Trapped in US-China trade war
08.04.2018 (The Star Online) - THE US-China trade war drummed up by Washington last month threatened to escalate to a full-scale confrontation when Beijing fired back last week with punitive taxes on a wide range of US goods entering China.
And Malaysia, being an open economy with huge exports to China and the United States, is feeling the heat of the tit-for-tat measures rolled out by the two largest economies in the world.
President Donald Trump has given several reasons to act against China. A key reason is trade imbalance and US large trade deficit, which he attributed to China.
In 2017, China exported US$505bil (RM1.95 trillion) in goods to the United States, which in turn exported US$135bil (RM522.4bil) in goods to China.
The Trump administration has also alleged that China sought to misappropriate US intellectual property through joint venture requirements, unfair technology licensing rules, purchases of US technology firms with state funding and outright theft.
Last month, Trump slapped Beijing with punishing tariffs on the import of steel and aluminium products, and warned that there would be higher taxes on about 1,300 Chinese products worth US$50bil (RM193.5bil).
China, which has often stated that it does not want a trade war as it would hurt all, retaliated last Monday by imposing additional duties of 15% to 25% on 128 US products worth up to US$3bil (RM11.6bil). Pork, recycled aluminium, steel pipes, wine and fruits are on the list.
After being criticised by its own elites that it was too soft in its retaliation, China’s State Council announced on Wednesday that it planned to impose additional tariffs of 25% on 106 US products into the country, including soybeans, aircraft and cars. The import value of the goods on the list in 2017 was US$50bil.
Beijing’s Wednesday response came soon after the US Trade Representative Office released details of 1,333 Chinese imports worth about US$50bil that it planned to hit with 25% tariffs, with emphasis on industrial and hi-tech goods.
Global Times, the official mouthpiece of the Communist Party of China (CPC), said in an editorial on Wednesday before its State Council’s statement: “China’s countermeasures should deal a heavy blow, hitting what the United States fears most. We strongly recommend starting with US soybeans and corn products. The ruling GOP will pay a huge price.”
It noted that nervous US soybean farmers, who were big supporters of Trump during the presidential campaign in 2016, had run advertisements to oppose launching a trade war against China.
China’s former finance minister Lou Jiwei reportedly said at a recent forum: “If I were in the government, I would hit soybeans first, and then cars and planes.”
By imposing punishing tariffs on US soybeans, Beijing will hurt US major farmers, given that China was the second largest importer of US agricultural products last year, buying US$19.6bil (RM73.5bil) of goods with 63% spent on soybeans.
As reducing US soybean imports would leave a shortfall for Chinese edible oil consumption and animal feed, this would need to be filled by imports from other countries. One source could be palm oil from Malaysia.
“Malaysia’s palm oil growers would stand to enjoy a windfall gain if China reduces the intake of soybeans from the United States, though our competitors like Indonesia also hope to sell more to China,” says economist Lee Heng Guie, executive director of Socio-Economic Research Centre (SERC).
In fact, the futures contracts of Malaysian crude palm oil (CPO) rose on Wednesday after China’s announcement. The positive impact on CPO prices continued on Thursday.
However, the local stock market – like other markets in the region – plummeted, as many investors believed more tit-for-tat measures covering more industries would be unveiled in this spat. The FBM KLCI lost 1.88% to close at its nine-week low of 1,815.94 points.
The local stock market has been weakening due to fear of this trade war. The technology stocks are particularly jittery as the US tariffs are seen as targeting mainly the Chinese electrical and electronic (E&E) and machinery sectors.
“In our view, the sectors that could be affected by the US-China trade war due to recently proposed import tariffs are semiconductors, building materials and ports in Malaysia,” said CIMB Research in a report on Thursday.
As Malaysia exports many E&E products and parts to China, local players within this supply chain are likely to feel the heat.
“We estimate Malaysia’s ultimate exposure to the United States – including via intermediate goods to China for assembly into final products destined for the United States – at 10% of GDP, about half of which is in electronics products,” Nomura Research says, adding that another 8% is exposed to China’s final demand.
While exports to China account for 13.5% of total annual exports of Malaysia, exports to the United States make up 9.5%. And E&E products form the biggest export item to both countries.
Nomura sees US trade protectionism and a sharper-than-expected slowdown in China as posing risks to the Malaysian economy, as exports account for 71% of its GDP.
This trade conflict has been listed by Moody’s as a global risk this year.
Consultancy Oxford Economics says the escalation of the trade war could knock 0.5% off global growth in 2019.
Although earlier this year many analysts and business groups in the United States had warned that Washington would not win in this trade war, Trump charged ahead nevertheless.
The modern and economically mighty China, under President Xi Jinping, will punch back decisively and swiftly, many have warned.
The pain points of China are not easy to find. Over a decade ago, Beijing had realised it could not rely on the low value-adding export processing industries.
The country is now focusing on developing its high-technology sector and expanding the domestic consumer market to cut down on reliance on exports.
With so many odds against America, why would Trump insist on taking on China?
According to an analysis by Hong Kong-based International Chinese Newsweekly, the rise of American nationalism and Trump’s gearing up for the mid-term elections is the key reason for the president’s plunge into a trade war.
His focus is on midterm elections and keeping a Republican majority in Senate and Congress. But he will have to deal with the possible backlash from the first round of US-China trade war once it goes full on.
Apart from the soybean sector, the United States’ aircraft and automobile sectors will be hit.
According to South China Morning Post, Boeing Corporation delivered 202 planes to China in 2017, or 26% of its global total. The company has projected that in the next 20 years, China will need 7,240 new planes valued at about US$1.1 trillion (RM4.26 trillion).
On the auto sector, the United States sold more than US$10bil (RM38.7bil) worth of vehicles to China. Last year, General Motors sold 3.9 million cars to China, or almost 39% of its global total. The company expects sales in China to grow to five million by 2020.
The Hong Kong newspaper also warned that if China discourages its nationals from visiting the United States, the impact on US tourism will be painful.
In 2016, three million Chinese visitors and students spent US$33bil (RM127.7bil) while in the United States. The US Department of Commerce expects Chinese visitors rise to 5.7 million by 2021.
The other weapon China could weild against Washington is off-loading its US treasury bonds. This will have an impact on the dollar and US interest rate.
Bejing’s holding of US treasury bonds was close to US$1.2 trillion (RM4.6 trillion) at end-2017.
How long the current trade tension will last is anybody’s guess, given Trump’s unpredictable character. The world still remembers that he showered Xi with praises before turning his back on China.
But one thing is certain: if US protectionism and the trade war escalates, it will hurt not only the two major economies, but also countries which have trade links with the two powers.
“The global repercussions will be highly disruptive and damaging on trade and economy if the US-China trade war deepens and impacts more products and countries. In such widespread trade conflicts, Malaysia’s trade will be significantly dampened,” says Lee from SERC.