Published on 03 Oct 2018.
RAM Ratings expects Malaysia’s export growth to decelerate to 3.3% in August (July: 9.4%), as exports begin to slow down on the back of more cautious sentiment amid escalating trade tensions between the US and China. On 23 August, both the US and China imposed a second round of import tariffs with those by the US especially pertinent to Malaysia given the impact on the semiconductor sector. Electrical & electronic (E&E) products constituted 36.7% of Malaysia’s total exports in 2017. The risk to trade momentum was heightened further when the US imposed a third round of tariffs on Chinese imports valued at RM200 billion on 24 September. At 10% initially, this rate is set to increase to 25% in January 2019.
While global trade will likely face some dampening on its momentum in the short run amid heightened tension between the US and China, producers in the region stand to gain from the demand diversion as firms in the economy rejig their supply chains down the line. For Malaysia, the biggest potential gain comes from the trade diversion effect of E&E which could boost overall export demand. Malaysia is one of the countries that is highly competitive in terms of revealed comparative advantage (RCA) to benefit from the trade diversion from the US’s second round of tariffs (23 August 2018) on China, which places heavier focus on semiconductors. There is also further potential for E&E trade diversion for Malaysia in the third round of US-China tariffs on 24 September 2018, despite not being a main beneficiary of the overall basket of goods tariffed.
“Electronic components under both US and China’s set of tariffs, respectively, constitute 6.8% and 16.4% of Malaysia’s overall exports, with correspondingly strong RCAs of 1.38 and 1.50,” highlights Kristina Fong, RAM’s Head of Research. That said, Malaysia still faces stiff competition from other markets in the region such as Vietnam and the Philippines, which have higher RCAs for this group of products - which may dilute some of these potential gains.
Woon Khai Jhek, CFA
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