When 2 elephantine economies fight...
Will Malaysia be caught in the middle?
THE trade war between the world’s two largest economies is not showing any sign of stopping just yet.
US president Donald Trump initiated the trade confrontation by announcing additional 25% tariffs on Chinese imports worth US$50bil, citing China’s unfair trade advantage. In retaliation, China initially announced higher tariffs on US$3bil imports from the US, but later raised it to US$50bil.
Now, Trump has ordered his administration to consider imposing tariffs on an additional US$100bil of Chinese imports.
While it remains to be seen whether these tit-for-tat announcements will materialise or eventually fizzle out, economists and fund managers generally agree that the US-China trade fight will affect Malaysia’s local industries and several stocks on Bursa Malaysia.
However, they differ on the extent of the impct from the escalating trade war.
In an email interview with StarBizWeek, Asian Strategy and Leadership Institute research and business development director Lau Zheng Zhou says that Malaysia will be hit with losses in trade opportunities, as both the US and China constitute 25% of Malaysia’s total trade.
He points out that investors may adopt a “wait-and-see” approach, which could cause certain sectors to slow down and hence disrupt manufacturers’ resource planning and projection.
“As opposed to exporting finished goods, Malaysian exports have footprints along an extensive supply chains across sectors in Asia such as automobiles, electronics, oil and gas, and machinery.
“With heavy tariffs being imposed by the US, Malaysian firms will be slapped with rising input costs and therefore falling demand for their value-added component products.
“Our logistics sector may also be affected if global trade slows down.
“But China’s tariffs imposed on the US may not directly impact Malaysia as it is strategically designed to cause damage to the US agricultural producers,” he says.
On the other hand, Malayan Banking Bhd group chief economist Suhaimi Ilias indicates that the potential impact from the US-China trade spat is small, or only 0.3% of total trade value, at this juncture
However, greater risks could arise if the additional tariffs spill into services trade and investment.
“In any case, US tariffs on solar panels, steel and aluminum will have some impact on Malaysia but we understand that the International Trade and Industry Ministry is seeking exemptions for these since Malaysia is in talk with the US on the Trade and Investment Framework Agreement (TIFA) as an alternative following the US pulling out of the Trans-Pacific Partnership.
“Meanwhile, China’s tariffs on US products may result in some trade diversions or substitutions that may result in increase demand for Malaysian products from China, and one potential area is chemical or petrochemical products which is a major industry and export for Malaysia,” states Suhaimi.
Currently, the Trump administration has proposed a long list of 1,333 items, which would see the imposition of an additional 25% tariff.
These items include robotics, aircraft seats, machine parts, semiconductors, communication satellites and television components, among others.
It is worth noting that there will be 60 days of public review before the tariffs take effect. Observers believe both China and the US will re-negotiate their trade terms during this period in order to prevent a full-fledged trade war.
More items affected
In the event of the US government imposing tariffs on the additional US$100bil worth of Chinese imports as per Trump’s suggestion, more items will be affected.
China, on its part, has announced that it will slap a similar 25% additional tariff on 106 products from the US, which include soybean, automobiles, chemicals and aircraft.
According to Lau, China’s tariffs are well-targeted to hurt rural, agriculture-dependent communities who were big supporters of Trump during the 2016 presidential election.
Many companies in Malaysia have been involved in the export of raw materials and intermediate goods to China and the US, which are later re-packaged or used in the production of other finished goods.
These finished goods, in turn, are exported by both China and the US to one another as well as to other countries.
Indirectly, the Sino-US trade spat will affect these exporting companies from Malaysia.
Suhaimi calls for accommodative monetary policy and the implementations of major investment and infrastructure projects to buttress Malaysia’s economic activities, if the trade dispute continues to worsen.
Fund managers’ take
Fortress Capital chief executive officer Thomas Yong says that the Malaysian semiconductor sector will be most negatively affected due to the trade spat.
“This is because most semiconductor companies in Malaysia export intermediate semi-conductor components to end-product manufactures in the US, and a tariff on these end-products could indirectly lower the demand from these component players,” he says.
He cautions investors to monitor the ongoing trade war between the US and China closely.
“If the tariffs are implemented, the impact will be very detrimental to the ongoing global growth recovery.
“A trade war will negatively affect stock valuations all around the world,” he says.
Similar to Yong’s perspective, Areca Capital chief executive officer Danny Wong also reckons that export-based Malaysian businesses in the electrical and electronics domain could be affected, especially if their exposure to both China and the US is significantly large.
However, both fund managers believe that the Sino-US trade spat may not be entirely bad for companies in Malaysia.
Wong tells StarBizWeek that the US’ Federal Reserve (Fed) may take necessary actions to remedy any unwarranted implications to the economy.
“If the trade war continues to prolong and ultimately weigh down global growth and trade, it could affect the Fed’s future actions.
“Hence, there is a likelihood for the Fed to put the expected interest rate hikes on hold.
“In the event of such decision, dividend stocks in Bursa Malaysia will definitely benefit.
“On top of that, the real estate investment trust (REIT) stocks will also benefit from the situation, as Reits thrive in the low interest rate environment,” he says.
Meanwhile, Fortress Capital’s Yong adds that stocks related to palm oil production may also benefit from the trade spat.
“Since crude palm oil (CPO) is a substitute for soybean oil, the Chinese tariff on American soybeans can potentially allow China to substitute to CPO to meet their vegetable oil consumption needs, in turn supporting the demand and prices for CPO.
“As Malaysia and Indonesia both account for more than 80% of global palm oil supply, oil plantation companies from these two countries could potentially benefit from the much needed price boost amid the current soft CPO price.
“However, it remains uncertain if China will substitute all of the current soybean oil consumption to CPO, as there are quite a number of other vegetable oils available in the market,” he says.
Earlier, StarBiz reported that the American Malaysian Chamber of Commerce (Amcham) believes Malaysia may see an increased amount of foreign investments, particularly from the US, if the brewing trade war between the US and China escalates further.
Businesses from the US and other countries could make Malaysia an alternative regional production hub for several goods instead of China, to avoid the additional tariffs imposed by the US on products imported from China.
The additional 25% tariff levied on the imports from China would likely make Chinese goods pricier. Under such circumstances, global manufacturers may opt to establish their operations in Malaysia or outsource their production to a domestic company.
Commenting on whether the Sino-US trade war will place Malaysia as an alternative to China in the eyes of investors, Lau says it is not reasonable for investors to do so.
“However, the trade spat may rather increase foreign direct investments, especially from China, in industries with heavy use of steel and aluminium or value-added manufacturing of innovative consumer products.
“This can avoid a ban, restrictions or high tariffs on products which are associated with China,” he says.