Published on 31 May 2019.
RAM Ratings expects export and import growth to come in at a sluggish 1.9% and 1.8%, respectively, in April 2019, resulting in an overall trade surplus of RM13.4 bil for the month. Nonetheless, this still represents an improvement over the marginal contraction of the preceding month (exports: -0.5%; imports: -0.1%).
Looking ahead, the lacklustre trade momentum is unlikely to recover in the near term, largely due to the escalating dispute between the US and China. “The tit-for-tat tariff actions between the two countries in the past fortnight and the consequent bans on essential inputs for their high-tech products marks a turning point for the trade tensions, rapidly dimming hopes for a “quick fix” trade deal,” highlight Kristina Fong, RAM’s head of research. The US recently went ahead with its plan to elevate tariffs on its imports from China, which had initially been scheduled to kick off at the start of this year. The move will raise the tariff on USD200 bil of Chinese goods from 10% (effective since September 2018) to 25%.
In retaliation, China announced its own tariff hike that will affect USD60 bil of imports from the US. This move will spike up the present 10% tariff to either 20% or 25%. It will also inflate selected item’s initial 5% duty to 10%. The steeper tariffs could divert demand to other producers with a revealed comparative advantage (RCA) in the said goods, as Chinese businesses rearrange their supply chains. Malaysia could benefit from trade-diversion effects on pockets of the tariffed basket of goods, particularly the sub-basket with the greatest tariff increase, i.e. from 10% to 25%. This is because Malaysia appears to be competitive in producing these goods, as indicated by its RCA index.
Should the US carry through its threat of another round of tariff on the remaining USD300 bil of Chinese imports yet to be taxed, Malaysia’s potential gain from this round of tariffs appears limited. This is because we have no discernible overall comparative advantage in the production of such items (RCA index: 0.66), which mainly constitute consumer goods.
Woon Khai Jhek, CFA
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