Spectre of new US tariffs
Analysts expect worsening trade war to cause slowdown in the global economy
PETALING JAYA: The downside risks for global economic growth, particularly the emerging markets, have intensified after US president Donald Trump slapped a second round of tariffs on US$200bil worth of imports from China.
Analysts expected the worsening trade war between the United States and China to cause a sentiment shock and lead towards a slowdown in global economic growth.
According to Socio Economic Research Centre executive director Lee Heng Guie, the impact from the freshly-announced tariffs will be significantly more compared with the first round of trade tariffs, which was somewhat manageable.
“The negative effects may not be seen immediately, perhaps by end-2018 or beginning next year. But, the risks have elevated not only for the United States and China, but also globally.
“For Malaysia, the gross domestic product (GDP) growth in 2019 is likely to be slower than this year, on the back of worsening trade hostilities between the United States and China,” he told StarBiz yesterday.
AmBank Research chief economist Anthony Dass said it is “fairly tough to assess the effects of the recent tariffs on the economic growth of Malaysia as well as the rest of Asia”, pending the complete disclosure of the affected Chinese imports to the United States.
“However, the impact on GDP could be around 0.5%, with a discrepancy of around 10% to 20% more likely to be felt in 2019 than this year,” he said.
Dass anticipated the currencies of emerg- ing market economies, including the ringgit, to weaken further as a result of the trade war.
“The trade war threat is coming at a time where the emerging markets have been battered by capital outflows and in the process, weakening their currencies. Underpinned by uncertainties, volatility remains strong with risk of capital outflow and weakening currencies including the ringgit, high on the table,” he said.
On Monday, Trump announced additional 10% tariffs on US$200bil worth of imports from China, effective from Sept 24 until yearend. The rate will be hiked to 25%, starting from Jan 1, 2019
Although Trump has expressed hope for the trade war to be resolved, he also warned China that the United States would immediately pursue greater tariffs on US$267bil of additional imports, if China engages in retali- atory actions.
China and the United States have to date imposed tariffs on US$50bil worth of each country’s goods.
Trump’s tariff announcement turned Wall Street investors anxious as the Dow Jones Industrial Average fell by 0.35% on Monday. The S&P 500 lost 0.56% and the Nasdaq Composite dropped 1.43%.
In Asia, several bourses fell into the red territory yesterday.
Singapore’s Straits Times Index and Indonesia’s Jakarta Composite Index were down by 0.07% and 0.21% respectively. Taiwan’s Taiex was lower by 0.63%.
The FBM Kuala Lumpur Composite Index (FBM KLCI) dropped below 1,800 as investors turned jittery, reversing the sentiment gained
last Friday, spurred by the expected renewal of Sino-US trade talks
At the time of market closing, the index was down by 10.82 points or 0.6% to 1,792.94 points.
The market breadth was overwhelmingly negative, with 611 losers compared with 272 gainers.
A total of 317 counters were unchanged. Meanwhile, China’s Shanghai Composite Index was up 1.82%, while Hong Kong’s Hang Seng Index rose 0.56%.
Other regional stock exchanges namely Japan’s Nikkei 225, South Korea’s Kospi and the Stock Exchange of Thailand were up by 1.41%, 0.26% and 1.51% respectively.
Fortress Capital chief executive officer Thomas Yong expected the weak sentiment among the regional stock exchanges to continue, pending the conclusion of the US-China trade talks.
“Regional markets indices have been heading south in addition to the observed weaken- ing of currencies against the US dollar. In a way, capital markets have been pricing in negative development of the trade war.
“Despite that, the weak sentiment is likely to continue as investors assess the impact of the trade war to the regional economies in the coming months before re-entering the markets in a meaningful way.”
Yong added that his fund management firm would avoid investments in companies with exports to China, especially whose goods that are re-exported to the United States. This was primarily because of the trade war uncertainties and the complexity of global supply chain.
Meanwhile, Dass said China may try to delay any trade negotiations with the United States until the outcome of the US mid-term election.
“The outcome of the election is probably what China feels could provide it with the possibility of having a better edge to negotiate,” he said.
Pundits have raised concerns on whether China would be able to respond to the US trade tariffs at a similar momentum, given the former’s lower import volume.
In 2017, China’s import value from the United States was worth only US$187.5bil, while the United States imported US$522.9bil worth of goods from China. This means China’s ability to tax its imports from the United States will be limited.
Lee expected China to retaliate against the fresh round of tariffs although the country would likely continue its trade talks with the United States.
“Negotiating its way out of the trade situation is important for China. Otherwise, its exports will be significantly affected,” he said.
Dass pointed out that China’s high leverage, namely corporate debt at about 165% of GDP and household debt at about 55% of GDP, would be a key challenge for the country if the trade war continues.
“While China may have some room to retaliate against the United States, one should not be too complacent on the debt issue that might see them approaching the table to negotiate with the United States,” said Dass.