Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on December 10, 2018 - December 16, 2018

WHILE the announcement last week that the US and China have agreed to suspend a proposed Jan 1 tariff hike on Chinese imports comes as a great relief, many feel that the reprieve will only prolong the uncertainties in global trade and investment flow as there is no guarantee that the two sides will reach a compromise within the given time.

“Although the US-Sino trade truce for 90 days provides a temporary respite to global financial markets, it prolongs uncertainty as to whether the two sides will resolve the trade dispute within the said period,” says Lee Heng Guie, an economist and executive director with think tank SERC Sdn Bhd.

“The devil is in the details. The contentious ones on the negotiation table are forced technology transfer, intellectual property rights and cyber intrusion, and non-tariff barriers.”

A ceasefire has been achieved, at least for now, after the heads of state of China and the US agreed to a concession and to get back to the negotiating table to find a solution to their dispute.

US President Donald Trump has agreed to put on hold for 90 days his plan to increase tariffs on US$200 billion worth of Chinese imports to 25% starting January while his counterpart Xi Jinping has agreed to buy a substantial amount of goods from the US.

The US claimed not only that it had suffered between US$225 billion and US$500 billion of intellectual property theft a year but also that China had forced American technology companies to transfer intellectual properties and patents to get access to its large domestic market.

Under its Made-in-China 2025 strategy, China set out to become a major competitor in advanced manufacturing in order to move up the value chain and avoid getting trapped in middle-income status for long.

Made-in-China was revealed in 2015 and aims to increase the domestic content of core components and materials to 40% by 2020 and 70% by 2025. Although it is targeted at industries at large, it has 10 priority sectors, including aerospace, maritime, biopharma and agriculture.

“The truce between the US and China to halt a further escalation in tariffs is an encouraging development. It opens the door for negotiations over 90 days. However, we expect the talks to be fraught with difficulties and uncertainty,” says Julia Goh, senior economist (Malaysia) and senior vice-president of global economics and market research at United Overseas Bank (Malaysia) Bhd, in an email response to questions from The Edge.

“It is unlikely that China will make major concessions on its Made-in-China 2025 blueprint — a key point of contention for the US — given its aspirations and capability.”

In fact, the arrest of Huawei’s chief financial officer Meng Wan Zhou in Canada last week at the request of US authorities could threaten the fragile truce.

The trade dispute between the world’s top two economies has been ongoing since January this year with the US firing the first salvo by imposing tariffs on imported washing machines and solar modules and cells, widely seen as targeting those from China.

The trade war officially started when the Trump administration imposed a 25% tariff on US$50 billion worth of goods from China in July. Then in September, the White House imposed a 10% tariff on US$200 billion worth of goods from China, threatening to increase it to 25% come 2019.

China retaliated by imposing its own tariff barriers on goods from the US, targeting those produced in regions that supported Trump in the 2016 presidency election. Some US$110 billion of American goods have been hit by Chinese tariffs.

An all-out trade war will be devastating to the world economy as it will disrupt global supply chains. Often, China-made goods use parts made in other parts of Asia and raw materials from the Middle East, Australia, Africa and elsewhere.

In the meantime, the ongoing trade dispute has led to economists slashing their global growth forecasts. According to Sunway University Business School economics professor Dr Yeah Kim Leng, Malaysia’s growth may drop below 4% next year and in 2020 if the trade war escalates. By comparison, the government and the World Bank have forecast growth of 4.9% and 4.7% for 2019.

A full-blown US-China trade conflict will result in a global economic slowdown of between one and two percentage points, and in a big reduction in demand for Malaysian products, says Yeah in an email response to The Edge’s questions.

“The external shock to the Malaysian economy will be significant in dampening output and investment through trade and financial channels. Malaysia’s GDP growth may then dip below 4% on account of the trade shock,” he explains.

However, the negative outcome may be mitigated, to some extent, by trade diversion and investment relocation from both China and the US, Yeah adds.

Some economists opine that one of the ways global manufacturers can tackle the trade war is through a “China plus one” strategy. “One” here means another country where companies with production facilities in China have a back-up production site.

Malaysia is said to be one of the countries considered by global manufacturers to supplement their China production sites, alongside Thailand, Vietnam, Singapore, India and the Philippines.

A report by Nomura Global Markets Research says Malaysia is at the top of a list of countries that could benefit from the trade war with industries involved in electronic integrated circuits, liquefied natural gas and communication apparatus expected to gain the most.

However, the benefits might not come directly to Malaysian manufacturers. There is still work to be done to ensure Malaysian-made goods are competitive with those produced outside China and the US.

Yeah points out that while there are opportunities to substitute China-made products in the US market and vice versa, Malaysian manufacturers must prove that they are able to produce competing goods.

“Industries that are engaged in the supply chains to the US and China will need to find alternative markets or face tougher conditions as the prices of their end products increase due to the tariffs,” he says.

Lee of SERC concurs, saying that Malaysian companies need to move up the value chain, diversify their products and markets as well as build competitive niches in newer markets in order to benefit from any level of disruption to global trade flow.

“The SMEs must continue to strengthen their digitalisation and industrial capacity in the global value chains. The government must proactively pursue multilateral and bilateral trade pacts to widen our markets,” he adds.

 

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