Thursday 28 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly, on February 13 - 19, 2017.

 

Donald Trump’s ascent to the US presidency and his threat to repeal all trade agreements can no longer be regarded as an amusing aberration. In his inauguration speech, he presented himself as a leader who will shatter the “established order” and usher in a new era that will restore America’s greatness.

His protectionist policies have encouraged anti-globalisation movements across the globe, drawing more attention to the current state of American political culture and its perceived failures. No country has been spared his vitriolic threats of trade retaliation, including long-time US allies Japan, the European Union and South Korea, and his all-time favourite nemeses, Mexico and China.

The notion that the rest of the world had conspired to grab jobs from the US economy appears to resonate well with its populace, who are dismissing all theories of globalisation and a free market economy — the very policy that the US has been propagating for more than 70 years. But what will happen to the Asian economy, particularly emerging countries like Malaysia, if Trump fulfils his war drum promises?

Many analysts brushed aside his virulent speeches on the campaign trail as empty promises that simply could not be fulfilled once he assumed office — after all he was never a part of the political establishment. They argued that even past presidents like Ronald Reagan, who was able to galvanise voters with his anti-Japan speeches during his 1980s presidential campaign, were not able to deliver on promises of trade retaliation against Japan. So why is Trump any different?

Unfortunately, many have failed to see the dissimilarities between these two periods. Unlike in the 1980s, the US economy has never been threatened with a mammoth trading partner like China, which is similar in size to its own economy. Trump’s entire presidential campaign was mired in messianic threats of a doomsday calamity to the US economy, which he blamed on unfair trade practices emanating from “reckless” trade agreements, not only with China and the North American Free Trade Agreement, but from every agreement that the US has been involved in.

Clearly, US voters have provided Trump with a popular mandate to remove these “threats” and take the country back to its past glory at all costs — even he if he has to upset the world order by instituting protectionist trade measures to protect US interests.

Now he has to fulfil, at least partially, his centrepiece campaign promises, which if carried out will lead to an imminent trade war. One of his most perilous promises is to impose unilateral tariffs to reduce US dependency on imports. China, which is one of the largest exporters of goods to t he US, will be slapped with tariffs as high as 45%.

Presently, there is a huge imbalance of trade between China and the US. In 2015, China’s exports to the US were worth US$483 billion while US exports to China totalled US$116 billion, registering a surplus of US$367 billion in China’s favour. Most of the goods imported by the US are finished goods, for which China obtains the raw materials from other economies, like Malaysia.

Malaysia exports raw materials and finished goods to China, including wood products, palm oil, rubber and textiles as well as other oil and liquefied natural gas resources to support the republic’s primary industries. In total, Malaysia’s exports to China are worth US$24.76 billion (RM101.53 billion) or 13.1% of total exports while it imports US$31.55 billion (RM129.36) worth of products, thus registering a deficit of US$6.7 billion. Exports to Singapore are worth US$108.47 billion, of which the bulk is then re-exported to China. In total, almost 30% of Malaysia’s total exports are dependent on China’s economy.

In the event of a trade war between the US and China, Malaysia’s exports to both these countries will slump. Any retaliatory measures imposed by China against the US will have an adverse economic effect on Malaysia’s total export value. For example, a decline of 30% in Malaysia’s exports to China will effectively translate into a 10% reduction in its total exports because those to the US will also be affected.

A trade war would also result in more US restrictions on the transfer of technology to China — a vital ingredient that is fuelling the US economy — thus severely curtailing the republic’s ability to progress rapidly. Any slowdown in China’s economic growth could also affect its investments in Malaysia.

In the short term, Malaysia’s stock market will remain jittery with investors uncertain about Trump’s trade policies. The consequences will be a volatile market rather than a bearish one until more information is publicly available. The money market, particularly debt instruments like bonds and warrants, will remain precarious, although hedgers will probably reap substantial benefits from investors who seek coverage from risk.

In the medium term, Trump’s policy of reducing taxes and increasing spending on defence will push the US economy to a higher level of deficit as government spending increases. Trump’s policy of reducing American reliance on overseas manufacturers will not directly impact Malaysia’s total exports but will generate unemployment in the manufacturing sector, which accounts for almost 28.4% of the country’s total workforce. Statistically, the US is Malaysia’s fourth largest trading partner, with the former enjoying a huge current account surplus of about US$4.6 billion.

Even if there is no change in US trade policy, Trump’s inclination towards a radical monetary policy regime, as expressed during his campaign, will lead to a more regulated environment in the US that could stimulate growth but, to a larger extent, increase inflation. This will decrease the volume of exports, which will create a negative impact on many industrialising economies that are dependent on US products.

The alternative for Malaysia is to fall back on China should the US falter in its trade policies. Trump’s insistence on inclusiveness rather than a free market economy will inevitably create a retaliatory response from other Asia-Pacific countries, particularly Malaysia, which has already embraced China as an economic powerhouse whose political cycles are not subject to the quirks of US trade policies.

Trump’s pledge of protectionism is within the realm of possibility, and Malaysia and other Asian countries are being battered by this existential threat of uncertainty. Any US attempt to change the present rule-based trading regime will de­stabilise the global international trading system. Economically, Trump’s protectionist policies would create a destructive chain of events that would harm manufacturers from emerging markets like Malaysia and ultimately lead to trade wars.

Malaysia, and many other countries across the globe, would expect US trade policies to be rewritten by Trump’s administration at the expense of preserving jobs in the US market — ignoring the plight of millions of workers in the least developed economies who are still living in harsh poverty — even if the US is well aware that it could spell the end of neo-liberal global economic order after 70 years of economic progress and prosperity.

Meanwhile, Malaysia must brace itself for the worst-case scenario by formulating sound economic strategies to counteract the effects of any imminent global trade war between two of its largest trading partners.


Dr Hassan Ali lectures at the Faculty of Economic, Management and Sciences at the International Islamic University of Malaysia. He can be contacted at [email protected].

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