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Business opportunities in a world of trade disruption

Trade tensions between the US and China remain for now, with some countries already in retaliatory mode. However, it is not all doom and gloom.

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Companies impacted by the ongoing US-China trade war should be aware of the true business and tax costs of changing a manufacturing location.

THE US-China trade war has been a topic of widespread discussion and concern. A poll at the recent EY Asia-Pacific Tax Symposium found that over half of the respondents from Singapore-based businesses felt moderate to significant impact from recent US trade actions, and believed that these trade actions will likely continue for the next six months to two years.

With the US mid-term elections giving President Donald Trump a Democrat House of Representatives but a Senate with an even wider Republican majority, it is unlikely that his trade policies will change. This current mindset in the US and the resulting policies have repercussions for the other countries in the world of trade. There is potential for more trade sanctions, with Russia, Iran and North Korea being the prime targets.

Between the US and China, despite the temporary truce, huge differences remain. The Trump administration has set out clear expectations, planning to reinstate the suspended tariffs if their demands are not met to their satisfaction after the 90-day negotiation period.

Countries, including Japan and the European Union (EU), will be involved in high-pressure free trade agreement (FTA) negotiations, just like Mexico and Canada. Ongoing investigations into certain goods, such as automobiles, automotive parts and uranium, by US Trade Representative Robert Lighthizer may result in more trade barriers for imports when completed. If this trend continues, the periodic appearance of specific international trade deals that are narrowly scoped, whether positive or punitive, may become the new normal.

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RETALIATION AND RISK

With the increase in US trade actions, the risk of retaliation grows. Canada, Mexico, the EU, Turkey and India have already put in place retaliatory tariffs, with Russia, Indonesia and Japan considering to follow suit.

This potentially has a significant impact on the sectors that are directly affected, yet the overall economic impact from the US-China trade war is, however, likely to be small - around 1.6 per cent off China's economic growth over the first two years, according to an analysis by the International Monetary Fund. However, the unpredictability of these actions causes an increase in risk and complexity for businesses carrying out cross-border trade, with a longer-term impact on investment decisions.

The landscape gets more complex with trade liberalisation measures being implemented in parallel. Between October 2017 and May 2018, members of the World Trade Organization not only implemented 75 new trade restrictive measures but also 89 new trade facilitative measures. For example, it is a less well-known fact that Mr Trump signed into law a bill reducing and suspending tariffs on around 1,600 products in September 2018 - the same month he unleashed the third list of punitive tariffs upon China.

Offering some optimism on the trade front is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which accounts for nearly 13.5 per cent of global gross domestic product (GDP), and is due to be implemented on Dec 30 this year. This will occur for Mexico, Singapore, Canada, Japan, Australia, New Zealand and probably Vietnam, who have already ratified the agreement. The CPTPP looks to provide benefits such as tariff elimination of more than 98 per cent of tariffs covering sectors such as industrial goods, seafood, horticulture and wine.

There are three aspects of the CPTPP that businesses should take note of.

Firstly, Peru, Chile, Brunei and Malaysia are also part of the 11-member CPTPP, but have not completed their ratification processes. It is expected that slower ratification of the agreement for these latter countries will result in their commitments entering into force later.

Secondly, being an open-access FTA, markets such as Taiwan, Thailand, the UK and mainland China are studying the possibility of accession to the CPTPP. The scope and impact of the CPTPP may expand in the future.

Lastly, bilateral agreements within the CPTPP also offer business opportunities but will require identification and detailed analysis, for instance, Canadian-made motor vehicles sold in Australia and Malaysia enjoy more liberal rules of origin.

The other significant FTA in the region, the Regional Comprehensive Economic Partnership (RCEP), which accounts for 30 per cent of global GDP, is also in the works. The RCEP is targeted for conclusion this year - substantial progress was made in 2018 but major announcements are indicated for 2019.

There are, among others, outstanding differences over market access such as India's preference for services but not goods liberalisation, which is opposite to the preferences of other members. However, if these issues can be resolved, the RCEP will be the largest FTA yet, bringing huge potential for trade and market access to the region.

UNREALISED TRADE OPPORTUNITIES

With the increasing complexity of trade measures and barriers, companies are naturally much more focused on trade risk as part of business and supply chain planning. However, many may not be fully aware of the proliferation of the FTAs and the opportunities available to them.

Where companies impacted by the US-China trade war are considering to shift sourcing or production facilities away from China, awareness of the true business and tax costs of changing a manufacturing location can be a game-changer. Therefore, businesses need to have a strong knowledge of FTAs and corporate tax regimes, as well as government credits and incentives, to proactively plan for cost efficiencies.

In the face of trade wars and increased trade risk, astute navigation of the complex international trade and business environment can still lead to favourable outcomes.

  • The writers are EY Asia-Pacific Indirect Tax Leader, and Senior Manager, Indirect Tax, Ernst & Young Solutions LLP, respectively.

‚ÄčThe views in this article are those of the writers and do not necessarily reflect the views of the global EY organisation or its member firms.