Malaysia’s trade positive in June but worries of Japan-South Korea trade war heighten

The Japan-S. Korea trade row could exert further downside pressure on weak regional trade momentum, particularly for the E&E supply chain, says RAM Ratings

by SHAZNI ONG/ pic by BLOOMBERG

MALAYSIA is expected to post a 1.1% expansion in trade for June compared to 2.5% in May, as the rising Japan-South Korea trade tension is fuelling concerns in a global economy that is already dented by the US-China trade war.

RAM Rating Services Bhd (RAM Ratings) said the slower growth in June was largely due to the Hari Raya festive holidays and a more subdued global trade.

“In line with its sustained export performance, imports are anticipated to increase by 1.6% in June compared to 1.4% in May. This will bring Malaysia’s overall trade surplus to RM5.7 billion at month-end,” the credit rating agency said in a statement.

RAM Ratings said the Japan-South Korea trade row would exert further downside pressure on weak regional trade momentum, particularly for the electrical and electronics (E&E) supply chain.

“This follows Japan’s decision to impose restrictions on exports of high-technology chemicals to South Korea (effective July 4). These items are vital to the production of semiconductors and display screens on smart devices — components of South Korea’s prominent E&E sector.

“Given Japan’s dominance in the supply of these high-technology materials (accounting for a reported 90% of global supply), this will likely exacerbate the already sluggish outlook on South Korea’s E&E exports,” the credit rating agency said.

RAM Ratings added that the direct impact on Malaysia’s exports from a potential shortfall in supply, as well as a potential loss in demand from South Korea appears limited as the former does not rely heavily on the latter’s E&E sector.

But the rating agency said Malaysia could be indirectly affected via a disrupted global E&E production chain.

RAM Ratings’ head of research Kristina Fong said the latest escalation in trade tensions between Japan and South Korea poses key downside risks to the global supply chain for E&E products, especially given the latter’s dominance in the supply of memory chips.

“South Korea accounted for 37.6% of global memory-chip exports in 2018. Although first-degree effects may not be significant for Malaysia, the potential over-arching supply bottlenecks for key inputs (such as these chips) in the short term may further stifle the tech cycle and retard the growth of the global E&E industry,” she said.

Fong said there may still be some room for trade-diversion benefits for Malaysia, in a bid to manage bottlenecks in the supply chain for inputs arising from export restrictions.

“Demand may be diverted to Malaysian firms. Global E&E players could also capitalise on the existing infrastructure and scale up their output capacity in Malaysia if they decide to diversify their production away from South Korea,” she said.