Published on 02 May 2019.
RAM Ratings expects trade growth to recover in March, with export and import growth rebounding to a respective 2.5% and 2.9% after the preceding month’s declines (export growth: -5.3%; import growth: -9.4%). Trade activity had been more subdued in February amid the lunar new year festivities, compounded by an already short working month. That said, the pace of expansion is expected to remain lacklustre amid more muted industrial activity growth in key regional markets, coupled with businesses’ caution while awaiting further clarity on the direction of the US-China trade dispute. Malaysia’s overall trade surplus is anticipated to come in at RM14.8 bil in March.
The US and China have been engaged in trade negotiations since the start of the year, in search of a solution to the protracted trade war between them. Details are scant at the moment, but a deal will most certainly entail China’s commitment to increasing its purchases of American goods to narrow its trade surplus with the US. This may lead to another round of disruptions in trade flows as China’s demand for goods from existing regional suppliers is diverted away to US producers. Initial talks in January had led to China agreeing to raise its imports of American agricultural, energy and industrial/manufactured goods.
"From our initial assumptions of how this potential deal could turn out, the most significant impact on Malaysia would be the diversion of China's demand for electrical and electronic goods to the US. This will be particularly so for electronic integrated circuits, which constitute 27.3% of Malaysia's exports to China and 5.1% of our total exports," explains RAM's head of research Kristina Fong.
If the trade agreement does not indicate the specific American goods that will be purchased by China, the direct impact of the trade diversion may be more muted for Malaysia. This is mainly because there is no significant overlap in the supply of goods in which both Malaysia and the US have a revealed comparative advantage (RCA). The greatest impact, if any, would be due to diverted demand from petroleum products, in which the US also has a competitive edge, as indicated by the RCA index.
Woon Khai Jhek, CFA
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