President Trump Announced US Will Impose Steel and Aluminium Tariffs

There are two events this week that will have negative and positive implications on the global trade front. First, President Donald Trump, which earlier announced that the US will impose 25% tariffs on steel imports and 10% on aluminium, would likely formally be signed this week. Second, the remaining members of the old Trans-Pacific Partnership (TPP) agreed to a revised trade agreement that will go ahead without the US, where the new Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will be signed on 8th March 2018 in Santiago, Chile. On the US tariffs, International Monetary Fund (IMF) recently cautioned that the import restrictions announced, if signed and implemented, are likely to cause negative implications, not only outside the US, but also to the US economy itself, including to its manufacturing and construction sectors, which are major users of aluminium and steel. IMF also noted that “measures proposed by the US will, de facto, expand the circumstances where countries use the national-security rationale to justify broad-based import restrictions,” indicating that the trade restrictions could lead to other countries retaliating and imposing taxes on imported American goods, that could potentially lead to a global trade war. The Trump administration has also used the provision to impose tariffs on imported solar panels and washing machines in January 2018, see Fig 1.

Tariff Decision Was After Investigation by US Department of Commerce

On 16th February 2018, US Department of Commerce published its reports on the effect of imports of steel and aluminium on US national security. The reports highlighted that US has been importing too much of steel and aluminium which “threatens to impair the national security.” According to the report, US is now the world’s largest importer of steel, while aluminium imports have risen to 90% of total demand for primary aluminium. Employment in the steel industry has dropped by 35% since 1998 and employment in the aluminium industry fell by 58% from 2013 to 2016. The report in relation to steel also highlighted that China plays a major role in the higher imports of steel in the US.

On an average month, China produces nearly as much steel as the US does in a year and its excess capacity alone exceeds the total US steel-making capacity, the report noted. At the same time, the US had two antidumping and countervailing duty orders in place on aluminium against China and four ongoing investigations against China.

Countries like Canada, European Union (EU) and South Korea are engaging talks with the US, while Japan is also hoping that they will be exempted from the regulation, acknowledging that they do not pose a threat to US national security. However, White House National Trade Council Director Peter Navarro was quoted recently that US allies, will not be exempted from the 25% tariff on steel imports and 10% tariff on aluminium imports. However, President Trump said the US may consider a lower tariffs on steel and aluminum from Mexico and Canada if the two countries agree to a revamped Nafta that’s fair to the US.

Impact on Restrictions on Steel and Aluminium Imports to Malaysia

Malaysia exports of steel and aluminium products to the US represent approximately 1.5% of the total exports to the US and only 0.15% of the overall Malaysia exports in 2017. In the short term, the recent tariffs announcement by US is likely to create some uncertainties on global trade and global production, as protectionist trade policies are likely to hurt growth momentum.

Impact on Malaysia, from the possible global trade wars, if it happened

The Malaysian economy will not be spared totally from the possible global trade wars, if it happened, as the country is dependent on external demand. We believe the growth momentum of the global economy will be affected, attributed partly to the negative impact of some disruptions to the global trade. Similarly, we also expect no emerging market can escape fully over the global slowdown and financial market volatility and global sentiment towards risk. We are currently maintaining Malaysia’s real GDP growth at 5.3% in 2018, supported by domestic demand, especially from private consumption and investment (5.9% in 2017), but there will be some downside risks. US and China are the world’s largest economies as well as the largest export destination for most of the Asean countries today. For instance, China is Malaysia’s largest trading partner, accounting for around 12% of the country’s total exports, and while US contributes close to 9%. The rebalancing between these two superpowers (imposition of tariffs from US) will likely to slow down Asean’s intra-regional trade performance. Nevertheless, during his presidential campaign in 2016, President Trump had pledged to impose a 45% across-theboard tariff on goods imported from China (35% tariff on Mexico) as well as renegotiate all US bilateral trade agreements. Moving forward, we believe any threats and decisions by President Trump in imposing further anti-trade measures, especially on China, will likely be less punitive than the earlier proposed and as suggested of 45% across-the-board tariff on Chinese goods.

US Tariffs Unlikely to Derail Global Trade Significantly

Despite some downside risks from anti-trade sentiment on international trade, both World Trade Organization (WTO) and International Monetary Fund (IMF) remain cautiously optimistic that growth in global trade and global growth will be sustained in 2018. WTO projects that the global trade growth will moderate but remain healthy at 3.2% in 2018, still significantly higher than the low of 1.3% in 2016 (3.6% in 2017). This was also evident in the global manufacturing PMI, which continued its upward trend, rising from 54.4 in January to 54.2 in February, its highest reading since March 2011, with growth of output, new orders, new export business and employment all gaining strength. China’s PMI was at 51.6 in February, slightly higher than 51.5 in January. China sets its economic growth target at about 6.5% for 2018 (6.9% in 2017).

Some Encouraging Positive Impacts From New TPP

Despite concerns from tariffs on steel and aluminium recently, there is also encouraging development on the global trade front. The remaining eleven countries namely Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam have decided to push through with the new Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade pact despite the US withdrawal.

The New Trade Pact Is Still a Sizable US$11.9 Trillion Economy

The CPTPP members represent a market with a total population of 499 million, 15% share of global trade volume and a combined GDP worth US$11.9 trillion. However, despite its size, it was lower when compared to the initial TPP population size of 822 million, 26% world trade volume share and a combined US$30.5 trillion worth of GDP. Note also that the potential of the pact could develop further, as it essentially allows any country to join the CPTPP if existing CPTPP countries agree, this includes both US and China.

20 Items Are Suspended From the Original TPP Agreement

Rather than a complete remake of the TPP agreement, the 11 members have opted to make a new agreement with seven elements in it, including a list of suspensions of certain provisions in the original TPP agreement, a new article on withdrawal, a new article on accession, an article to review CPTPP, and article seven which copes all of the original TPP agreements.

There are overall 20 items being suspended from the original TPP agreement, most of which revolves around the areas of investment, intellectual property and government procurement. Coincidently, these are the items which made the TPP agreement somewhat controversial in many parts of the world. Agreements by all CPTPP members will be needed for these provisions to be applied in the future as part of CPTPP.

Use of Generic Medicine Is Now Unaffected

Among the important items in the suspension was the use of generic medicine. Under the original TPP agreement, patent for new medicines and biologic products will have a minimum period of five years. For example, while most countries already have in place this rule, Malaysia has no specific period of regulatory data protection (RPD) for biologic products yet. With the suspension of Article 18.50 and Article 18.51, member countries are free to set their own period for RPD medicines.

Scope of Investor-state Dispute Settlement (ISDS) Is Narrower

Government will has the flexibility to make own decisions, laws and regulations in areas such as public healthcare, public education and social services while claims are no longer permitted in relation to investment contracts and approvals. Effectively, this means that under CPTPP, private companies which enter into an investment contract with the Government will not be able to use ISDS clauses if there is a dispute about the contract.

The New CPTPP Agreement Should be Positive to Malaysia

With the suspension of the 20 items in the CPTPP, we believe that the revised TPP agreement will be flexible for countries. Some market observers also noted that the CPTPP will likely to be more acceptable to the public as compared to the original TPP guidelines. Under the new CPTPP, Malaysia’s SOEs are given some flexibility in which all references to the phrase “after signature of this Agreement” has been defined as “after the date of entry into force of this Agreement for Malaysia”.

Net Benefit for CPTPP Members

Several CPTPP members have advocated their net benefits of entering into the CPTPP, namely Canada, New Zealand and Vietnam. For example, Global Affairs under the Government of Canada stated that Canada’s inclusion in CPTPP will lead to an anticipated CA$4.2bn increase in its GDP by 2040 compared to an estimated CA$3.4bn under the original TPP. Stronger GDP will be supported by increases in exports of goods and services, and by increases in investment. In terms of trade, Canada will establish new FTAs with Australia, Brunei Darussalam, Japan, Malaysia, New Zealand, Singapore and Vietnam. Government of Canada also projects that Canadian exports to other CPTPP members will rise by CA$2.7bn or 4.2% compared to CA$1.5bn under the TPP by 2040.

A Study From New Zealand Pointed a Positive Net Economic Benefit

New Zealand’s Foreign Affairs & Trade has published an analysis of the impact of its membership in the CPTPP. In its report, it states that the CPTPP will increase New Zealand’s GDP growth for about 15 years where domestic annual GDP is projected to gain between 0.3% and 1.0% (NZ$1.2bn-4bn) compared to 0.9% growth previously expected under TPP. The net economic benefit is anticipated to result in improved and a rise in employment and wages.

As for trade, the report stated that an estimated NZ$222mn removal of tariffs per year will be reaped once CPTPP is fully phased, in which is NZ$50mn lower compared to NZ$272mn per year under TPP. Despite lower savings on tariff, New Zealand will still benefit from a wider range of markets such as Japan, Canada, Mexico and Peru. This will also add to the more than 620,000 jobs in New Zealand which are dependent on export.

CPTPP Is Likely to Expand Further in the Future

The lower level and flexibility of regulation in the CPTPP may be the main factor for other countries to likely join the trade pact in the future. Recall that Thailand, Indonesia and Philippines had all shown their interest to join the pact. It is also worth noting that the UK trade minister did not deny the possibility of UK joining CPTPP after Brexit takes place, while India, may follow UK’s footstep. Although China may also be able to join the initiative, we believe that the second largest economy will give a higher priority to the Regional Comprehensive Economic Partnership (RCEP) agreement.

RCEP Could Also be a Major Game Changer on Free Trade

Regional Comprehensive Economic Partnership (RCEP) is an initiative to integrate the 16 countries in Asia and Oceania economically. The 16 countries will represent approximately 50% of global population and 28.4% of global trade activity. The potential of RCEP due to the sheer size of its population could possibly be the game changer for international trade relations in the future. While we acknowledged that there could be some risks associated with protectionist policies, which may put some downward pressure on Malaysia’s exports and economic growth, we believe Malaysia is heading towards the right direction by pursuing trade agreements with multiple countries, particularly through the CPTPP and RCEP initiatives.

Source: Affin Hwang Research - 6 Mar 2018

Source: Affin Hwang Research - 6 Mar 2018