US-China Trade Tussle & Impact On China And ASEAN After a one-year hiatus in 2017, US President Trump focused his policies on trade issues as he had pledged to make significant changes during his presidential election campaign. One of the cornerstones of Trump s trade focus is on China. While we believe that the current US-China trade tensions will NOT worsen to a point of no-return, our base case scenario (at 65% probability) is that after the tariffs imposed on the respective US$50bn of goods by US and China earlier, the additional tariffs for US$200bn of Chinese goods and US$60bn of US goods will also be imposed sometime in 4Q 2018, followed by long negotiation process into 2019 before reaching resolution. We expect global growth to be reduced by about 0.4ppt in 2019 while our growth forecasts for Asian economies have also been pared lower for next year as the impact broadens. We assume China s growth unchanged at 6.6% in 2018 and we lower GDP growth forecast by 0.3ppt to 6.3% in 2019. US trade protectionism was one of the key risks that the markets had feared when Donald Trump first got elected in late 2016. However, during 2017, his first year in office, with the exception of withdrawing US from the Trans-Pacific Partnership (TPP) trade deal, Trump largely focused on US domestic agenda and avoided foreign trade issues, which were a key area that he had vowed to make significant changes during his presidential election campaign. But it has been a very different 2nd year in office for Trump, where trade issues featured prominently. From imposing tariffs on steel and aluminum imports, to renegotiating existing trade agreements including the North American Free Trade Agreement (NAFTA) to US-EU agreement for tariff reduction negotiations to the on-going US-China trade tussle. Chart 1 shows a timeline how trade tensions between US and China escalated in 2018. 16
Chart 1: Key Timeline Of US-China Trade Tensions In 2018 Source: Media Reports, And while the US Treasury Secretary on 13 Sep has extended an invitation to China for yet another round of talks (the fifth round in 2018 so far) which was welcomed by the Chinese government and brought temporary relief to the financial markets, many in the financial markets are are skeptical that there will be a positive resolution in the US-China trade spat anytime soon, especially with Trump s subsequent tweet (13 Sep) that the US is under no pressure to make a deal with China, they are under pressure to make a deal with us. imposed sometime in 4Q 2018, followed by long negotiation process into 2019 before reaching resolution. We expect the aggregate impact of the trade measures to be felt more materially only in 2019, and we estimate it would reduce global growth by about 0.4 percentage point next year. Using IMF estimates of global growth at 3.9% in 2018 and 2019 (WEO, July 2018), Best Case we will expect 2019 growth to be reduce to 3.5%. We have also assigned a slightly higher probability (20%) to the worst case compared to the best case (15%) to reflect that risks are still skewed more to the downside for now. Please see the table for more details. Scenario Probability Impact on 2019 Global GDP Growth* China and done, leading to negotiations and resolution in early 2019 15% < -0.1ppt So far, China and US have fully implemented additional tariffs of 25% on US$50bn worth of goods from each other. That said, we believe that the current US- China trade tensions will NOT worsen to a point of no-return. Instead, our base case scenario (at 65% probability) is that after the tariffs imposed on the respective US$50bn of goods by US and China (in July & August 2018), the additional tariffs for US$200bn of Chinese goods and US$60bn of US goods will also be Base Case Worst Case China, additional tariffs for US$200bn of Chinese goods and US$60bn of US goods, followed by long negotiation process into 2019 before reaching resolution China, additional tariffs for US$200bn of Chinese goods and US$60bn of US goods, followed by escalating and sustained trade actions including blanket tariffs, restrictions on technology transfer & other measures * Estimates 65% ~ -0.4ppt 20% ~ -0.9ppt 17
Escalating trade protectionism between US and China, the two biggest economies in the world, will be undoubtedly negative for the global economy. But the conventional assumption that emerging market (EM) economies will be worse off than developed market (DM) economies because EM are more exposed to trade, may not be entirely accurate. This is deu to the maturity of the global supply chain over the past several decades of globalization and outsourcing. As Chart 2 shows, the top intermediate goods exporters to China include DM economies like South Korea and Switzerland as well as EM economies like South Africa and Chile, and ASEAN economies like Singapore and Thailand. Having said that, some ASEAN countries may benefit from initial impact of trade diversion to the region but second order effect from demand declines and slowdown in China and US could weigh on the outlook. We estimate that China and US contributed to 27% and 16% of global growth respectively in 2017. In addition, the increased trade and connectivity between ASEAN and China over the years does imply that the negative impact from US trade protectionism on China, will also be felt by ASEAN economies. The magnitude will likely vary, higher for trade-dependent economies like Singapore to lower from less trade-dependent economies like Indonesia. The US Is Not Done With Protectionist Measures On China Yet The trade data in July-August suggests that China has already started to divert away from US imports as seen in US products share of its total imports falling to around 7.1% in July-August from 8.1% in 1H18 and 8.4% last year. Meanwhile, China s exports to the US registered the fourth consecutive month of double-digit growth in August with export share maintaining at around 19% of China s total exports. The resilience of China s shipments to US could be supported by the strength in the US economy and also some frontloading before further tariffs are implemented. Thus, the negative trade developments have yet to show up on China s data. Chart 2: US-China Trade Tensions Will Affect A Mix of EM And DM economies Source: World Bank, Korea Japan Switzerland United States South Africa Germany Hong Kong Thailand Australia Chile Singapore India 0.7 0.1 0.4 0.8 0.3 2.6 2.8 3.6 3.0 3.8 4.9 5.4 Top Intermediate Goods Exporters To China (2016) 7.5 10.0 9.5 9.4 11.6 11.6 12.8 15.9 Intermediate goods exports to China (US$bn) Chart 3: ASEAN s Major Trading Partners (2017) % Share ASEAN: Share of Total Trade and Exports, 2017 25 22.9 23.6 20 15 10 5 0 17.1 14.2 11.8 10.1 10.7 9.1 ASEAN China Euro Area US Japan S.Korea Hong Kong Total trade 8.5 8.0 6.0 4.2 6.8 26.6 4.2 4.1 2.7 Exports Chart 4: ASEAN s Trading Trends With US, EU and China % Share of Total 25% 20% 15% 10% 5% % GDP 32.8 34.7 37.0 2.9 3.4 2.3 2.6 Taiwan India Australia 0% 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 United States European Union China+HK 18
However, given that the continuation of the tariff war will inevitably expose a greater share and amount of China s exports to tariffs compared to the US, there is certainly concerns that the impact will be significantly larger for China going forward. Former PBOC governor Zhou Xiaochuan claimed the impact will be at less than 0.5% of GDP even if the US imposes tariffs on all of Chinese goods, given the companies ability to re-route their exports over time and a series of fiscal and monetary policy measures undertaken by China since the middle of 2018. The caveat here is that the impact from the drop in sentiment is harder to estimate. To put this into perspectives, US market accounts for 19% of China s exports and assuming that around a fifth of these are lost as a result of the tariffs, the impact on total China s export will be around 3.8%, translating to a manageable impact on growth particularly if part of this can be offset by currency depreciation and an increase in China s export tax rebates. To be sure, China s growth is mainly driven by consumption and investment while net export of goods and services had contributed negatively to the GDP growth rates in the 1H18. Thus, the key avenues of damage to China s economy from the trade tensions will likely be on investment and consumption. We estimate that the indirect impact from loss in investments and consumption could amount to as much as 0.8% point to growth in 2019 but a more proactive fiscal and monetary policy can help to mitigate some of this impact. With our base-case assumption of tariffs on US$250 bn of Chinese goods for now, we assume China s growth at 6.6% in 2018 and we lower GDP growth forecast by 0.3ppt to 6.3% in 2019. Chart 5: US Widening Trade Gap With China Source: Macrobond, Chart 6: Telecomm, Computing and Electrical Goods Are Key US Imports From China Key US Imports From China 600 US$ bn 500 400 300 200 100 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 Others Apparel & Clothing Accessories Electrical Machinery, Apparatus & Appliance Miscellaneous Manufactured Articles Office Machinery & Automatic Data Processin Telecomm, Sound Record & Reproduce Equipment Chart 7: China s Consumption and Investment are Main Avenues of Impact From Trade War China: Contribution to GDP Growth (% point) 8.0 7.1 7.0 6.0 Impact On Selected Asian Economies Indonesia: Minimal Impact On Exports But Removal Of Indonesian Preferential Tariff Treatment The Main Risk Indonesia remains reliant on commodity exports revenue, dominated by mineral fuels and oils (including various ores of coal, aluminum, bauxite, copper, and nickel) and animal/vegetable oils 4.0 2.0 0.0-2.0 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Final Consumption Expenditure Gross Capital Formation Net Export of Goods and Service GDP Growth (RHS) 6.9 6.8 6.7 6.6 6.5 19
(including CPO) as well as rubber. Those 3 major items accounted for a significant 40% of total exports, valued at US$67.6bn in 2017. It is noted that most of Indonesia s natural resources exports are bound for the Chinese market and quite likely to intended for final consumption in China rather than as raw/intermediate products for re-exporting. Based on the list for the next potential large tariff on US$200bn worth of Chinese exports to the US, Indonesia could be more exposed in its footwear-related and apparel and clothing exports with a total exposure to the world s market of around US$9.1bn, predominantly exported to the USA (60% of total, or around US$5.5bn) while direct exposure to China is relatively small in 2017 at less than USD0.5bn mainly in footwear-related exports. The main risk to Indonesia, however, is that if the next big tariff imposition on the US$200bn on Chinese exports is accompanied by the removal of Indonesian preferential tariff treatment under the Generalized System of Preferences (GSP) and the Most Favoured Nation tariff treatment. Malaysia: Some Exports At Risk But Re-orientation Of Supply Chains Provide A Bright Spot Based on our preliminary estimates, the US-China trade dispute (US tariffs on US$250bn worth of Chinese products and China tariffs on USD50bn worth of US goods) could affect ~USD21bn of Malaysian exports directly and indirectly, which is equivalent to ~6%-7% of Malaysia s GDP. Exports of electrical machinery & equipment, mineral fuels & oils, rubber, plastics, and chemical products are among key items vulnerable to US-China trade tensions. However, there are silver linings as re-orientation of supply chains could bring more trade flows to Malaysia and other parts of the region. The International Trade and Industry Ministry of Malaysia said the ongoing US-China trade war has spurred increasing interest among foreign investors (i.e. China and Japan) to move their regional operations to Malaysia. Thailand: Near Term May See Some US And China Products Offloaded Into Thai Domestic Market With increasing global trade tensions, Thailand is likely to be affected although the impact should be limited for now. In the short term, some products of both the US and China would be diverted into Thailand, resulting in stiffer competition with Thai domestic productsand producers. Nonetheless, Thai food exports such as cassava chips, soybean, seafood, processed food and frozen food may benefit from the US-China trade tension. The impact of the possible US tariffs on China high-tech goods should be limited for Thailand since the linkage of Thailand s supply chain to high-tech exports of China is relatively minimal. Moreover, Thai exports of electrical products to China are mainly for domestic consumption. The Ministry of Commerce targets export expansion of 9% this year (from the previous forecast of 8%), after a 9.9% rise last year. 20