SINGAPORE: As trade friction between the United States and China heats up with mutually-threatened tariffs kicking in on Friday (Jul 6), the world seems to be “moving a little closer” to an all-out trade war – a scenario that will weigh on Singapore’s economy, economists said.
While united in the view that a global trade war, if it happens, will have an impact on Singapore’s gross domestic product (GDP), experts differed on the extent of the damage.
For instance, estimates of downside risk to growth this year ranged from 0.2 percentage points to 0.8 percentage points.
The 25 per cent tariff levied by the US on US$34 billion (S$46 billion) worth of Chinese products across 818 categories is set to take effect just after Friday midday in China. Beijing has said that it will respond the instant these measures kick in with tariffs on the same value of US goods, including vehicles and agricultural products.
The Trump administration is also preparing to target a second tranche of Chinese goods valued at US$16 billion once it completes further reviews.
All these come on top of the already-imposed US tariffs on solar panels, washing machines, steel and aluminium imports from all major trading partners, as well as further threats of extra 10 per cent duties on an additional US$200 billion worth of Chinese products.
Economists are particularly worried about the potential retaliation to the latter, which could cause the ongoing trade spat to evolve into a full-blown trade war.
“We believe China is likely to retaliate, having warned of strong countermeasures,” said Schroders’ emerging markets economist Craig Botham.
“(The 10 per cent tariffs on US$200 billion of Chinese goods) marks a significant intensification of hostilities and a more substantial macroeconomic impact, with total targeted Chinese trade now 10 per cent of Chinese exports.”
Echoing that, Oxford Economics’ lead Asia economist Sian Fenner said: “There is little doubt that with the US threatening extra tariffs on China, its NAFTA allies, the European Union (EU) and others, which will prompt retaliations, we are moving a little closer to a trade war.”
If all the tariff threats materialise, global trade flows and financial markets will be hit.
“The increase in tariffs will have an impact on global trade. Another is the reaction from financial markets, which could fall given the flight to safe haven. We can expect the US dollar to appreciate and correspondingly, some of the Asian currencies to depreciate,” she explained.
HOW BAD COULD IT BE FOR SINGAPORE?
Under that backdrop, trade-dependent Singapore will feel some pain even if it is not a direct target of the tariffs, said Ms Fenner.
“Exports will be hit and that will affect export-dependent sectors, like transportation and storage, wholesale and retail. Singapore being an important financial hub will also be hit if financial markets get adversely impacted. Private investments may slow as an uncertain outlook and weaker external demand will have implications on business decisions.”
As a result of that “bad case scenario”, Ms Fenner said Singapore could see a lower growth figure of 2.9 per cent, instead of 3.1 per cent, this year. For 2019, the impact would be more severe with the economy slowing to 1.7 per cent – a reduction of 0.7 percentage points from Ms Fenner’s initial estimate.
In total, that could mean a loss of S$3.4 billion in GDP in the event of an all-out trade war.
In an analysis by DBS chief economist Taimur Baig, a full-blown trade war – defined to be a scenario with 15 to 25 per cent tariffs on all products traded between China and the US – could shave 0.25 percentage points off the GDP of both economies this year, and 0.5 percentage points in the following year.
“This would set off a major global chain reaction,” wrote Mr Baig in a Jul 3 note. “Given their trade openness and exposure to the electronics supply chain, there will no respite whatsoever for Malaysia, Singapore, South Korea, and Taiwan in this tail risk scenario.”
Singapore would be the worst hit among its neighbours, with downside risks of 0.8 percentage points in 2018 and 1.5 percentage points next year, according to DBS.
OCBC Bank’s head of treasury research and strategy Selena Ling is less bearish.
“While our baseline forecast for Singapore’s 2018 full-year GDP and manufacturing growth remains at 3.0 per cent and 4.4 per cent year-on-year, there could be downside risk from here,” she said.
“In a scenario where our worst trade war fears materialise, and manufacturing growth flatlines or even contracts in the second half with potential spillovers into sentiment-sensitive services sectors, the potential hit to full-year GDP growth could be up to 0.3 percentage points.”
Schroders predicted that Singapore is among the top 10 countries most impacted by the US-China trade conflict via supply chains.
For his research, Mr Botham utilised trade in value added (TiVA) data sourced from the Organisation for Economic Cooperation and Development (OECD). Data up to 2011 were used to obtain a rough estimate of the value added in exports for 2017.
“TiVA data is used to analyse the effects of tariffs on trade between US and China because it tells you the exposure of economies to those trade flows via supply chain effects,” he explained in an emailed response to Channel NewsAsia.
“For example, only 65 per cent of the value of Chinese exports to the US comes from China itself, with the rest added by firms in other countries. These firms will suffer if the US applies tariffs to Chinese goods, and TiVA data helps to quantify that damage.”
For Singapore, the estimated value-added in Chinese exports to the US is at 1.33 per cent of its GDP, while that of US exports to China stands at 0.08 per cent. According to Mr Botham, that makes Singapore the fourth most vulnerable country to a China-US trade spat given its position in the global value chain.
IMPACT “LIMITED” FOR NOW
Nevertheless, the impact remains minimal for now.
“The tariffs that have been imposed remain fairly isolated that affect only certain sectors. They have not impacted consumer goods, especially electronics that make up a key component of Singapore’s exports,” said Ms Fenner.
“For now, there’s not much of an impact yet.”
Minister for Trade and Industry Chan Chun Sing had previously said that the tit-for-tat tariffs between US and China have had “limited” negative impact of about 0.1 per cent on Singapore as they affect only a “modest share” of the country’s exports.
Meanwhile, the Monetary Authority of Singapore (MAS) on Wednesday said the local economy will likely remain on a steady expansion path this year despite escalating trade tensions.
Full-year GDP estimates are at around 2.5 per cent to 3.5 per cent – unchanged from the growth forecast range announced in May.
Still, its chief Ravi Menon cautioned that given the country’s position as a node in sectors like electronics, it needs to guard against spillover effects which are the “real risks” of the ongoing trade conflict.
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