China said it could impose 25% tariffs on 106 US products worth USD50bn, in direct retaliation to the USD50bn worth of Chinese goods the US is targeting. No date has been set for the implementation. While the impact to US is manageable at 0.3% of total GDP, the swiftness and aggressiveness of China’s move heightens concerns of a tit-for-tat trade war between the two major economies. On China, it may face higher consumer prices should input costs increase. Impact to Malaysia is anticipated to be modest as up to 6% of total exports could be affected. In the short-term, global financial markets are expected to be volatile due to policy uncertainty. Maintain our GDP forecast at 5.3% and USD/MYR projection at 3.85-4.00 barring significant developments.

China retaliates. In less than twenty-four hours after US unveiled a list of Chinese imports that the administration aims to target, the Chinese authorities swiftly retaliated with 25% tariff on US goods with a trade value matching the USD50bn targeted by the US. The swiftness and severity of China’s move heightens global concerns of a tit-for tat trade war between the two largest economies. However, China did not specify the effective implementation date but said that it would depend on talks with the US. In addition, Chinese Finance Vice Minister Zhu Guangyao also said there is room for negotiation with the US.

Impacting over 1/3 rd of US exports to China. The affected goods account for 38% of US exports to China and is seen to be more targeted as it focuses on 106 products as opposed to US list of 1300 products. Products also include politically sensitive goods such as soybeans, wheat, corn, passenger vehicles and certain aircrafts. Of significance, China is the world’s largest soybean importer and biggest buyer from the US with trade equivalent to USD12bn in 2017.

Implications to US. While the additional tariff affects 38% of US exports to China, it is equivalent to 0.3% of US GDP. Nevertheless, there will be impact on the affected sectors, such as agriculture and transportation as China may seek alternative country sources for these products. In turn, this could affect employment and consumption which account for 70% of US GDP. If the situation escalates, this may complicate monetary policy decisions in the US.

Implications to China. China may face higher consumer prices should input costs increase (e.g. pork prices). Nevertheless, the moderation in China’s producer price may negate some of the price pressures. Alternatively, China may divert its demand of the targeted products to other importers. For example, car demand from the US could shift to Germany and Spain while China’s soybean demand could deviate to Brazil and Argentina.

What this means for Malaysia. On Malaysia’s front, the impact is expected to be modest as up to 6% of Malaysia’s exports could be negatively affected through intermediate exports through the US. In the short term, the negative sentiment emanating from trade spat between US and China could lead to financial market volatility and capital reversals from emerging economies. For now, we maintain our projection for Malaysia’s GDP at 5.3% in 2018 and USD/MYR 3.85-4.00 in 2018 barring further significant policy developments.

Source: Hong Leong Investment Bank Research - 5 Apr 2018