CHINA-U.S. TRADE SPAT MAY AFFECT GDP GROWTH

Economist sees possible 1.3pc downside if tariff war escalates and shakes financial market sentiment

THE trade war between the United States and China may adversely impact Malaysia’s gross domestic product (GDP) growth by 1.3 per cent over the next two years. CIMB Group chief economist Dr Donald Hanna said this was possible if the trade tensions continued to escalate and shake the confidence of financial markets, especially if China sold its holdings of US Treasury securities.

“This would result in reductions of global trade that would affect Malaysia as an open economy and spiralling interest rates that may exacerbate the problem,” he said on the sidelines of the Asean Roundtable Series on “Trade War And Its Impact On Asean”, organised by CIMB Asean Research Institute (CARI), here, yesterday.

However, Hanna said the 1.3 per cent was only a possible downside and not the likely outcome.

The US has imposed a 25 per cent tariff on US$34 billion (RM139 billion) worth of Chinese goods, while duties on an additional US$16 billion of imports will kick in on August 23.

The US has also threatened a 25 per cent tariff on another US$200 billion of Chinese imports.

Hanna also cited possible impacts of the trade war on growth in other Asean countries, including Asean6 (-1.4 per cent), Indonesia (-1.6 per cent ) Singapore (-2.0 per cent) and Thailand (-1.2 per cent).

He said with the scale of retaliation, the worst might be yet to come, adding that higher tariffs would not only hurt growth in China and the US but also globally, should it escalate into a full-blown trade war.

Hanna said Asean would suffer mainly from financial effects, adding that trade diversions to the region were unlikely to outweigh sheer trade losses from higher US tariffs.

According to Hanna, the biggest impact would be in the electronics sector in Malaysia and Singapore, the food products sector in Indonesia, Malaysia and Thailand, as well as the wood products industry in Indonesia and Thailand.

“Due to the sheer magnitude of Singapore’s trade and the importance of its financial sector, the city-state could experience the largest hit to its GDP from a trade war, especially one that implies higher US bond prices.

“Indonesia would be the second-largest hit, hurt by its higher value-added share in China’s exports and trade deficit, and as 42 per cent of its domestic bonds held by foreigners,” he added.

Meanwhile, CARI chairman Tan Sri Munir Majid, in his opening remarks, said Asean member states usually responded to a trade war on an individual basis.

He said it was in the national interest to make Asean economic integration more real to position the region as a bedrock of future expansion and prosperity.

Investment flows must not be blocked and free trade must stand, said Munir.

This (escalating trade war) would result in reductions of global trade that would affect Malaysia as an open economy...

DR DONALD HANNA

CIMB Group chief economist