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US trade war may affect M'sia
Published on: Sunday, September 09, 2018

Kota Kinabalu: The ongoing United States-initiated trade war with China and other countries, including the imposing of sanctions, could lead to a global recession, impacting Malaysia as a trading nation.

Head of Malaysia Industrial Development Fund (MIDF) Research Zulkifli Hamzah (pic) said companies and entrepreneurs should understand the mix of products and services that sell at each point in the market cycle and what they need to do to adjust the mix.

"Know your key people and core capabilities and know how to retain them during a downturn," he said.

Trade war is a circumstance in which countries retaliate against each other's trade usually by imposing trade barriers such as tariffs and quotas.

Zulkifli shared with the audience the ways to prepare for the next economic downturn.

Citing the Malay proverb "Prepare the umbrella before it rains", he said: "Know and monitor the key indicators for your business. Understand how much liquidity you need at each point in your market cycle. Structure your ownership and lease/rent agreements in a way that allows you to flex up or down quickly."

On ways for the public to prepare for an economic recession, Zulkifli said: "Have or start saving. More people have been saving since the 2008-2009 recession because they are thinking about the 50:30:20 rule of fixed expenses: discretionary spending: savings. Build stock of necessities like food storage. Learn new skills. These can translate into side jobs for additional income. Mentally prepare for things to worsen. Get out of debt. Adjust lifestyle. Decrease spending by 10 to 15 per cent. Practise caution in investment portfolio. Take profit and consolidate cash. Wait for prices to fall as opportunities arise," he suggested.

"Most economists will tell you that a trade war is not a zero-sum game. Trump's view is that by going to a trade war with China, he's going to win. Trump's not to slow down any sooner. The only way to avoid a recession is to get Trump impeached and removed. Seriously, Trump is the biggest threat to the world's economy," said Zulkifli.

He said the first country feeling the effect of the trade war is Turkey. Its currency is down by 40 per cent. It's going into a recession as a result of trade restriction by the US.

Zulkifli said the Malaysian Government is cutting back on spending this year.

"KL City Hall cancelled RM1 million worth of spending, affecting contractors and suppliers. The global economy is going to slow down. By 2020, Malaysia should be more stable financially. Rising interest rate will have an impact on demand. The property market and the stock market are good indicators of the economy."

He said Bank Negara revised Malaysia's economic performance from 5.5 to 6 per cent growth rate down to 5 per cent due to the world's uncertain economic situation that arose from a trade war.

"This is coupled with the fact that international exports and imports for the past few years have reflected a slowdown in the global economy. MIDF puts it at 5.2 per cent."

He indicated that looking at 2018, external trade activities across the globe are expected to moderate, particularly due to unfavourable base effects, continuous geopolitical risks and growing protectionism threats. The recent tariff hikes on imported solar panel, washer, aluminium and steel are examples of protectionist policies under Trump's administration. Analyses by many US institutions have shown significant losses by American firms and consumers following previous tariff actions (such as the tyre tariffs imposed by President Bush in 2002).

He recalled that World Bank Group lead economist and acting country manager Richard Record said that like any highly open economy, it is natural for Malaysia to face risks relating to uncertainty in the external environment.

Escalation of protectionist tendencies would have a disproportionate adverse impact on Malaysia, given its high level of integration with the global economy and financial markets, and its dependence on global value chains as a source of growth. Elsewhere, the possibility of financial market disruptions has increased amid shifting monetary policy expectations in advanced economies, which could spread across emerging economies, including Malaysia, through heightened financial market volatility, reversals in capital flows and pressures on exchange rates.

Rising trade tensions between the US and China have led towards increasing concerns on Malaysia's external trade and the related domestic sectors which depend substantially on exports.

Such worry among market observers is rather justified, given Malaysia's nature as one of the most export-reliant economies in the world. In 2017, the country's exports of goods and services represented nearly 71.5 per cent of its GDP.

The recent tariff hikes by the US will have impacts on Malaysia's other trading partners such as Singapore, China and South Korea, although for Malaysia, both export and import shares of the US have been on declining trends for more than a decade. FDI inflows by the US have been on falling trends for four consecutive quarters. The consecutive falls were in tandem with Trump's protectionism moves since he was inaugurated as the 45th President of the US in January 2017 withdrawing US from TPPA.

Lately, Trump had signed a memorandum that would witness additional tariffs worth up to US$60 billion in Chinese imports. The continuous protectionism moves by Trump have provoked trade wars, escalating global tensions.

Apart of high base effects, further protectionist moves by Trump's administration will possibly hit global trade activities as well as exports demand on Malaysia's external trade performance in 2018.

Direct exports to the US constitute nine per cent of Malaysia's total outbound shipments. More than half of the exports are electrical and electronic products and other manufactured goods.

With the steep tariffs, the demand on manufactured goods, especially products relating to washers, solar panels, aluminium and steel will drag down Malaysia's exports to the US. Malaysia's exports growth to the US will decelerate to 3 per cent to 5 per cent this year as compared to 11.8 per cent year-on-year in 2017.

For export performance, demands from Southeast Asia remain prominent for Malaysia as its share holds above 25 per cent since 2012.

Imports share of the US had similar downturn directions since early 2000s while imports share of China rose to a record high of 20.8 per cent during the first month of 2018.

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