Please allow me to share with you a recent report by Moody’s Analytics, which I believe is very relevant particularly to those who are very concerned with the ongoing trade war between the United States and China. Essentially, Moody’s Analytics noted that “US trade policy has the potential to do more harm than good for US manufacturing and the broader economy, particularly if more protectionist policies are implemented by the US or if its trading partners retaliate.”
The report, titled “Pride and Protectionism: U.S. Trade Policy and Its Impact on Asia,” offered three trade scenarios and their resulting impact on US, Chinese, and the Asian economies. The report used the “Moody’s Analytics Global Macro Model,” which reportedly covers more than 70 countries linked via trade flows, foreign direct investment, commodity prices, and financial markets.
SCENARIO 1: EXPECTED TARIFFS (50% PROBABILITY)
The first scenario assumes the current US tariffs on $311 billion of imported goods, with no further retaliation, and tariffs on $134 billion of US exports. If this is the extent of the tariff increases, then while not good for the US and global economies, the overall impact will be limited.
• US: Real GDP would fall just over 0.13 percentage points at the peak of the impact a year from now, and 200,000 jobs would be lost over the period. The economic impact outside of the US will be comparable.
• China: GDP growth would fall by 0.03 percentage point in 2018 to 6.67%, and in GDP in 2019 would be 0.09 percentage point below the no-tariffs baseline to 6.28%. The unemployment rate would remain at baseline levels through 2023, but consumption would soften and drive down house price growth by 0.14 percentage point in 2019 to 2.76%. China’s stock market would be most affected as retail investors continue to pull out of the equity markets.
• Asia: The rest of Asia is not immune, but the hit to GDP growth would be negligible: real GDP growth would decline by only 0.02 percentage point in 2018 and 0.08 percentage point by 2019, impacted mostly by exports.
• Specific sectors: However, reduced global trade flows would drag on commodity prices and have a pronounced impact on commodity export-oriented countries such as Australia and Indonesia. A slowdown in regional demand would also hurt India’s petroleum-related exports.
SCENARIO 2: THREATENED TARIFFS (40% PROBABILITY)
This scenario assumes that all tariffs that US President Donald Trump has threatened are implemented, including a 15% average tariff on $800 billion in US imports. This total includes $275 billion in vehicle imports subject to a 25% tariff. This scenario also assumes a 15% tariff on an additional $475 billion of US exports. If actually implemented, close to one-third of all imported goods into the US would be subject to higher tariffs. Assuming that impacted US trading partners would respond with in-kind tariffs on US goods, the macroeconomic consequences would be more serious.
• US: Real GDP would decline by 0.5 percentage point and employment by 700,000 jobs at its peak.
• China: GDP growth would fall by 0.07 percentage point in 2018 to 6.62% and in 2019 would be 0.42 percentage point below the no-tariffs baseline at 5.95%.
• Asia: Real GDP growth would decline by around 0.06 percentage point in 2018 and 0.38 percentage point in 2019 before recovering in 2020.
• Specific sectors: Economies that are important tech hubs throughout Asia, such as Taiwan, Malaysia, Hong Kong and Singapore, would suffer from tariffs on Chinese tech exports to the US simply because of their role in the supply chain.
SCENARIO 3: TRADE CONFLAGRATION (10% PROBABILITY)
This scenario assumes an across-the-board 25% hike in tariffs on US-China trade, coupled with Chinese “qualitative” measures that complicate doing business in China for American companies.
• US: Under this scenario, the US economy would descend into recession by the second half of 2019. Real GDP would decline by 1.8 percentage points by early 2020, costing the economy almost 2.6 million jobs. Unemployment would rise to well over 5%.
• The rest of the global economy would also suffer, although a stronger US dollar would somewhat mitigate the impact.
• China: GDP growth would drop by 1.19 percentage point to 5.18% in 2019 and 0.19 percentage point to 5.64% in 2020. The stock market would also fall sharply, declining by 9.4% in 2019.
• Asia: GDP growth would fall around 0.24 percentage point in 2018 and 0.92 percentage point in 2019 before recovering modestly in 2020.
• Specific sectors: Under this scenario, too, tech hubs (Taiwan, Malaysia, Hong Kong, Singapore) would be severely affected, while commodity producers (Australia, Indonesia) would face lower prices. Foreign direct investment would fall in India.
These scenarios become doubly important in light of the report that the trade tiff is now worrying finance ministers in the Asia-Pacific region. APEC finance ministers meeting recently in Port Moresby, Papua New Guinea, expressed concern that the trade war between the world’s two largest economies was endangering the economy of the entire Asia-Pacific region.
In a statement, the ministers said risks to the global economy have gone up given the “heightened trade and geopolitical tensions.” While this was more in reference to the US-China tiff, it can also include the ongoing crises involving Iran and Saudi Arabia that has impact on global oil supply and prices.
In a report on the APEC meeting by the Agence France-Presse out of Sydney, as published by the Philippine Star, Papua New Guinea treasurer Charles Abel was also quoted as warning that “protectionist trends stemming from trade tensions and the buildup of debt are troubling and a real threat to development and prosperity right around the APEC region.”
“Amid concerns that the Trump administration was pursuing a strong dollar policy and persistent suspicions that China is similarly manipulating currency exchange rates to gain a competitive edge, the group did say it would ‘refrain from competitive devaluation and will not target our exchange rates for competitive purposes,’” the AFP report added.
Only recently, Trump said his government would impose billions of dollars’ worth of additional tariffs on Chinese goods, alleging that China has been systematically cheating on globally agreed trade rules, AFP reported. In turn, it said, Beijing is taking retaliatory measures to protect its economy’s growth.
Chinese President Xi Jinping is expected to visit the Philippines next month. For sure, trade and economic matters will be in the agenda when he meets President Duterte. Meantime, BusinessWorld has reported that the Philippines and the US are now working to resolve a number of pending bilateral trade issues, in light of the possibility of signing a new free trade pact in the future. How we move forward with these two developments can make a big difference on our trade fortunes.
I was in Singapore in late 2004. Lee Hsien Loong had just succeeded Goh Chok Tong as Singapore’s third Prime Minister, and Goh had just been named Senior Minister, a post he held until 2011. In a meeting with Goh at the Istana, I recall him mentioning Singapore’s effort to attract more investments from the Middle East.
This was about three years after 9/11, or the September 11, 2001, terrorist attack on the World Trade Center in New York, and still the height of strained relations between the US and the western world and the Arab and Muslim world. With US allies having become skeptical of Arab money, investment opportunities for the latter became limited at the time. And, in that crisis, Singapore saw an opportunity and made the most of it.
Today, given the obvious competition between the two world’s two largest economies, the Philippines should also take advantage of the situation to get the best deals from both countries. While being a friend to all and a foe to none is easier said than done, now is the time for the Philippines to brush up on diplomacy and negotiating tactics as it tries to put the nation’s interest ahead of anyone else’s. We are living in very interesting times. In crises around us, we should realize the opportunities for advancement or advantage.
Marvin Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippines Press Council