariff on imported passenger cars from the EU and a 25 per cent tariff on imported pickup trucks while the EU currently imposes a 10 per cent tariff on imported US cars.
US and EU trade chiefs are expected hold a first meeting in Brussels this coming week to pursue closer transatlantic ties and renegotiate trade policies between the region and US.
US ↔ NAFTA ↔ Canada
Aside from faltering free trade agreements between US and several countries in Asia, the North America Free Trade Agreement (NAFTA) has also been on the Trump Administration’s chopping board since President Trump came into office.
The NAFTA, a trade agreement between US, Canada and Mexico, was criticised by Trump who blames NAFTA for wiping out US manufacturing jobs by allowing companies to move factories to Mexico for cheaper labour.
Meanwhile, Canada said it will impose retaliatory tariffs on C$16.6 billion of US exports from July 1 until the US lifts its own measures.
According to Reuters, these measures include 25 per cent tariffs on iron and steel products, and 10 per cent tariffs on a variety of items including food, orange juice, whiskey, aluminum products and toiletries.
Ripple effects of the widening trade rifts
Malaysia takes a hit as investments sway
For Malaysia, while the global trade tensions continue to escalate, its trade remains stable as can be seen by its recent external trade numbers.
According to Malaysia’s Department of Statistics, both imports and exports from Malaysia achieved new record highs in July 2018 with values of RM77.8 billion and RM86.1 billion, respectively.
It also noted that Malaysia’s total trade which was valued at RM164 billion, an expansion of RM14.6 billion or 9.8 per cent from a year ago while trade surplus for July 2018 was at RM8.3 billion, advancing by RM138.8 million (1.7 per cent) from a year ago.
“The expansion was primarily driven by continuous growth in manufactured goods (12.6 per cent y-o-y vs 12.7 per cent y-o-y in Jun-18) and rebound in mining goods (7.1 per cent y-o-y vs -10.9 per cent y-o-y).
“In addition, lesser drop in agriculture goods (down 14.5 per cent y-o-y compared with down18.7 per cent y-o-y) also contributed to the performance. Meanwhile, imports growth moderated to 10.3 per cent y-o-y in Jul-18 from 14.9 per cent y-o-y registered in the prior month however still outperformed exports. Trade surplus recorded at RM8.3 billion, higher than RM6 billion posted in June 2018,” said MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research).
However, it pointed out that while it anticipate Malaysia’s exports to remain optimistic on the back of tax holiday period and stable retail fuel price, concerns on global trade spat remained.
Phillip Futures Sdn Bhd senior directives analyst David Ng meanwhile believed that for now, China will continue to emphasise negotiations as a way to resolve the current trade dispute.
“But even if talks resume, they could easily stretch beyond November, with US tariffs on US$200 billion of Chinese imports being introduced before a resolution has been reached.
“Amid weaker global trade expectations, Fed and ECB minutes show some concern with trade tensions. The latest world trade volumes data for 2Q18 show only a small effect of the protectionist policies discussed and implemented since the beginning of the year. But this is a backward-looking indicator and front-loading of trade, to avoid tariffs, could support volumes in short run.”
He further highlighted that recent minutes of the July FOMC meeting mentioned the latest staff economic outlook which showed that trade policies could have a significant adverse effect on US growth.
“Trade tensions were also recognised as a notable driver of recent market moves in EM and currencies. With this regard, Malaysia may face external pressure amid the ongoing trade tension as both countries (China and Malaysia) represent a large bloc of Malaysia trading partner,” he pointed out.
Aside from Malaysia’s trade, its equity markets also took a hit, with the Bursa Malaysia recording multiple dives which seem to coincide with trade or policy developments in the US or any of the global economic juggernauts.
Spook by events in the global trade, foreign investors have pulled out from Malaysia’s equity markets for safer havens.
“Fears on global trade outlook will continue haunt equities. If risk appetite shy away, the stock markets, not only Malaysia but also at the global stage, will be under pressure again,” a dealer was reported as saying by Bernama, recently.
Sensitivity around trade would cause an imbalance in the foreign exchange (forex) market, thus elevating US dollar and other safe-haven currencies, he added.
Meanwhile, Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid recently stated that generally speaking, the Malaysian equities markets was still marred by the external uncertainties. With US’ economy continued to exhibit a healthy trend, he pointed out: “Obviously, the prevailing inflation rate is above the two per cent target of the US Federal Reserve (Fed) which implies that the US central bank is on track to raise its federal fund rate at the upcoming meeting in September.
“On one hand, we have a situation where we have a higher interest rate environment in advanced countries and on the other, anxiety over policy direction domestically.
“Perhaps, this could explain why the net foreign fund flow trend was uneven although intermittently we saw net inflows.”
According to MIDF Research, on a year-to-date basis as of August, the total foreign net outflow from Malaysia stood at approximately RM8.6 billion or US$2.2 billion, making it the second lowest outflow (behind the Philippines) amongst the four Asean markets it tracked.
Malaysia en route to lower GDP
With domestic policy changes brought on by the shift the political landscape as well as jitters on the external front triggered by trade tensions between economic powerhouses, analysts and experts generally believe that Malaysia could see a lower gross domestic product (GDP) recording this year.
MIDF Research noted that already, Malaysia’s 4.5 per cent y-o-y GDP in 2Q18 came below its and the market’s forecast of 4.9 per cent y-o-y and 5.2 per cent y-o-y, respectively.
“It is the weakest growth in 6-quarters and less than previous year’s average of 5.4 per cent. Among others, domestic demand contributes about 4.3 per cent of the total growth during the quarter,” it added.
“We opine the slowdown in GDP growth was in tandem with moderating performances of industrial production, manufacturing sales, distributive trade and external trade during the quarter.
“Moderating inflationary pressure, strengthening domestic demand and accommodative economic policies as well as strong exports growth are expected to be major drivers for GDP performance in the second half 2018,” it commented.
Meanwhile, Standard Chartered Bank lowered its forecast for Malaysia’s GDP in 2018 to 4.8 per cent from its earlier estimate of 5.3 per cent due to the US-China trade war and weaker-than-expected economic growth in the first half of the year.
According to chief economist for Asean and South Asia, Edward Lee, the impact could be cushioned by investors’ confidence in Malaysia, with a stream of new investments committed by businesses who were seeking an alternative production base.
“Malaysia’s growth will be affected directly and indirectly, but I am not sure whether this will be by the end of the year. Probably we will see a clearer picture in early 2019,” he told reporters after a global research briefing for the second half of 2018.
“I think that (the trade war) has affected especially investment sentiment in Asia. This is quite clear on two things.
One is it seems really to be targeted against China and second, and more worrying for me, is this may be more of a long-term issue. Trade is just one of the factors that we are looking at,” he was reported as saying by Bernama.
Nevertheless, he pointed out that while investments seemed slightly weak while exports face a very high base compared with last year. Bank Negara Malaysia would likely keep its policy rate at the current level.
Malaysia’s economic growth was expected to rise to five per cent next year, he added.
Looking East, Asia’s growing trade liberalisation
As US creates trade frictions with nearly half the world, there is a silver lining to this ordeal as countries within regions look to each other to help boost their trade ties and subsequently; their economies.
Regional free trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) are in the works to lower trade barriers and open up opportunities for countries in Asia to trade with countries such as Canada, Chile, Peru, Mexico and others.
For now, while focus still remains on quelling rising trade tensions between economies and not much progress has been made in finalising the CPTPP before its February 2019 deadline, regional free trade agreements such as the CPTPP offer a glimmer of hope in the current global trade scene.
“China’s economic and political relationship with the US is the most important one in the world today. We believe that both sides want a ‘win-win’ solution to the trade dispute, which will result in even more trade and investment between the two economic powers,” Standard Chartered Global chief economist David Mann said in his ‘The three main risks facing the global economy’ post.
“The tariff impact would hurt other Asian countries in China’s supply chain; we estimate that 1.8 per cent of Taiwan’s exports could be affected by a US-China trade war, 1.2 per cent for Malaysia and Singapore, one per cent for Vietnam and 0.9 per cent for Korea.
“However, some of these same countries might benefit from the US-China trade dispute by displacing China’s exports to the US,” he highlighted.
Meanwhile, the research team at iFAST Capital Sdn Bhd (iFast Capital) pointed out that despite the Sino-US trade tensions, the tone is much more upbeat from a fundamental perspective.
“Many other EM countries, especially in Asia, appear healthier with improving current account balances as well as lower external debt to GDP ratio. And structural reforms in countries such as China and India are likely to put economies on the path to a more sustainable long-term growth.
“According to the data released by the International Monetary Fund (IMF) by end-June 2018, the annual growth rate for emerging market over the next five years will remain at high level, while the growth rate of GDP for the developed markets will be declining. T
“his is a very compelling reason to take a harder look at the emerging region of the world, and position portfolios for this coming shift,” it explained.
MIDF Research also pointed out that US’ beef with other countries as well as Malaysia, could help the country reduce its trade surplus, especially with US which has been its biggest contributor to its trade surplus.
It noted: “Over 95 per cent of Malaysia-US total trade being dominated by manufactured goods, especially electrical and electronic (E&E) products. Other than E&E, exports of optical & scientific equipment, rubbers products, transport equipment and manufactures of metals are among key manufactured goods shipped to US.”
In 2017, it said, Malaysia had trade surplus with Asean, EU and US amounted to RM58.2 billion, RM15.5 billion and RM19.4 billion respectively. Comparatively, it noted, Malaysia had a trade deficit with China worth RM38.4 billion.
“US has been one of the strong trade surplus contributors to Malaysia. Hence, in the event of slower demand by US on Malaysia’s products, it will reduce the size of Malaysia trade surpluses,” it added.
On a technical point of view, MIDF Research opined, “With imposition of tariff hikes since early this year, we view the demand on manufactured goods especially products relating to washers, solar panels, aluminum and steel will drag down Malaysia’s exports to US.
“We forecast Malaysia’s exports growth to US will decelerate to three to five per cent this year as compared to 10.5 per cent in 2017. Since 2017, exports growth to US had been lower than outbound shipments to EU, China and Asean. As for 1H18, exports to US grew by 0.8 per cent y-o-y and inbound shipments shrank sharply by 19.6 per cent y-o-y.”
Nevertheless, the research team highlighted that trade with Asean remains on steady path, constituting 27.5 per cent of total trade last year.
“Due to the structural change, slower demand by US does not deter overall Malaysia’s trade performance. However, the impacts of slower demand by US will affect Malaysia via indirect channels especially thru tepid pace in global trade growth,” it commented.
Overall, MIDF Research pegged a positive outlook for the trade landscape in Malaysia as well as generally, Asia, in the third quarter of 2018 (3Q18).
“Looking at our regional partner’s, exports of Vietnam and South Korea in August 2018 continued to expand by 5.5 per cent y-o-y and 8.7 per cent y-o-y respectively. This could provide similar waves to Malaysia’s upcoming trade numbers for August 2018.
“Based on manufacturing condition and activity, both global and emerging economies manufacturing PMI still maintain on expansionary trend at 52.5 points and 50.8 points in August 2018.
“For instance, PMI of US went down to 54.7 points in August 2018 which pointed to the slowest expansions in factory activity since November 2018 as output and new order growth rate eased although remained solid. Similarly, PMI of China inched down to 50.6 points while edged up to 52.5 points for Japan during the same month.
“However, all readings are above 50 which signal an expansion in the sector. We predict global trade activities in 3Q18 to remain on an upbeat momentum albeit at a moderating pace, in tandem with easing global manufacturing PMI,” it explained.
Despite its positive outlook, MIDF Research still warned of the protectionism threat which remains as global downside risks.
“We forecast exports growth to average 9.3 per cent in 2018. Underpinned by sanguine signs of key global indicators and gradual recovery in commodities prices, we foresee Malaysia’s exports will expand by 9.3 per cent this year (18.9 per cent in 2017).
“In fact, for the first seven months of 2018, exports growth is recorded at 7.3 per cent y-o-y which is far lower than 22.6 per cent y-o-y registered in the same period last year. The moderating pace is mainly due to higher base effect and in tandem with the expectation of slight slowdown in overall business performance.
“Nevertheless, brewing trade tensions between the U.S and a number of countries on top of escalating geopolitical tension could be a headwind to global trade including Malaysia,” it said.
Beyond trade matters, MIDF Research believed that despite the global trade tensions, Malaysia’s domestic fundamentals remain solid, buoyed by private consumption which holds above 50 per cent for five-consecutive years since 2013.
“Henceforth, any external shocks would have lesser impacts towards Malaysia as compared to previous crises periods amid lesser exposure towards international trade,” it added.