This article first appeared in The Edge Financial Daily on March 27, 2018

KUALA LUMPUR: UOB Malaysia expects the United States’ plan to impose up to US$60 billion RM234 billion) in tariffs on Chinese goods to have only a minimal impact on Malaysia.

The bank’s economist, Julia Goh, said it’s too early to say for certain what the exact impact will be until the US administration publishes the formal list of proposed tariffs within two weeks followed by a 60-day consultation period.

“For now the tariffs are quite uncertain. We have to wait for the details from the US government to see their opinion before we get greater clarity and details about what the real effect or the actual tariffs will be,” Goh told a media briefing yesterday.

“As there is still room for a negotiated solution, we do not think it is a serious threat at this juncture. Naturally, US trade measures to date are focused mainly on China, and Malaysia is not a direct target of the US tariffs,” she added.

Goh said that while the direct impact on Malaysia is seen to be quite minimal, the situation may change if trade tensions escalate.

This is because Malaysia’s trade exposure to both China and the US accounted for 25% of its total trade, she said, pointing out that Malaysia was impacted by Washington’s earlier move to impose tariffs on solar panels.

“Of course, solar panel is the area we have already been impacted due to the exposure we have, but [the effect from the tariffs imposed on steel and aluminium] was not so much given the relatively small volume of steel and aluminium exports,” she said.

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.

Meanwhile, 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 the US.

“I will be watchful of the recent tariffs the US has announced on China,” Goh said, cautioning that Malaysia could be part of the supply chain if the US imposed tariffs on machinery, electrical products and household goods from their 1,300 targeted product categories.

At the same time, Goh said exporting countries are usually caught in the middle if trade tensions escalate. No one is spared, especially the open Asian economies that are widely exposed to trade, she said.

“We think the use of levies and tariffs is mainly to gain leverage in negotiated talks,” she added.

US President Donald Trump said last week he will impose tariffs on US$50 billion to US$60 billion in Chinese imports, to counter alleged Chinese cyber and intellectual property theft of US technology.

Earlier this month, Trump slapped a 25% tariff on steel imports and 10% tariff on aluminium imports from China on the grounds of national security interests.

In 2017, China was Malaysia’s second-largest export destination, constituting 13.5% or RM126.2 billion of total exports, while the US was the third-largest export destination, accounting for 9.5% or RM88 billion of Malaysia’s total exports.

On the ringgit outlook, UOB Malaysia is maintaining its projection for the local currency to strengthen to 3.80 against the US dollar by year end, amid rising global trade tensions, supported by Malaysia’s strong economic fundamentals and the effective regulation of the onshore foreign exchange market.

Goh said growing tensions around the US trade tariffs may trigger renewed market volatility while the possibility of more rapid reduction of the US Federal Reserve’s balance sheet and a faster pace of interest rate rises in the US would probably put pressure on currency markets.

“The introduction of US trade tariffs and the possible proliferation of further protectionist trade policies could impact global export and trade activity. There is a risk that export-driven Asian economies could be negatively impacted by such trade policy revisions,” she said.

However, Goh expects the ringgit to be less susceptible to sharp spikes in volatility compared with other regional currencies as it is supported by favourable domestic growth drivers.

“Should regional currencies weaken against the US dollar, we expect the ringgit to experience some volatility in the near term but to perform better overall compared with other Asian currencies,” she said, stressing that the ringgit is still undervalued on a real effective exchange rate basis.

The ringgit strengthened to 3.8960 against the greenback yesterday.