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Frictions in global trade order – and what this spells for Malaysia
US’ trade protectionism agenda is causing more problems than solutions for many of its trade allies – and the rest of the world.
As one of the strongest and most influential economy, its new global trade policies and sanctions have rippled across the world, with its impact felt most by emerging markets (EM). Malaysia is not spared from this.
From heightened tariffs on products imported from China, Turkey, Canada and the European Union, into the US, to trade sanctions on Russia and other countries, the effects, while mild for Malaysia’s trade, could be felt in its equity markets from the fluctuation of foreign investments wary of the current changes in the global market.
Looking back at the start of this brewing storm, trade frictions first began when US President Donald Trump pledged to uphold the ‘Made in America’ movement as part of his election campaign by limiting imports into US and encouraging local manufacturers to return their operations into the US to improve job employment in the country.
Since coming into office, Trump has questioned ‘liberalised’ trade deals and the idea of ‘globalisation’ in the trade order. He has seen touted ‘ fairer trade deals’ by renegotiating several important trade agreements across the world.
This sparked a growing number of tit- for- tat measures thrown by other countries to counter US’ trade protectionism policies and subsequently, it has thrown the global markets into disarray as investors flee in favour of safer havens.
Analysts and economic experts have generally expressed concerns on this growing trade tension and have warned US’ government on the consequences of its trade policies.
“In the current economic environment characterised by subdued potential growth and anti-globalisation rhetoric, the risk of “beggar-thy-neighbour” trade policies has risen.
“This was highlighted by the recent failure of G20 economies to renew their long- standing commitment to free trade and pledge to resist all forms of protectionism at the last Finance Ministers meeting in March 2017.
“An increase in within-country income inequality during the period of rapid globalisation has fuelled an intense debate about the benefits of trade liberalisation and immigration in many advanced economies.
“Ongoing structural changes in the multilateral trading system and the international communities’ response to them will be crucial in shaping the future dynamics of trading relations.
“If these changes are accompanied by an upward spiral of beggar-thy-neighbour protectionist measures, they could result in the erosion of efforts during decades of trade liberalisation and the corrosion of the multilateral rules-based system that’s been under construction since the mid-1940s,” the World Bank Group had warned in its ‘The Global Costs of Protectionism’ research paper.
It added, “While politically attractive in the short run, protectionist measures can have large negative repercussions. Such an increase in global protectionism is likely to have wide-ranging, economy- wide consequences not only for consumers, but also producers (firms), government, investment and trade flows.” Undermining confidence, derailling growth
Echoing this, the International Monetary Fund (IMF) Economic Counsellor and director of Research Maurice Obstfeld in his address during the release of IMF’s ‘World Economic Outlook 2018’ report pointed out that the prospect of trade restrictions and counter-restrictions threatens to undermine confidence and derail global growth prematurely.
While some governments are pursuing substantial economic reforms, Obstfeld said trade disputes risk diverting others from the constructive steps they would need to take now to improve and secure growth prospects.
“That major economies are flirting with a trade war at a time of widespread economic expansion may seem paradoxical – especially when the expansion is so reliant on investment and trade.
“Particularly in advanced economies, however, public optimism about the benefits of economic integration has been eroded over time by long-standing trends of job and wage polarisation, coupled with persistent sub-par growth in median wages.
“Many households have seen little or no benefit from growth,” he said.
“Governments need to rise to the challenges of strengthening growth, spreading its benefits more widely, broadening economic opportunity through investments in people, and increasing workers’ sense of security in the face of impending technological changes that could radically transform the nature of work.
“Fights over trade distract from this vital agenda, rather than advancing it.”
Closer to home, EMs, including Malaysia, have likely benefitted the most from the trade hyper-globalisation seen before Trump’s era.
“The abundant and competitively priced labour supply in these countries, together with free trade, led to large foreign direct investment (FDI) inflows, allowing these countries to export their way up the development ladder,” Phillip Futures Sdn Bhd’s senior product specialist David Ng, said in a column to The Borneo Post.
However, he stressed, “Intuitively, this suggests that these countries should also be more vulnerable to a rise in protectionism.”
He added, “The fragile sentiment in EMs is underlined by the market response to the removal of steel and aluminium tariff exemptions for NAFTA partners and the EU.”
Ng further pointed out: “The main risk to the US and globally, in our view, is that individuals, businesses, and financial markets have underestimated the desire of the Trump administration to re-orient trade flows and that further steps to implement tariffs will lead to a reduction in confidence, a slowdown in hiring, and a correction in equity markets.”
With that, BizHive Weekly takes a look at the rising trade worries and how it affects Malaysia’s markets:
That major economies are flirting with a trade war at a time of widespread economic expansion may seem paradoxical – especially when the expansion is so reliant on investment and trade. e.
Maurice Obstfeld, IMF Economic Counsellor and director of Research