US tariff hike on China to impact certain sectors in SE Asia

In addition, the trade tensions could result in an increasingly fragmented global trading framework

by LYDIA NATHAN / pic by MUHD AMIN NAHARUL

SELECTED economic sectors in South-East Asia (SEA) are expected to be adversely affected by US President Donald Trump’s tariff increase to 25% on US$200 billion (RM832 billion) worth of Chinese goods that took effect last Friday.

Moody’s Investor Service Inc said the tariff hike is expected to exacerbate the global trading environment further, while raising more tensions between the two nations.

Moody’s MD and chief credit officer for Asia Pacific Michael Taylor said the higher tariffs could also lead to the repricing of risk assets, tighter financing conditions and slower global growth.

“In addition, the trade tensions could result in an increasingly fragmented global trading framework, weakening a rules-based system that has underpinned global growth, particularly in Asia, over the past several decades,” he said.

Taylor said the higher tariffs could have a significant negative effect for China, dampening the rest of Asia’s export-dependent economies.

“While we believe that a trade deal will eventually be reached between the US and China, the risk of a complete breakdown in trade talks has certainly increased,” Taylor said.

With China expected to retaliate, tensions between both sides will only escalate and further affect other countries across South-East Asia.

However, positive effects are also expected to be seen in certain business areas.

An economist told The Malaysian Reserve that the tariffs could benefit Malaysia in certain areas.

He said the previous tariff hikes that Trump imposed did result in the relocation of Chinese companies into other nations like Vietnam, Thailand and Malaysia.

“For example in 1997 and 1998, Malaysia was exporting parts from the electrical and electronics (E&E) sector to be assembled in China, and the growth was good,” the economist said.

A recent report stated that in the last five years, China and Hong Kong have been the largest export market for local electronic companies, with the value of shipments increasing 15.5% in 2017 to RM82 billion.

The economist said some of China’s lower value activities have been relocated to countries like Laos, Indonesia, Myanmar and the Philippines as well.

However, higher wages and increasing environmental regulations in China, combined with insecurities from the trade war, have further accelerated this trend.

“It is not particularly attractive for Chinese firms to relocate to western China because of the distance. Depending on products that move via flights but, for example, the export of clothing is by sea,” he said.

The economist said the tariff hike is possibly due to Trump’s effort to keep competition within the US and attract investments back to the country.

“Leveraging on the US as the biggest national market, the tariffs could attract investments for the country. It may also keep China at bay, but it is something that he will not succeed in holding China’s technological progress,” he added.

The economist said China has a lower consumption compared to investment, which allows the country to weather restrictions.

“Ultimately, the tariffs will be borne by consumers themselves, so we will have to watch and see. Firms that export to the US will have a bearing from the tariffs and will have to make a choice of relocating,” he said.

He said the countermeasures that China has talked about will have to be thought out carefully, so that the effect is minimal to them.

“China may go to the World Trade Organisation as they have a dispute settlement mechanism or China may even take action on their own. They will look at actions where the layers involved are with minimal effects to them because their goods will be impacted by the knock-down effects,” he said.

Meanwhile, Fitch Ratings Inc stated that the increased tariffs do not necessarily change the view on China’s sovereign rating as the 2019 growth target is reachable without the need to significantly step up stimulus efforts.

Fitch Ratings chief economist Brian Coulton said the current growth rate for China is expected to be maintained at 6.1%.

Coulton said the bigger concern is if a new tariff rate of 25% is imposed on the rest of US imports from China.

“That would be a much more material threat to China’s growth outlook, unless we saw some quite aggressive policy easing. It’s hard to overstate the impact of China on the global growth cycle — renewed weakening in China would rekindle financial market concerns about global growth risks,” he said.

Coulton added that there are some discussions on imposing the 25% tariff rate on the remaining portion of US imports from China which have yet to see new tariffs, though nothing official has been announced.