This article first appeared in The Edge Malaysia Weekly on March 12, 2018 - March 18, 2018

TRADE wars are good and easy to win,” tweeted US President Donald Trump recently in the run-up to the US’ proposal to impose tariffs of 25% on steel imports and 10% on aluminium imports.

Trump maintains that the tariffs are necessary to parry overseas operators, specifically the Chinese, who are undercutting American companies.

This move comes shortly after steep tariffs were imposed on imports of solar panels and washing machines in January.

However, the bigger concern is how other major trading partners will react to this fresh round of tariffs. Economists say the real threat is if these tariffs cause a retaliatory response from other countries, which could end up derailing the global economic recovery.

“With the global economy firming up and global trade gaining traction from a low trajectory, widespread protectionism accompanied by retaliation of trade measures of scalable magnitude between major global trading nations and impacting developing countries would hurt global trade and global economic growth,” says Socio-Economic Research Centre (SERC) executive director Lee Heng Guie.

While economists believe the situation will not escalate into a full-blown trade war as they expect measured and restrained responses from all the countries involved, news reports thus far have not been encouraging.

Last Wednesday, European Commissioner for Trade Cecilia Malmström said the EU was drawing up its own list of US products that may face its tariffs, and that these would include items such as whisky, peanut butter, cranberries and orange juice.

A day later, China Foreign Minister Wang Yi was reported as saying the country will respond as necessary in the event of a trade war with the US.

Nevertheless, Malmström has said the EU still hopes to avoid a full-scale trade war while Wang has warned that a trade war would harm all parties.

Maybank Investment Bank Research suggests in a report that the US may be using the import tariffs as a negotiation tool to achieve better and fairer deals and trade concessions.

“The affected countries may, at the very least and for a start, lodge complaints with the World Trade Organisation (WTO), challenging the US decisions. Alternatively, they may respond directly by imposing retaliatory tariffs on the imports of the same or similar products from the US or on other key or ‘strategic’ imports from the US,” says the report.

It is worth noting that the last time a trade war flared up was in the 1930s after President Herbert Hoover signed the Smoot-Hawley Tariff Act, raising close to 900 tariffs on more than 20,000 products. This caused other countries to retaliate, imposing tariffs on US exports and enacting protectionist policies.

While protectionism did not cause the Great Depression of the 1930s, many believe the higher trade barriers exacerbated the effects of the Great Depression and stalled economic recovery.

Global trade volume fell an estimated 25% between 1929 and 1933, half of which decline was blamed on the higher trade barriers.

“Tit-for-tat protectionism was a feature of the 1930s as countries sought to find ways of helping domestic manufacturers through the Great Depression,” says Lee.

The key concern about protectionism is that it does not encourage economic growth in the long run. The Organisation for Economic Co-operation and Development (OECD), which urges governments to resist calls for protectionism, says protectionist policies and measures as a means of saving jobs and enterprises are in fact counterproductive.

“Import barriers raise domestic prices through higher costs for intermediate inputs — and so export products also become more expensive and lose market share in the face of international competition,” it said.

Many also believe that protectionism will ultimately breed complacency among companies, which would impede innovation. However, some contend that it could work where national interests are concerned.

Minimal exposure to Trump’s tariffs

If only the tariffs on solar panels, aluminium and steel are considered, the impact appears minimal.

CIMB Research says in a report that it expects the spillover effects on Malaysia’s economy to be limited as the country’s steel and aluminium exports to the US of US$300 million in 2016 accounted for only 1.8% of total exports to America.

Malaysia is the largest exporter of solar cells and panels to the US, accounting for 24% of total US imports of the products last year. However, Malaysia may be exempted from the duties.

“On Feb 7 this year, the Minister of International Trade and Industry said Malaysia is not affected by US import duties on solar cells and panels as the two countries are currently in the midst of the Trade and Investment Framework Agreement (TIFA), which serves as an alternative route to a trade deal with the US after it pulled out of the Trans-Pacific Partnership (TPP). This suggests that countries that are pursuing bilateral trade deals with the US may be spared from its ‘protectionist’ trade policy,” Maybank Investment Bank Research says in a report.

What appears to be a more significant threat to Malaysia’s exports is the European Union’s plan to phase out palm oil in biodiesel by 2021. Of Malaysia’s total palm oil exports last year, those to the EU accounted for 12%.

“To mitigate the impact of lower palm oil exports to the EU, Malaysian producers must sell more to China and India as well as to markets in Asean such as Myanmar, the Philippines and Cambodia. It is heartening that China’s Ambassador to Malaysia, His Excellency Bai Tian, has said there is no limit on the purchase of palm oil from Malaysia, which makes up 9.7% of the country’s (total) palm oil exports,” says SERC’s Lee.

Likely to be affected by a trade war

Nevertheless, in the event of a global trade war, Malaysia will not be spared as exports are an important component of the local economy. China is Malaysia’s biggest trade partner, accounting for 12% of its exports. The US accounts for 9%.

United Overseas Bank (M) Bhd economist Julia Goh plans to monitor official statements, business confidence and sentiments to gauge how the trade situation will pan out.

But economists are not rushing to cut gross domestic product growth targets or export projections just yet.

“The local economy will not be spared totally from a possible global trade war, if it happens, as the country is dependent on external demand. We believe the growth momentum of the global economy will be affected, attributable partly to the negative impact of some disruptions to global trade,” says Affin Hwang Capital Research.

“Similarly, we don’t expect any emerging market to fully escape the effects of a global slowdown, financial market volatility and global sentiment on risk. We are maintaining Malaysia’s real GDP growth at 5.3% in 2018, supported by domestic demand, especially private consumption and investment (5.9% in 2017), but there will be some downside risk.”

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