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Frictions in the global trade market

Frictions in the global trade market

The global trade market is rife with noise ranging from the possibility of a global trade war, trade disputes between major economies and regions, trade curbs to cap oversupply, and more.

While anti-trade or anti-globalisation moves are nothing new in the global trade market, for the last few years, more countries are implementing more policies and moves to increase trade barriers to counter what they see as ‘unfair trade’.

Perhaps events of 2016 in leading economic powerhouses triggeredthe challenges we see now in the global trade market.

From UK’s Brexit referendum meant to protect its trade and currency from being influenced by its connection to the European Union’s (EU) economy, to US’ call to ‘Make America Great Again’ by pushing the ‘Made in US’ campaign, the surge in anti-trade rhetoric around the world is now more prominent than before.

“In the face of concerns over unemployment and recession, governments are coming under pressure to implement protectionist policies and measures – including tariffs, quotas and various forms of subsidies – as a way of ‘saving’ domestic jobs and enterprises,” said the Organisation for Economic Co-Orperation and Development (OECD).

“However, such measures would be counter-productive. Direct trade-restricting measures have the most negative impacts on growth and employment,” it warned.

Ripple effect of impacts

Moody’s Investors Service recently said the series of wide-ranging protectionist trade policy decisions by US – and possible resulting retaliatory actions by other countries affected by these threats –  would leave a negative impact to Asian sovereigns and manufacturers, given the region’s trade-reliant industries and economies.

“Asia is exposed to unfavourable shifts in US trade policy because of its volume of direct exports to the US, and also because of intermediate trade activity through supply chains, most notably through Greater China.

“Moreover, policy actions by the US targeted at countries with which it has large bilateral trade deficits could negatively impact several other economies in the region, including Japan and Korea, as well as China.

“More broadly, a greater emphasis on bilateral – rather than multilateral – trading arrangements would be credit negative for Asia’s economies, in view of the benefits to the region from an open, rules-based regime of international trade,” it said.

As free trade agreements are renegotiated or aborted completely, and new tariffs are being imposed on imports, the global trade movement, particularly in major economies in Asia and Europe, are now wary of the developments in the overall global trade market.

Despite trade developments in US, for Malaysia, an open market and a country that is export-reliant, the nation continues to work on its trade networks with its trade partners across the Asean region.

During last year Asia-Pacific Economic Cooperation (APEC) CEO Summit, Prime Minister Datuk Seri Najib Tun Razak had stressed that globalisation was not a choice, nor something that the world could stay on the sidelines without the risk of being marginalised.

“As (a) major trading nation, we will benefit from an open and free-trade regime, we want to pursue that, we want to see reductions in tariff and non-tariff barriers,” he added.

With that, BizHive Weekly takes a look at this global phenomenon and what it means for Malaysia’s trade:

US’ import tariffs and what it means for Malaysia’s steel, aluminium trade

Earlier this month, US President Donald Trump surprised the global markets with his proposal to impose a 25 per cent tariff on steel imports and a 10 per cent tariff on aluminium imports, with exceptions for Canada and Mexico, into the US. Trump’s administrations’ reason for this was also to protect US’ national security.

Last month, the US Commerce Department has also recommended a much higher tariff of at least 53 per cent on steel and aluminium imports from 12 countries which include Malaysia, China, Brazil, Costa Rica, Egypt, India, Russia, South Korea, South Africa, Thailand, Turkey, and Vietnam.

The 10 per cent tariff on aluminium and 25 per cent tariff on steel imports are expected to go into effect after March 23.

According to Reuters, many trade experts view these tariffs as ‘safeguards’ – a type of emergency protection that is allowed if a sudden, unforeseen or damaging import surge threatens to damage a particular industry, rather than tariffs to protect US’ national security.

In whichever case, the proposal, when first announced, shook the global steel and aluminium markets.

For Malaysia, with US as one of its top trading partners, the nation’s market was also initially affected by this announcement, with its steel and aluminium stocks tracking downwards since early this month when Trump first hinted on these tariffs.

Affin Hwang Investment Bank Bhd’s vice president and head of Retail Research Datuk Dr Nazri Khan Adam told Bernama that Trump’s plans to impose the tariffs had triggered trade war worries involving major economies such as China and the European Union.

“Investors believed the move would have a spillover effect on emerging markets like Malaysia and turn away from the equity market,” he said.

Threat of oversupply possible

The move also threatens to leave the world facing the possibility of an oversupply in steel and aluminium as according to Reuters, US is the world’s top steel-buying nation, with a total import of steel at 35.7 million tonnes last year.

In a report, the research arm of AmBank (M) Bhd (AmBank Research) noted that it will also have some knock-on effects on steel-consuming industries based on the dynamics of these industries which are wide, although the direct effect of the tariffs accounts for just over two per cent.

“Although the direct effect of tariffs could be low since steel and aluminium products account for just over two per cent of overall imports, the knock-on impact on industries that use these products can be more significant based on the dynamics of the steel-consuming industries in US which are wide,” it explained.

It noted that some of the industries expected to be affected include those involved in the manufacturing sector such as fabricated metal products, machinery and equipment, transportation equipment and parts; chemical manufacturers; petroleum refiners and their contractors; tyre manufacturers; and non-residential construction companies.

“Small businesses which are price takers, implying they have no or little influence on the prices, will be the hardest hit,” it warned.

For now, the impact on Malaysia’s steel and aluminium industries remain unclear as developments in regards to this policy are still unfolding, with many global economic and trade agencies condemning the move.

Furthermore, negotiations are still being made between US and other major steel and aluminium exporting countries, particularly with its major allies in the European Union (EU) such as Germany.

AmBank Research opined, “We expect potential trade retaliation from the EU and other steel producers, thus heightening fears of a trade war.”

It also pointed out that it remains unclear as to whether the US will introduce a 53 per cent tariff on the 12 identified countries if it fails to meet the target of reducing 13.3 million metric tonnes on all steel product imports.

Nevertheless, it highlighted that the exposure of Malaysia’s exports of all steel products to the US is only around 0.3 per cent with an estimated potential loss of about 0.48 million metric tonnes to 0.49 million metric tonnes.

Second International Trade and Industry Minister Ong Ka Chuan had previously noted that of its total trade with US, steel and aluminium exports to US were only 0.2 per cent, with other exports being much higher at 55.4 per cent (RM49.14 billion) for electrical and electronic products, 6.9 per cent (RM6.11 billion) for rubber products, 6.3 per cent (RM5.5 billion) for optical and scientific equipment, 5.6 per cent (RM4.97 billion) for other manufacturing products, and four per cent (RM3.4 billion) for wood-based products.

However, AmBank Research stressed that the loss could be more if the US decides to impose the 53 per cent tariff on all imported steel products from selected countries which include Malaysia.

Effects fall like dominoes

Apart from import tariffs, Malaysia will also experience anti-dumping or counter-vailing duty collections applicable to any steel product.

“Should the US impose a 53 per cent tariff on all steel imports on these 12 countries, Malaysia’s exports to the US will drop sharply.

“From our computation, the total loss will be around 0.075 million or 75,000 metric tonnes to 0.021 million or 21,000 metric tonnes.

“In short, the impact on Malaysia’s import would be more severe should the US impose a tariff on the selected 12 countries where Malaysia is in the list as opposed to a blanket tariff on all the countries the US imports from.

“A drop in import volumes from the impact of selected tariff amounts to 0.075 million or 75,000 metric tonnes compared to the impact from across-the-board tariff which results in a loss of 0.048 million or 48,000 metric tonnes, implying an additional 27,000 tonnes.

On a positive note, AmBank Research also believed that if US does decide to impose the heavy tariff on nations such as China, Malaysia, and others, it could mean added pressure on the dollar as fleeting investments weigh down on the dollar.

“We expect the US dollar to weaken from the imposition of the tariffs. Tariffs tend to worsen the trade balance because import demand is less price sensitive in the short term or from the first-round effect of the tariffs.

“As such, demand will remain the same or drop only marginally while prices paid for imports will rise, thus hurting the trade balance. Based on the tariff structure (with only Mexico and Canada exempted), the US dollar should weaken to a low of 87.5 within the first month and 86.5 within the third month.

“In turn, the Malaysian ringgit should gain to around 3.87 within the first month and probably reach around 3.84 within the third month. Should the US decide to impose a tariff of 53 per cent on the selected 12 countries, the US dollar could reach around the 89 level in the first month and 88.6 in the third month while the ringgit should hover around 3.89 levels in the first month and possibly settle around 3.88 in the third month, given that Malaysia’s exposure to US steel imports is low,” the research team added.

On a closer look on how this policy might impact the equity market, AmBank Research noted that Malaysia could see some ‘knee-jerk’ effect when the tariffs come into place.

It explained, “For Malaysia, there could be some knee-jerk pressure on the KLCI mainly due to the influence of the steel prices. However, the appetite on MGS remains.”

Press Metal stays buoyed despite looming headwinds on the global field

For local listed aluminium company, Press Metal Aluminium Holdings Bhd (Press Metal), US’ steel and aluminium tariffs are not expected to make a huge impact on the company’s performance.

While its stock prices dipped to RM4.97 following news of Trump’s proposal to impose the tariffs on steel and aluminium imports earlier this month, it has since traded steadily between RM4.95 to RM5 per share.

Press Metal had remarked that its company exports a very minimal amount of its primary aluminium products to the US, including extrusion products. It also pointed out that its exposure to US’ market is less than one per cent of its total revenue.

“The consumption of primary aluminium in the US is almost six million tonnes in 2017, as compared to domestic production of close to one million tonne.

“Canada, Russia, and the Middle East are the top three exporters to the US constituting approximately 80 to 90 per cent of the US imports of primary aluminium,” it said, in a statement.

Meanwhile, the research arm of AmInvestment Bank Bhd (AmInvestment) highlighted that irrespective of whether the company exports its products to the US, Press Metal will still feel the impact of lower aluminium prices in the international market if the tariff takes effect.

However, it also pointed out that it remains positive on Press Metal’s prospects despite the imposition of the steel and aluminium tariffs by US.

“We continue to like Press Metal premised upon the positive price outlook for aluminium in the international market backed by supply constraints and strong demand from the automotive industry and infrastructure projects, its low cost structure compared to its peers owing to the cheap hydro power it has locked in over the long term, and its strong management as evidenced in its ability to bounce back quickly from major production disruptions in the past,” it opined.

Beyond US, Malaysia’s trading partners enhance ties

While US remains one of Malaysia’s top trading partners, encompassing 8.3 per cent of the nation’s total trade based on the Department of Statistics’ report in January 2018, there is a silver lining in the global trade landscape.

Within Asia, there is a rise in intra-regional trade, while more countries are joining in on regional trade agreements to bank in on the high demand and high output from the region as well as to reduce their dependencies on US’ trade.

“Amid all the rhetoric about protectionism, improving trade figures in Asia are a ray of hope for globalisation,” Deloitte Insights highlighted in its fourth quarter of 2017 (4Q17) Asia Pacific Economic Outlook report.

Across Asia Pacific, Deloitte Insights said the region saw growing export volumes, combined with an uptick in commodity prices, boosting export values for countries in the region, which, in turn, has aided their external balances.

“That augurs well for currencies in the region facing potential downside pressure from rising interest rate differentials with the US,” it said.

In the Asian region, it noted that the flow of goods and services has gone up sharply. It pointed out that the region had the highest share in its own exports, highlighting a strong rise in demand from within the region.

The report also noted that since the global downturn of 2008 to 2009, Asian exporters have increasingly turned to domestic consumers for growth and Asian households, in turn, delivered, with increasing affluence in emerging economies aiding spending.

For Malaysia, as an open market nation and as an economy that is highly dependant on trade, it is actively participating in global trade partnerships that could benefit its trade and overall economic growth.

To date, according to Malaysia has established various trade agreements with its trading partners, including seven bilateral free trade agreements (FTAs) with Japan, Pakistan, India, New Zealand, Chile, Australia and Turkey.

Within the Asean region, Malaysia has six regional FTAs under the Asean Free Trade Agreement (AFTA) and this includes countries such as China, Korea, Japan, Australia, New Zealand, and India.

Meanwhile, the wide-reaching Trans-Pacific Partnership (TPP) agreement, which was scrapped last year with the withdrawal of US’ participation in the negotiations, had been revived earlier this year, with the participation of the remaining 11 countries from the original TPP agreement.

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) consist of countries across the Pacific which includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

According to Moody’s Investors Service, the economic gains for members of the CPTPP will prove smaller without the participation of the US.

Based on a case study of the trade agreements, post-TPP without US, by Peterson Institute for International Economics (PIIE) in its ‘Going It Alone in the Asia-Pacific: Regional trade agreements without the US’ working paper, an 11-nation agreement generates a global income benefits of US$147 billion.

While it is far lower than what the TPP promises (a possible gain of US$492 billion in global income), Moody’s pointed out that the CPTPP trade deal will still boost exports and incomes for all members and help sustain reform efforts in a number of countries.

Moody’s noted that, compared with TPP, lost trade opportunities will be felt most in Vietnam, Malaysia, and Japan, because these countries stood to gain the most from greater access to the US market, given the scope of current trade agreements.

“Nevertheless, Malaysia will prove the biggest winner from the revised agreement, because the deal will provide export access into new markets, including Canada, Peru and Mexico; benefiting palm oil, rubber and electronics exporters,” it highlighted.

Trade stats so far

Last year, based on trade statistics compiled by Malaysia External Trade Development Corporation (Matrade), Malaysia’s largest exports products are electrical and electronic products which amounts to RM343 billion or 36.7 per cent of Malaysia’s total exports of RM935.39 billion in 2017.

Its palm oil exports totalled RM46.12 billion or 4.9 per cent of Malaysia’s total exports in 2017.

Currently, Malaysia’s trade into markets such as Canada, Peru and Mexico remains relatively low.

In 2017, based on trade figures from the Malaysian Department of Statistics, the country’s exports into Canada totalled to RM3.526 billion, while for Mexico, Malaysia’s total exports in 2017 were RM9.611 billion and to Peru, RM505.497 million.

According to the Federation of Malaysian Manufacturers (FMM), the CPTPP is expected to diversify manufactured product exports.

As over 80 per cent of Malaysian exports comprise of automotive parts, particularly rubber components, FMM expects Malaysia to enjoy duty free access immediately.

“This will help Malaysian parts and components manufacturers to export to global original equipment manufacturers (OEMs) located in CPTPP countries like Mexico and become part of the global supply chain,” the FMM told Bernama.

The federation said tariff concessions agreed to by each CPTPP country would boost exports for the electrical and electronics (E&E) industry which has been a key contributor to Malaysia’s export earnings.

It added that with CPTPP, Malaysia’s exports growth into other countries such as Canada and the Latin American countries, particularly Mexico could improve as these countries currently impose high tariffs for electrical appliances, telecommunication devices and consumer electronics.

“Given the continuous increase in demand of nitrile gloves in Canada, Malaysia’s participation in the CPTPP will give our glove manufacturers a competitive advantage over non-CPTPP countries such as China in such exports,” it added.

On the issue of reform, Moody’s noted that because the lower trade and non-trade barriers under CPTPP are conditional on country-specific reforms, the agreement would help sustain domestic reform momentum.

“The ongoing reform efforts should boost competitiveness and investment, and strengthen institutional quality over time for member nations. And, the benefits would be greatest for sovereigns with relatively low governance and competitiveness scores, such as Peru, Vietnam, Mexico and Brunei,” it said.

Expanding membership circles

If the CPTPP expands its membership to include other large Asian economies which have expressed interest in joining the deal – including Indonesia, Korea, the Philippines, Taiwan, and Thailand – Moody’s said real income gains for members would be much greater than the current CPTPP deal and higher than the original TPP pact, according to estimates from the PIIE.

Aside from the recently signed CPTPP, the Ministry of International Trade and Industry (Miti) also noted that it is now focusing on the Regional Comprehensive Economic Partnership (RCEP) which is a proposed FTA involving Asean, Australia, China, India, Japan, South Korea and New Zealand.

Overall, the global trade landscape, while riddled with ongoing disputes amongst large economies, remains steady as World Trade Organisation (WTO) had highlighted that global trade in goods is expected to continue growing above trend.

WTO economist Coleman Nee said trade disputes and international trade friction do not much affect the overall global trade picture as they tend to affect a particular sector in a particular country, and if one source of goods is restricted, importers often simply switch to alternative sources for the same goods.

Nevertheless, WTO noted that a very wide-ranging dispute or a tit-for-tat battle could still create uncertainty and sap economic growth, but that would be visible in a GDP slowdown rather than directly in trade statistics.

For Malaysia, it will continue to actively participate in global trade negotiations to embrace globalisation and expand its trade networks to enable its investors to gain greater access into the global market.

“Globalisation is not a choice, nor something that we can stay on the sideline without the risk of being marginalised.

“You have to embrace change, you have to confront it and take the challenge and make necessary policies and programmes.

“We see globalisation is good for us in Malaysia and the world. But you cannot allow it to be unbridled and ensure positive intervention,” Prime Minister Datuk Seri Najib Tun Razak said during a panel discussion at last year’s Asia-Pacific Economic Cooperation (APEC) CEO Summit.

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