Singapore could be the first casualty of a looming global trade war
In March. US President Donald Trump issued hefty tariffs of 25% on steel and
10% aluminium imports that raised the possibility of a trade war should other countries raise their own rates in retaliation. As a heavily export-dependent economy, Singapore stands to lose as much as $22b in the case of a full-blown trade war which could smash financial markets and hit domestic manufacturing sectors in the citystate, according to analysts.
“Trade war could trigger the risk of a recession. Risk assets will likely to be depressed for an extended period, until a ceasefire is reached, and typically when the economic losses are significant for all parties involved,” Bank of Singapore senior investment strategist James Cheo said in a report.
The city’s promising growth prospects are also marred by the possibility of a global trade war, which was revealed by the Monetary Authority of Singapore (MAS) in its survey of professional forecasters.
“The possibility of a global trade war scenario present significant concerns for a large proportion, or 88%, of respondents. This is more than double that in the December survey,” MAS noted.
However, such a massive loss would only occur in the worst case scenario, said
Sian Fenner, lead economist at Oxford Economics. In an interview with Singapore Business Review, she noted that this would only occur if the Western superpower defaults on its trade obligations and pulls out of the North American Free Trade Agreement and imposes blanket trade tariffs on China, South Korea and Taiwan, prompting the countries to retaliate.
“This would hit world trade and global financial markets adversely affecting Singapore’s domestic manufacturing sectors and export-dependent services such as transport and storage,” said Fenner.
Worst case scenario
This could lead to as much as $22b loss in end-2019 GDP to the extent that the the central bank would have to intervene to avoid subsequent market shocks. “In the event that this worse scenario played out the MAS could loosen monetary policy by adopting a depreciation bias or at the very least maintain its current zero appreciation bias in SG$NEER into 2020,” she added
Against this bleak outlook, economic growth will inevitably slow down to 1.8% in 2019 from 3.6% in 2017 because even if tariffs are not imposed directly on Singapore, exports would still reel from lower Chinese and regional trade.
“Being a small, open, and trade dependent economy, Singapore will likely be negatively affected should a trade war erupt. This could weigh on exports, with exports accounting for a significant part of the economy of 173% of GDP in 2017,” Chia Shuhui, senior analyst at BMI Research.
Alicia Garcia Herrero, chief economist at Natixis echoes this sentiment, “Although the directed impact on Singapore maybe more muted thanks to FTA, the reality is that Singapore is really an entrepot so it is affected by reduction in demand for goods of neighbouring countries. In addition, the war that the US is conducting is not only a trade war but also an investment word (Broadcom has become one of the first victims) as well as currency war, talking down the USD.” However, Fenner noted that the likelihood of such an extreme scenario remains low, estimating the probability of a full-blown trade war at only 12%.
Singapore stands to lose as much as $22b in the case of a full-blown trade war