It takes two to start a trade war

PETALING JAYA: With US President Donald Trump’s campaign rhetoric of inward-looking trade policies now coming into play in the form of import tariffs, it raises the question of whether these are telling signs of a brewing trade war.
RHB Banking Group chief economist and head of research Dr Arup Raha told SunBiz that there has not been a trade war since the Smoot Hawley Tariff Act in the 1930s and any answers at this point will be pure speculation.
“Any answers right now will be pure speculation. The truth is we haven’t had a trade war since the 1930s. And with organisations, such as the World Trade Organisation, who are meant to resolve trade disputes, an all out war seems unlikely. There may be token retaliatory tariffs but hopefully there will be a resolution before it gets very serious,” he noted.
“Moreover, Trump has a tendency to go back on policy announcements, so one can’t be sure how aggressively he will follow a protectionist regime.
“That said, the one consistent message from Trump since the 1980s is that he is not really a free trader. So, we may be in uncharted waters,” he added.
On how Malaysia will be affected, in the event of a trade war, especially with the US being one of its major trading partners, Arup said Malaysia will be undoubtedly affected should a trade war which shrinks global trade growth unfolds, as trade forms an important component of the Malaysian economy.
On whether more trade tarriff’s are on the horizon, Arup said it is hard to tell at this juncture.
“Hard to tell. EU has threatened tariffs on jeans, bourbon, etc which are more symbolic than anything. China has been relatively calm so far.There are no winners if this escalates into a full blown trade war so cooler heads should prevail,” he explained.
Meanwhile, in light of the recent US action, OCBC Bank economist Barnabas Gan noted in his report that, while a trade war is not totally off the cards, market reaction to Trump’s action has been unsurprisingly positive.
“Market reaction was unsurprisingly positive, with Wall Street rallying modestly as the details of the watered-down tariffs meant that initial risks over trade wars can likely be avoided,” he added.
Gan said tariffs without exemption could do more harm than good and likely to impede the US economy as well as global growth and trade activities.
And should exemptions fail to materialise, retaliation fears could once again be at the forefront of worries. Retaliatory trade deals by US’ trade partners wars could spell cascading woes into other US industries and its key exports, and likely inhibit Trump’s agenda of “Putting America First”,” he added.
S&P Global Ratings also flagged concerns of the US’ impending tariffs increasing the risk of a retaliatory action from the affected countries, which could in turn trigger a trade war.
The ratings agency said most of US trading partners have signaled their concern on the announcement and stated that they are prepared to retaliate with their own tariffs on goods imported from the US.
It said while the direct or first-round macroeconomic impact of these tariffs is likely to be negligible, the overall impact is less certain.
It also noted that more important are the potential second-round effects on consumer and business confidence and spending, which would ultimately drag down gross domestic product.
“Although we don’t expect a full-scale trade war, such an outcome is not assured. The initial US tariffs could lead to an escalation of punitive, retaliatory tariffs by trading partners despite the known welfare damaging effects,” it added.
Nevertheless, it said the overall economic impact of the tariffs on the US over the near term is likely to be minimal, with a mixed impact on corporate sectors.
S&P said US domestic steel and aluminium producers are likely to benefit from the tariffs, while certain other corporate sectors would suffer from higher input costs.
US steel imports represent just 2% of global production, while aluminium’s proportion is 6%. However, the tariff for aluminium is lower, it added.