Frictions in the global trade market

The global trade market is rife with noise ranging from the possibility of a global trade war, trade disputes between major economies and regions, trade curbs to cap oversupply, and more.

While anti-trade or anti-globalisation moves are nothing new in the global trade market, for the last few years, more countries are implementing more policies and moves to increase trade barriers to counter what they see as ‘unfair trade’.

Perhaps events of 2016 in leading economic powerhouses triggeredthe challenges we see now in the global trade market.

From UK’s Brexit referendum meant to protect its trade and currency from being influenced by its connection to the European Union’s (EU) economy, to US’ call to ‘Make America Great Again’ by pushing the ‘ Made in US’ campaign, the surge in anti-trade rhetoric around the world is now more prominent than before.

“In the face of concerns over unemployment and recession, governments are coming under pressure to implement protectionist policies and measures – including tariffs, quotas and various forms of subsidies – as a way of ‘saving’ domestic jobs and enterprises,” said the Organisation for Economic Co-Orperation and Development (OECD).

“However, such measures would be counter- productive. Direct trade-restricting measures have the most negative impacts on growth and employment,” it warned.

Ripple effect of impacts

Moody’s Investors Service recently said the series of wideranging protectionist trade policy decisions by US – and possible resulting retaliatory actions by other countries affected by these threats – would leave a negative impact to Asian sovereigns and manufacturers, given the region’s trade-reliant industries and economies.

“Asia is exposed to unfavourable shifts in US trade policy because of its volume of direct exports to the US, and also because of intermediate trade activity through supply chains, most notably through Greater China.

“Moreover, policy actions by the US targeted at countries with which it has large bilateral trade deficits could negatively impact several other economies in the region, including Japan and Korea, as well as China.

“More broadly, a greater emphasis on bilateral – rather than multilateral – trading arrangements would be credit negative for Asia’s economies, in view of the benefits to the region from an open, rules-based regime of international trade,” it said.

As free trade agreements are renegotiated or aborted completely, and new tariffs are being imposed on imports, the global trade movement, particularly in major economies in Asia and Europe, are now wary of the developments in the overall global trade market.

Despite trade developments in US, for Malaysia, an open market and a country that is export-reliant, the nation continues to work on its trade networks with its trade partners across the Asean region.

During last year Asia-Pacific Economic Cooperation (APEC) CEO Summit, Prime Minister Datuk Seri Najib Tun Razak had stressed that globalisation was not a choice, nor something that the world could stay on the sidelines without the risk of being marginalised.

“As (a) major trading nation, we will benefit from an open and freetrade regime, we want to pursue that, we want to see reductions in tariff and non-tariff barriers,” he added.

With that, BizHive Weekly takes a look at this global phenomenon and what it means for Malaysia’s trade:

Earlier this month, US President Donald Trump surprised the global markets with his proposal to impose a 25 per cent tariff on steel imports and a 10 per cent tariff on aluminium imports, with exceptions for Canada and Mexico, into the US. Trump’s administrations’ reason for this was also to protect US’ national security.

Last month, the US Commerce Department has also recommended a much higher tariff of at least 53 per cent on steel and aluminium imports from 12 countries which include Malaysia, China, Brazil, Costa Rica, Egypt, India, Russia, South Korea, South Africa, Thailand, Turkey, and Vietnam.

The 10 per cent tariff on aluminium and 25 per cent tariff on steel imports are expected to go into effect after March 23.

According to Reuters, many trade experts view these tariffs as ‘safeguards’ – a type of emergency protection that is allowed if a sudden, unforeseen or damaging import surge threatens to damage a particular industry, rather than tariffs to protect US’ national security.

In whichever case, the proposal, when first announced, shook the global steel and aluminium markets.

For Malaysia, with US as one of its top trading partners, the nation’s market was also initially affected by this announcement, with its steel and aluminium stocks tracking downwards since early this month when Trump first hinted on these tariffs.

Affin Hwang Investment Bank Bhd’s vice president and head of Retail Research Datuk Dr Nazri Khan Adam told Bernama that Trump’s plans to impose the tariffs had triggered trade war wor- ries involving major economies such as China and the European Union.

“Investors believed the move would have a spillover effect on emerging markets like Malaysia and turn away from the equity market,” he said.

Threat of oversupply possible

The move also threatens to leave the world facing the possibility of an oversupply in steel and aluminium as according to Reuters, US is the world’s top steel-buying nation, with a total import of steel at 35.7 million tonnes last year.

In a report, the research arm of AmBank (M) Bhd (AmBank Research) noted that it will also have some knock-on effects on steel-consuming industries based on the dynamics of these industries which are wide, although the direct effect of the tariffs accounts for just over two per cent.

“Although the direct effect of tariffs could be low since steel and aluminium products account for just over two per cent of overall imports, the knock-on impact on industries that use these products can be more significant based on the dynamics of the steel-consuming industries in US which are wide,” it explained.

It noted that some of the industries expected to be affected include those involved in the manufacturing sector such as fabricated metal products, machinery and equipment, transportation equipment and parts; chemical manufacturers; petroleum refiners and their contractors; tyre manufacturers; and non-residential construction companies.

“Small businesses which are price takers, implying they have no or little influence on the prices, will be the hardest hit,” it warned.

For now, the impact on Malaysia’s steel and aluminium industries remain unclear as developments in regards to this policy are still unfolding, with many global economic and trade agencies condemning the move.

Furthermore, negotiations are still being made between US and other major steel and aluminium exporting countries, particularly with its major allies in the European Union (EU) such as Germany.

AmBank Research opined, “We expect potential trade retaliation from the EU and other steel producers, thus heightening fears of a trade war.”

It also pointed out that it remains unclear as to whether the US will introduce a 53 per cent tariff on the 12 identified countries if it fails to meet the target of reducing 13.3 million metric tonnes on all steel product imports.

Nevertheless, it highlighted that the exposure of Malaysia’s exports of all steel products to the US is only around 0.3 per cent with an estimated potential loss of about 0.48 million metric tonnes to 0.49 million metric tonnes.

Second International Trade and Industry Minister Ong Ka Chuan had previously noted that of its total trade with US, steel and aluminium exports to US were only 0.2 per cent, with other exports being much higher at 55.4 per cent (RM49.14 billion) for electrical and electronic products, 6.9 per cent (RM6.11 billion) for rubber products, 6.3 per cent (RM5.5 billion) for optical and scientific equipment, 5.6 per cent (RM4.97 billion) for other manufacturing products, and four per cent (RM3.4 billion) for wood-based products.

However, AmBank Research stressed that the loss could be more if the US decides to impose the 53 per cent tariff on all imported steel products from selected countries which include Malaysia.

Effects fall like dominoes

Apart from import tariffs, Malaysia will also experience anti-dumping or counter-vailing duty collections applicable to any steel product.

“Should the US impose a 53 per cent tariff on all steel imports on these 12 countries, Malaysia’s exports to the US will drop sharply.

“From our computation, the total loss will be around 0.075 million or 75,000 metric tonnes to 0.021 million or 21,000 metric tonnes.

“In short, the impact on Malaysia’s import would be more severe should the US impose a tariff on the selected 12 countries where Malaysia is in the list as opposed to a blanket tariff on all the countries the US imports from.

“A drop in import volumes from the impact of selected tariff amounts to 0.075 million or 75,000 metric tonnes compared to the impact from across- the- board tariff which results in a loss of 0.048 million or 48,000 metric tonnes, implying an additional 27,000 tonnes.

On a positive note, AmBank Research also believed that if US does decide to impose the heavy tariff on nations such as China, Malaysia, and others, it could mean added pressure on the dollar as fleeting investments weigh down on the dollar.

“We expect the US dollar to weaken from the imposition of the tariffs. Tariffs tend to worsen the trade balance because import demand is less price sensitive in the short term or from the firstround effect of the tariffs.

“As such, demand will remain the same or drop only marginally while prices paid for imports will rise, thus hurting the trade balance. Based on the tariff structure (with only Mexico and Canada