Likely Disruptions to the Global Trade and Global GDP

On 22nd March 2018, US President Trump announced plans to impose tariffs on Chinese goods, with a 25% tariff imposition to at least US$50bn or more worth of Chinese imports, which include aerospace, information and communication technology (ICT), and machinery. According to the US Trade Representative (USTR), the finding from its latest Section 301 report highlighted evidence of China violating its commitments on intellectual property and technology transfers.

US President has instructed the Treasury Department to develop investment restrictions in 60 days aimed at preventing Chinese-controlled companies and funds from acquiring US firms with sensitive technologies. As the list of products will only be published within 15 days from 22nd March, we believe it would be too early for market observers to understand what the US tariffs cover and whether the tariff rates will have significant impact on the Chinese economy or not.

To add to uncertainty on global trade, on 23rd March 2018, China retaliated against US's decision to impose tariffs, with its own tariffs on up to US$3bn of about 128 US products, which include US pork, recycled aluminium, steel pipes, fruit, dried fruit and nuts, wine, modified ethanol and ginseng. The China’s Commerce Ministry will implement the measures in two stages, with a 15% tariff on 120 products including steel pipes, dried fruit and wine, and following up with a 25% tariff on pork and recycled aluminium. China has also stated they will pursue legal action against US at the World Trade Organisation (WTO) in response to Trump’s tariffs on Chinese imports.

The WTO is currently working on a "detailed analysis" on both countries’ decision to impose tariffs, especially on Chinese imports, which also included the earlier US tariffs of 25% on imported steel and 10% on aluminium on China. The escalation of trade war between US and China has raised concerns about a possible full blown global trade war, where both countries may continue to strike at each other's economies with tariffs and other trade restrictions.

There are already talks of China possibly expanding its tariff list on US imports, in relation to the smaller amount of tariffs (US$3bn) of US imports compared to US$50-60bn or more by US on China. A particular sector which may be a target by China is the US agriculture sector. China depends on the US for its soybean imports. In 2017, the US shipped about US$14.6bn of soybeans to China. Hence, if China retaliates by limiting its imports on soybeans, this may encourage China to seek imports from other countries, such as Brazil. Besides that, China could also cancel its order for 300 planes from Boeing and move their orders to Airbus instead. Back in 2015, China’s President Xi Jinping gave Boeing a US$38bn order on a plant visit in Seattle. This will jeopardise Boeing’s expectation of US$1trn worth of aircraft demand from China over the next 20 years, according to its September report forecast. Currently, close to 25% of Boeing planes arte purchased by China.

Some market observers also noted that China, which is the largest holder of US Treasury Securities at 18.7% of total foreign holdings or US$1.17trn as of January 2018, may reduce China's holdings of US Treasuries as a form of retaliation against US.

Source: Affin Hwang Research - 26 Mar 2018