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Navigating a challenging landscape of disrupted global trade flows

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While the risks have increased significantly for businesses due to the US-China trade spat, economists believe that Singapore companies can still benefit from potential trade flows into the ASEAN region.

They say countries and companies have already started looking at alternative markets for their products if any should be caught within the tariffs list rolled out by the US and China.

“Singapore’s firms increasingly need to capitalise on the ‘unintended’ trade flows into ASEAN. The growth spots will be the increased connectivity to these ASEAN economies,” said UOB economist Francis Tan.

He said Chinese manufacturers may shift their factories or plants to ASEAN at a faster pace due to more challenging access to US markets as tariffs raise the cost of exports of Chinese-made goods and as labour costs rise quickly in China.

“I am positive on Thailand, Vietnam, and Malaysia on the receiving end of such flows,” said Mr Tan.

Vishnu Varathan, Mizuho Bank’s economist, said the US-China trade tensions could deepen trade relations elsewhere although on a limited scale.

“To some extent, some countries could benefit from a larger slice of the pie, being a substitute, but the global pie is undeniably smaller than it otherwise would have been,” said Mr Varathan.

“In reality, we could see some limited gains in terms of final assembly being re-located away from China,” he said.

“It all boils down to how key products destined for tariff markets can find alternative sales points,” said Song Seng Wun, Regional Economist at CIMB Private Banking.

If growth is strong, Mr Song said, then the impact would not be so severe compared with a slowing economy.

Sector Plays: Some sectors will do ok; others more at risk

It is widely acknowledged that Singapore, as a small open economy, will not be immune to the US-China trade dispute.  

Despite not being directly impacted by tariffs, the supply-chain transmission could quickly hit Singapore’s trade sector hard, while unanticipated financial shocks could resonate rapidly.

But economists said some threats in the horizon are being countered by stronger-than-expected performances in certain sectors of the Singapore economy.

For instance, while goods-producing sectors are slowing to some extent, the technology sector is still growing in the global economy, while the chemicals sector is being supported by steadier prices.

“If the demand side holds, the services sector could mitigate against the goods sector slowdown and, hence, the economy is still holding up,” said Mr Song.

Still, economists say it is uncertain how far the “US trade tantrum” will spread and what is the end game.

“Heightened uncertainties may adversely affect business confidence and their investment capital expenditure decisions, and potentially hit consumers who may have to pay higher costs for certain goods,” said Selena Ling, Head of Treasury Research and Strategy at OCBC Bank.

“Industries most likely affected include the electronics, chemicals, and maritime & shipping industries. For non-manufacturing sectors, such as finance, increased market volatility may drive capital flows and flight to quality,” said Ms Ling.

“While there may be some safe-haven flows, nevertheless, Singapore may also face a similar fund outflow story which prevailed in Emerging Markets and Asia in June this year,” she added.

UOB’s Mr Tan believes that “highly-leveraged” and export sectors will take a hit, although these would be offset by “counter-cyclicals and risk-free assets” as investors re-allocate their funds into perceived safe havens.

Scenarios: Holding off the worst case for now

Market watchers are generally projecting three scenarios for the US-China trade spat.

In the best-case scenario, the US stops at or reverses the current US$34-50 billion of tariffs it has already imposed, triggering a similar positive response from China. According to OCBC’s Ms Ling, there is a 25 per cent probability of this happening.

In the mid-case scenario, the US holds its guns at the next level of US$200 billion in tariffs (45 per cent probability)

A worst-case scenario sees the US going for broke and imposes tariffs on US$550 billion worth of Chinese products as it has threatened (30 percent probability)

Barring unforeseen circumstances, most observers say a “mid-case” scenario is most likely for now.

Mitigation: Leveraging trade pacts

Economists say more countries and regions will try to mitigate the effects of the US-China trade war by leveraging multi- and bilateral trade agreements.

“Countries within the trade deals will channel their goods and services to where they can find opportunities,” said Mr Song.

Singapore, for one, has championed open global linkages through its web of free trade agreements and involvement with multilateral platforms such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

As part of ASEAN, Singapore has also participated in ongoing efforts to conclude the Regional Comprehensive Economic Partnership (RCEP) involving the Southeast Asian grouping and many of its major trading partners.

“Working on more multilateral agreements will continue to be of great importance for Singapore,” said Mizuho’s Mr Varathan, adding that facilitating regional services, such as legal, regulatory and technical expertise, as well as connectivity, remain key advantages. 

Outlook: Hopes for the best compromise

Ultimately, the impact of the US-China trade fight on Singapore may well be shaped by consumer behaviour which will, in turn, drive business confidence.

“The risks are starting to materialise but not yet showing up in the real economy for analysts to cut their forecasts,” said Mr Song.

At this point, CIMB’s full year 2018 forecast for the Singapore economy is still intact, mirroring the official view of the Monetary Authority of Singapore, at around 3.2 per cent for the year.

“For the second half, the big question mark is on consumer confidence and whether businesses pull back on investments,” said Mr Song.

“If consumers lose confidence, then things may change for the worse,” he said.

For 2019, CIMB is looking at 3 per cent growth for the Singapore economy, slightly down from 2018 but still relatively steady.

OCBC projects that if overall regional and China-centric trade flows decline, the Singapore economy will likely take a hit due to its dependence on trade and manufacturing activities.

In a July 2018 report, OCBC identified two possible near-term scenarios: (1) a mild trade war with US$50 billion of US tariffs, and (2) a more severe trade war with US$250 billion of US tariffs.

If the more severe scenario occurs, OCBC said Singapore’s full-year 2018 GDP growth may be shaved by 0.3 percentage points to around 2.7 per cent year on year, down from its initial forecast of 3 per cent.

This article is part of a series brought to you by CPA Australia to share knowledge on topical issues relevant to business, finance and accounting. 

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