CFA Institute Singapore
SINGAPORE (Feb 26): On Feb 16, US Commerce Secretary Wilbur Ross proposed a tariff of at least 24% on steel imports from all countries and at least 7.7% on aluminium imports. His recommendations were issued following anti-dumping investigations that have lasted several months, and mark an escalation in US protectionism under President Donald Trump.
In January, the US Trade Representative imposed a 30% tariff on imported solar panels. The agency responsible for US trade policy also imposed a 20% tariff on the first 1.2 million imported large residential washers this year. A tariff of 50% will be imposed on subsequent imports, but both tariffs will come down to 16% and 40% respectively in 2020.
As the global economy improves, global trade is picking up too. And trade-dependent economies such as Singapore should benefit. But a trade war threatens to reverse the recovery. Is Singapore at risk of being slapped with punitive measures? How vulnerable is the economy to protectionist sentiment in the US?
So far, the US appears to be targeting China in its trade measures. China supplies half of the world’s steel and is also the source of many of the US’ solar panel imports. In November last year, the US also imposed duties of about 250% on cold-rolled steel imported from Vietnam but made with Chinese substrate.
The antagonistic position the US has taken towards China is likely linked to its huge trade deficit with the latter. According to figures from the US Census Bureau, the US’ largest deficit position is with China — at US$375.2 billion ($497.1 billion). Mexico is a distant second, at US$71.1 billion, while Japan is third, at US$68.8 billion.
On the other hand, Singapore is among the countries with which the US has a significant trade surplus. Last year, US goods exports to Singapore amounted to US$29.8 billion, while US imports from Singapore totalled US$19.4 billion. This translates into a trade surplus of US$10.4 billion for the US. Singapore ranks sixth among the countries that the US has the largest trade surpluses with — behind Hong Kong, the Netherlands, the United Arab Emirates, Belgium and Australia.
“I do not think the US will impose anything against Singapore because the US has a trade surplus with the Republic,” says Cédomir Nestorovic, professor of International Marketing and Geopolitics at ESSEC Business School. “The number of jobs lost in the US because of Singapore is largely compensated by a trade surplus, so I do not see how the US can impose something specific on Singapore.”
Nestorovic also says Singapore plays a key role in Southeast Asia as a facilitator, a deal broker and an investor in other Southeast Asian countries. Singapore is always looking for a balanced foreign policy between the US and China, and with a majority Chinese population, it is an asset to US interests. Hence, the US is unlikely to come after Singapore.
Graham Ong-Webb, a research fellow at the S. Rajaratnam School of International Studies (RSIS), adds: “At the end of the day, even if there was an attempt at pushback on Singapore by the Trump administration, we can expect the sizeable US business community in Singapore to pressure against such a move.”
A trade war would, nevertheless, have knock-on effects on Singapore’s economy. “An intensification of trade restrictions among major global trading partners will create economic distortions and inefficiencies. This will not necessarily undermine the global system of trade agreements; rather, it may affect specific product categories. Implications for the global economy will be negative but limited,” Taimur Baig, chief economist at DBS Bank, tells The Edge Singapore via email.
Bank of Singapore chief economist Richard Jerram agrees. Barriers to trade on a handful of items will not have much impact on growth, he says, but the concern is that China will retaliate and then the process spirals. “It looks like a difficult judgement for China — if [it takes] no action, then [that] could boost US confidence that tariffs can be imposed with impunity; but if [it is] too aggressive, [it risks] provoking a more damaging reaction,” he writes in a note dated Feb 14.
Already, China has signalled some intention to retaliate. On Feb 4, it announced an anti-dumping and countervailing investigation against sorghum — a type of grain used in animal feed and that is imported from the US. China’s Ministry of Commerce expects the investigation to end before Feb 4 next year, though it could be prolonged by a further six months from that date in “special cases”.
China has also signalled that it could halt soybean and maize imports from the US; divert aircraft purchases from US manufacturer The Boeing Co to European rival Airbus; impose tariffs on US automotive vehicles; and limit the number of Chinese students furthering their studies in the US.
How much further will the US and China take these tit-for-tat actions? Trump appears fixated on the country’s overall trade deficit position of US$796.1 billion last year. He is convinced that by reducing the trade deficit, the US economy will be strengthened and jobs will be created.
So far, his rhetoric has been gaining him followers. The latest polls indicate that Trump’s Republican Party is leading against the Democrats on the generic congressional ballot for the first time in months.
“The Republicans’ lead in the polls is, to a large extent, driven by growing public confidence in the party’s ability under Trump to handle the economy and jobs. Though misguided, a good number of supporters of the administration have bought into Trump’s depiction of China’s economic aggression and the need to punish it for currency manipulation and for further unhinging an already imbalanced bilateral trading relationship,” says Ong-Webb of RSIS. In the run-up to the mid-term US elections, likely to be held in November, he expects Trump to “persist with his hard stance against China as part of his efforts to preserve his core voting base, which is essential to ensuring that the Republican Party can win the congressional majority”.
The US sees China as an adversary, given the latter’s economic might and growing military presence, adds Alex Capri, a visiting senior fellow at the NUS Business School. Hence, China is a threat to its dominance. Capri reckons the US will not just look at imposing tariffs but also a broader range of sanctions.
He highlights the US investigation into the alleged intellectual property violations suffered by US firms. Capri expects some form of increased duties on Chinese goods will be imposed to “recover” these “damages”. “It’s anybody’s guess how far Washington pursues this and how many Chinese products are targeted and how high the duties will be.”
Keith Tan, senior managing editor of steel and raw materials at S&P Global Platts, says he would not be surprised if Trump proceeds to impose tariffs on steel imports. “US steelmakers have been vocal about how Trump’s US$1.5 trillion infrastructure plan — which steelmaker Nucor Corp estimates would generate 75 million metric tonnes in steel demand over the next decade — has yet to include provisions to ‘Buy American’. These proposed tariffs could go a long way in pacifying them,” he says.
China, on its part, is likely to retaliate. “They would want it to be targeted in terms of hurting Trump’s support base,” says Song Seng Wun, director at CIMB Private Banking.
Negative for Asia
A trade war between China and the US would have a negative impact on Asia as the two countries represent the two largest trading partners for the region, says Chua Hak Bin, senior economist at Maybank Kim Eng Research. “Global and Asian trade volumes will be disrupted if the US embarks on a trade war with China and other countries. Korea and Taiwan will likely see a more negative impact from US trade measures targeted at China. Korea and Taiwan are more integrated with the Asian supply chain, particularly electronics,” he says.
Nevertheless, Chua acknowledges that global trade is complex and difficult to significantly disrupt unless the trade measures are sweeping. He says complex trade and production chains allow countries to divert and channel their exports via third-party countries. Moreover, objectives of trade measures (such as narrowing the bilateral trade deficit) are often negated by offsetting currency movements. Additionally, he notes that trade in services is rising as a share of global GDP, and this cannot be readily disrupted by trade measures.
At the same time, China is Singapore’s largest trading partner. In 2016, Singapore’s merchandise trade with China totalled $137.1 billion and services trade amounted to $21.3 billion. “Singapore is heavily dependent on global and Asian trade activity and could be hit if a full-blown global trade war erupts. Some of Singapore’s services sectors — including the wholesale trade and transport services sectors — ride on the fortunes of Asian trade volumes,” says Maybank KE’s Chua.
Baig of DBS thinks China’s impact would be limited, as Singapore trades widely in terms of geography and product. “Other than for some specific line of producers, depending on the nature of the area being affected, we don’t foresee any major disruption to Singapore’s trade. The risk, however, is that future investment will be deterred and sentiments will be dampened by the poor signal given by rising trade tensions.”
In any case, Singapore is not as dependent on merchandise trade as it used to be. “From a cyclical perspective, global trade flows had been lacklustre the past few years due to weak economic conditions. Singapore being a global trading hub, as well as the 14th largest exporter in the world, would naturally be affected. But this phenomenon is also partly due to shifts in the structure of the Singapore economy,” says DBS Bank economist Irvin Seah.
This article appears in Issue 819 (Feb 26) of The Edge Singapore which is out this week