This article first appeared in The Edge Financial Daily on July 4, 2019

KUALA LUMPUR: RAM Rating Services Bhd expects Malaysia’s trade growth to have gained more momentum in May despite the worsening US-China trade relations manifested by escalating import tariffs.

The rating agency said export growth is estimated at 4% in May, healthier than April’s 1.1%. This is partly attributable to the frontloading of shipments ahead of the Aidilfitri festive holidays in June, it said.

“Import growth is also estimated to rise to 6.8% in May (April: 4.4%), primarily due to low-base effects amid slower imports around the time of the 14th general election in May 2018,” RAM said in a statement.

Overall, Malaysia’s trade surplus is projected to come in at RM6.3 billion in May, said RAM.

RAM head of research Kristina Fong said although the recent meeting between US President Donald Trump and his Chinese counterpart Xi Jinping at the Group of Twenty summit led to a truce, uncertainties are set to continue given the lack of concrete details on resuming any trade negotiations.

“As such, the observable trade-diversion effects to date, in the form of diverted trade flows and FDI (foreign direct investments) flows, may even become more pronounced as this situation persists,” said Fong.

While the resumption of trade talks is a welcome development, the dispute has already disrupted global trade patterns as firms seek alternative sources of imports, said RAM.

“Analysing the import sources of the US and China in 4M (four months) 2018 and 4M2019, both countries’ shares of imports from each other have declined significantly. Over the same period, US imports from China shrank 2.6 percentage points while China’s proportion of imports from the US diminished 2.4 percentage points y-o-y (year-on-year),” it said.

However, import disruptions experienced by the US and China have yielded trade-diversion opportunities for major Asian economies.

RAM noted that Malaysia gained from the trade diversion, despite its relatively stable y-o-y share of exports to the US and China in 4M2019, as Malaysia’s diversified exports mask some trade-diversion benefits.

“The nation still chalked up gains in exports to both economic giants in terms of goods affected by their import tariffs, particularly Malaysia’s export of miscellaneous manufactured products to the US and mineral fuel to China,” it said.