The Malaysian Reserve

EMs could benefit from Trump’s trade tantrums

Trump is deliberately focused only on the merchandise trade balance between the US and China (Pic: Bloomberg)

While Trump’s protectionism can be a catalyst for relocation of production capacity, developing nations have to seize the opportunity

By PROF DR OBIYATHULLA ISMATH BACHA / Pic By BLOOMBERG

US President Donald Trump appears hell bent on delivering on his campaign promise of correcting America’s “unfair trade relationships”. While he has targeted the European Union (EU), Canada, Mexico and others, he seems particularly focused on China.

Interestingly, both the US and China are the world’s top two trading nations. However, their relative positions seem juxtaposed between exports and imports.

Based on 2017 data — in US dollar terms — China is the world’s largest exporter with total exports of about US$2 trillion (RM8.2 trillion), while the US is the second- largest with about US$1.5 trillion of exports.

When it comes to imports, however, the US is the largest importer with about US$2.3 trillion of total imports, whereas China only imports about US$1.7 trillion in total.

The other two trading nations, Germany and Japan, are respectively in third and fourth placing for both exports and imports.

Of these four top trading nations, the US is the only country with a current account and trade deficit. China, Germany and Japan all have trade and current account surpluses. Simply put, these countries sell more to the world than they buy. The US certainly has cause to complain.

Going by the merchandise trade balance between the US and China, the imbalance is about three times. That is, China exports about three times more to the US than it imports from it. However, this imbalance becomes much less skewed when services are brought in. Adjusting for services reduces the imbalance from three times to about 1.5 times.

Trump, however, is deliberately focused only on the merchandise trade imbalance of three times — which in US dollar terms is a deficit of about US$375 billion.

Conflict Genesis

The US-China trade conflict began in January 2018 when the US imposed restrictions on China-made solar panels and washing machines. These then escalated with the tightening of aluminium and steel imports.

In early July, the US announced the imposition of 25% tariffs on Chinese goods worth about US$200 billion. Given these moves, there is little to doubt the Americans resolve to level the playing field from their viewpoint.

For China, the trade restrictions, coupled with rising interest rates in the US, have begun to bite. The carefully managed Chinese yuan has depreciated and is currently at its weakest point for the year. The Shanghai Composite Index has fallen more than 20% year-to-date.

China’s perceived economic invincibility appears to be shaken. This may have to do with the fact that the trade conflict started before China has had the opportunity to fully resolve its domestic debt problem.

With domestic debt estimated at 250% of gross domestic product (GDP), China has a highly leveraged economy. As is always the case, a build-up of debt reduces policy options. Monetary side accommodation, which can blunt the impact of the trade problems, runs the risk of increasing domestic debt.

China’s inability to do much and American resolve to push the trade agenda can have long-term consequences for the rest of the world, especially the emerging markets (EMs).

The last time something similar happened, the decks were rear-ranged and a tectonic shift happened in global production capacity. This was the Plaza Accord of 1985.

Though a currency agreement, it was really intended to correct the trade imbalance with the then export champion Japan, and the Asian Tigers, South Korea, Taiwan and Singapore.

The yen which was trading in the range of ¥280-¥300 per US dollar pre-Plaza Accord, strengthened steadily to hit ¥84 against the dollar in mid-1995, an appreciation of 250%. The other Asian Tiger currencies also revalued substantially, though at a lower rate than the yen.

Realising the inevitable rise in their currencies, these countries chose to do the logical thing — which was to relocate their manufacturing and production facilities to lower cost nations.

The result was the foreign direct investment-fuelled boom, particularly in the EMs of Asean. Countries like Malaysia, Indonesia, Thailand and Vietnam became world beaters with some of the fastest GDP growth rates.

For several years until the Asian financial crisis of 1998, these countries experienced the fastest growth rates in the world. Aside from reducing poverty, the relocation enabled them to lay the foundations for a domestic industrial/manufacturing base.

Window for Developing Nations

The current trade war once again provides such an opportunity for developing nations. Given the sheer size of Chinese manufacturing, the potential benefits could be much higher.

The geographic spread of the relocation could also be much wider than the previous regional focus on Asean.

The realignments may already have begun. The EU and Japan have just signed what has been dubbed the world’s biggest ever trade deal, creating an open-trade zone covering nearly a third of the world’s GDP.

While Trump’s “America First” protectionism can be a catalyst for relocation of production capacity away from the traditional economic superpowers, developing nations have to seize the opportunity.

America cannot produce the many low-end products that China now exports to it, certainly not at prices that US consumers want.

Developing nations, especially those with plentiful labour and a not-too-skewed trade balance with the US, are well positioned to benefit. But the initiative must come from them.

China has proven that it is willing to invest wherever it stands to bene- fit. Within the Muslim world, Indonesia, Egypt and Algeria come to mind as potential beneficiaries.