Published by EMIR Research, image from Free Malaysia Today.
Where do petty politics end and global politics begin? Many are yet to notice the impact of the US-China trade war on their daily lives, but at the macro level, the inability of two economic giants to resolve their issues raises concerns among analysts and governments. The immediate effects for other economies will be hard to gauge, but it is definitely already time to be concerned.
In interviews with foreign media, Malaysian International Trade and Industry Minister Darell Leiking argued that the US and China had a “global responsibility”, and should be mindful of how their trade relations – whether good or bad – affected others.
“Well, I think it’s true. I think the word ‘global responsibility’ – I think those are two nice words,” president Trump said, responding to the reporter when he invoked the comment by the “Malaysian trade minister”.
Indeed, ‘global responsibility’ remains precisely what Trump said – a pair of nice words, rather than an attitude that materializes into certain political considerations. A lot has been written on the topic with the same generalized conclusion that the trade war will affect not only the US and China, but the whole world, as sophisticated supply chains are involved in the matter. Financial markets felt the immediate impact, with the main indexes going down after the US announcement of the raise of tariffs to 25% for $200 billion worth of Chinese goods from 10 May.
For Malaysia, that was a moment of particular concern, as the recent Bloomberg report released in April named its stock market performance the worst for this year, as it slipped by 3.6%, while the FBM KLCI kept falling below the psychological minimum of 1600. With the latest announcement by Trump, the Malaysian stock market immediately fell by 1.8%.
This is in expectation of China retaliating with up to 25% tariffs on $60 billion worth of US imports to be implemented on 1 June, and the US government considering the increase of tariffs for the remaining amount of Chinese exports worth $300 billion. The two are hard at war and the truce is not on the horizon; this has been the new stressful normal for the past year.
As the author of Trumponomics Stephen Moore has put it – “the mutually assured destruction strategy” is at play and everybody will suffer, even though China would probably suffer three to four times more than the US. No wonder, in this harsh economic battle, smaller economies are seen from the perspective of being supportive or disruptive to any of the two powers, and not as independent actors to care about.
Looking beyond the stock market
Remarkably, the World Economic Forum Global Risks Report 2019 indicated economic confrontations between major powers as the most expected risk to increase this year (91% or respondents). This was naturally followed by the erosion of multilateral trading rules and agreements (88%) and then political friction between major powers (85%). Although the results are obtained based on threat perception, which might be subjective, the first half of 2019 proved those expectations to be just right. The media is fixated on the US-China trade war, despite being occasionally distracted by the outbreak of violence in Syria, the escalation of tensions in Persian Gulf, or the non-ending Brexit story.
What is more tangible and probably easier to spot in this process is how existing challenges affect efforts to protect global commons, which is important for every single member of the global community – for example tackling climate change or regulating cyberspace. When everybody is busy thinking forward about the next move in the trade war or how to mitigate its effects, the more fundamental issues remain largely sidelined. From time to time, Malaysia tries to draw attention to some global or regional common goods, and a tilt in the global agenda to a protracted economic war will definitely make its voice muffled.
Economists say that among the indirect implications of the trade war is a drop in investment due to an increase in uncertainty on future business conditions causing firms to ‘wait and see’. According to the simulations conducted by the World Bank, as well as the French Council of Economic Analysis and Paul Krugman, the high financial stress triggered by the trade war would reduce the level of global GDP by 2% on impact and by almost 3% after two years.
On the financial side, how significant are indicators of the stock market in analyzing the effects of the US-China trade war? The World Bank’s lead economist in Malaysia, Richard Record suggested that Malaysia focuses on fundamentals, which makes the country an attractive place for local and foreign investors, instead of stressing over Bloomberg assessments.
“Malaysia’s starting point is a very strong one. The economy is growing at a commendable rate, and we see solid foundations in terms of a diversified economy.”.
Therefore, a fixation on the financial market’s low performance at the moment would be counterproductive. Investment will grow with the overall economic growth and positive investment climate. Malaysia has enough of its own structural matters to attend to, for example diversification of the crops in the agricultural sector.
Effects on Southeast Asia
Economically, the impact of the US-China trade war on Malaysia and Southeast Asia is rather indirect and is going to affect not only stock markets, but interdependently, currency rates and national GDPs.
First, the fall of renminbi will be felt by the economies that export their goods to China, including Malaysia, for which China is the top export destination, as their products will become more expensive for a Chinese buyer.
Second, it remains to be seen how the oil price market is going to be affected. At some point, the prices stabilized due to OPEC’s promise to offset the cutting of Iranian oil from the market, but with further escalation in the Persian Gulf and the mysterious fire outbreak aboard several oil tankers in the UAE, the situation remains volatile. Saudi Arabia, the main US ally in the Middle East, is the second largest crude oil supplier to China – in case one wants to consider all the possible leverages at hand.
Third, it is about China’s place in the global supply chain. According to China’s customs, over 30 per cent of the country’s total exports in 2017 were processed and assembled products that incorporated other countries’ inputs and components, for electronics this share goes as high as 40%. This means that other countries in that supply chain used to make profits from products under the label “made in China” will feel the pinch, even though Malaysia would not be the most important among those.
Therefore, the decline in China’s exports to the US will cause the decline in its demand for components of the value-added chain among its partners. Economists named Singapore as the most exposed to the fallout, followed by Taiwan and then Malaysia.
On the bright side, tentative forecasts speak about businesses potentially shifting its manufacturing from China to Southeast Asia, Vietnam in particular, due to the low cost of land, labour and lower tariffs on imports to the US. At the same time, fast and painless relocation is a myth and will take time and certain resources to be accomplished.
Some, like CGS-CIMB, pointed at rubber gloves producers as potential beneficiaries of the trade war. Not only will the demand on Chinese nitrile and vinyl gloves fall due to the tariffs increase, thus increasing the chances for Malaysian products; but the weakening of the ringgit by every 1% as a result of the trade war will increase earnings of Malaysian glove manufacturers by 0.4% to 0.5% – 5 cents of positive news as uncertainty continues to unfold.
Anger management
WEF Global Risks Report 2019 re-examined the very concept of economic policy, which has been “long seen as a means of mitigating geopolitical risk by embedding powers in mutually beneficial relationships”, but “is now frequently seen as a tool of strategic competition”. For example, economic security is now regarded as a part of national security. Hence, the impact of the US-China trade war should be of concern to many governments which might be not involved in it directly.
Unfortunately for Malaysia, the US-China trade war can interfere with Pakatan Harapan’s plans to deliver on their election economic promises, and this makes the matter even more politically and emotionally charged.
With reference to Gallup’s research that concludes that anger became the emotion of zeitgeist, the WEF report points at complex transformations in social fabric, technology, work-related shifts that brought these conditions into being. Feeling a lack of control and uncertainty are taking over people’s lives. The increase in uncertainty that recalibration of the supply chains and reshuffling of investment brings will not be small, should the American-Chinese negotiations fail to achieve any settlement.
In the WEF survey, 59% of respondents said they expect risks associated with “public anger against elites” to increase in 2019. Given that evolution of the ongoing conflict into a full-blown trade war between China and the US is named the number one high impact risk for the global economy in 2019, the upcoming public anger might be well related with its indirect impacts on national economies.
For smaller nations who are not directly involved in the trade war, there might be some expected and unexpected gains, especially if further developments entail attempts to build alternative infrastructural and trade networks to debunk existing monopolies. This restructuring will probably bring about better multilateralism in the long-term.
However, in the short run, it promises stress, anger and uncertainty for many. The US and China might remain relatively unconcerned with the collateral damage, but others have to think for themselves – how can the modification of supply chains and diversification help achieve better resilience in future?
Julia Roknifard is Director of Foreign Policy at EMIR Research, an independent think-tank focused on strategic policy recommendations based upon rigorous research.
