Highlights

• In August 2017, the Trump administration launched a Section 301 investigation into Chinese trade practices. In its findings, the 2017 Report to Congress stated that after 2 decades of joining the World Trade Organisation (WTO), the Chinese government continues to undertake a wide array of interventionist policies and practices aimed at limiting market access for imported goods and services. At the same time, China provides substantial government assistance, resources and regulatory support to Chinese companies designed to extract advanced technologies from foreign companies.

• Hence, on 22 nd March 2018, the Trump administration announced that it intends to impose 25% tariffs on approximately USD60bn of Chinese goods. The proposed list will include aerospace, information and communication technology, as well as machinery. Bulk of which will be in the electrical and electronics sector (E&E). The USTR is expected to publish the final list of goods within 15 days of the President’s announcement and leave it open for public comment for 30 days thereafter.

• In 2017, US goods trade deficit with the world stood at US$792.6bn. Almost half of the deficit is accounted by US goods trade deficit with China at US$375bn (China entry into WTO at 2001: US$83bn). For comparison, US trade deficit with Malaysia was US$24.5bn, approximating 3% of US total deficit with the world.

• While US$60bn of Chinese goods are anticipated to be affected by the tariff measure, it only represents 2.8% of Chinese exports of US$2trn to the world. Hence, the impact to China’s GDP is not anticipated to be significant. However, much of the products that are imported from China are produced by multinational companies. Therefore, this anti trade measure is anticipated to affect other exporting countries to varying degrees, including Malaysia.

• Malaysia’s exports to China account for 13% of Malaysia’s total exports, with E&E exports to China accounting for smaller share of 6% of Malaysia’s total exports. Assuming Trump’s tariff measure to affect Malaysia’s intermediate exports through China, the overall impact is anticipated to be limited to 1-6% of Malaysia’s total exports.

• While President Trump’s current measures on Chinese goods is not expected to have a material impact on Malaysia’s trade, further escalation in trade tensions between US and China may have significant repercussions on global growth and trade which will affect Malaysia.

• As US and China make up 33% of global GDP, the risk of a global retaliation of trade war could negate and reverse the global recovery process. In the short term, the negative sentiment emanating from trade spat between US and China could lead to financial market volatility. For now, we maintain our projection for Malaysia’s GDP at 5.3% in 2018 and US$/MYR3.85-4.00 in 2018 barring any significant policy developments.

Source: Hong Leong Investment Bank Research - 27 Mar 2018