Institute of Strategic and International Studies (ISIS) Malaysia The US-China Trade Conflict Is Malaysia benefiting from diversions in US import demand? Calvin Cheng calvin.ckw@isis.org.my 4 October 2019 ISIS Malaysia Staff Presentation
The US-China Trade War: Has Malaysia benefited from diversions in US import demand? Contents Calvin Cheng, Firdaos Rosli, Maya Kartika September 2019 LINK to Policy Brief 1. US-China trade tensions: context and major events 2. Macroeconomics of trade wars 3. Empirical analysis 4. Policy implications 5. Conclusion 11 October 2019 ISIS Malaysia Staff Presentation
US-China trade tensions A series of unfortunate events Tariff Truce Planned action 2018 Early 2018 July 2018 Aug 2018 Sep 2018 Dec 2018 Jan: US applies US applies List 1 US applies List 2 US applies List 3 US and China tariffs on all washing tariffs (25%) on tariffs (25%) on tariffs (10%) on agree to a machines and solar $34b Chinese $16b Chinese $200b Chinese temporary trade panel imports imports imports imports truce at sidelines of G20 summit in March: US applies China applies China applies China applies Buenos Aires tariffs on all steel 25% tariffs on 25% tariffs on 10% tariffs on (25%) & aluminium $34b US imports $16b US imports $60b US imports (10%) imports in retaliation in retaliation in retaliation 2019 May 2019 Sep 2019 Oct 2019 June 2019 Dec 2019 Progress on trade US and China US applies List 4A US plans tariff List 4B tariffs is tariffs (15%) on hikes on Chinese set to take effect talks slow, US breaks agree to a truce and raises the temporary trade $112b Chinese goods in List 1 (15%) on $160b imports and List 2 from Chinese imports tariff rate on List 3 truce at sidelines tariffs from 10% to of G20 summit in 25% to 30% China applies China intends to 25% Osaka 5-10% tariffs on apply 5-10% 1,717 goods from tariffs on ALL the US US imports 1
US-China trade tensions By the numbers: US tariffs on Chinese goods US tariffs on Chinese imports China tariffs on US imports US List 1 tariffs US List 4A US List 2 tariffs US List 3 tariffs Applied: Sep 2019 Applied: July 2018 Applied: Aug 2018 Applied: Sep 2018 Tariff Rate: 15% Tariff Rate: 25%* Tariff Rate: 25%* Tariff Rate: 25%* Coverage: Coverage: Coverage: Coverage: 3,244 items 1,096 items 279 items 5,964 items (US$112 bil worth) (US$34 bil worth) (US$16 bil worth) (US$200 bil worth) US List 4B Aircraft parts, Oils & chemicals, Seafood & Applied: Dec 2019 machine parts, machine parts, agricultural products, Tariff Rate: 15% electrical machinery, electronic circuits, minerals & ores, electronic parts, railway parts, diodes, chemicals, wooden Coverage: motor vehicles, electronic parts furniture, textiles, 557 items turbines electronics, motor (US$160 bil worth) vehicles & parts *Increasing to 30% on Oct 1 2019 Bloomberg News, Author’s calculations, USTR 2 Note: US Customs allow de minimis $800/day and 1,000 item exclusion lists
US-China trade tensions By the numbers: Chinese tariffs on US goods US tariffs on Chinese imports China tariffs on US imports China tariff 1 China tariff 4A China tariff 2 China tariff 3 Applied: Sep 2019 Applied: Aug 2018 Applied: Sep 2018 Applied: July 2018 Tariff Rate: 15% Tariff Rate: 25%* Tariff Rate: 25%* Tariff Rate: 25%* Coverage: Coverage: Coverage: Coverage: 1,717 items 333 items 5,140 items 545 items (US$75 bil worth) (US$16 bil worth) (US$60 bil worth) (US$34 bil worth) updated 1 June 2019 China tariff 4B Aircraft parts, Soybeans, wheat, machine parts, Aircraft parts, Applied: Dec 2019 electric vehicles, electrical machinery, machine parts, Tariff Rate: 15% meats, seafood, electronic parts, electrical machinery, alcohol & tobacco motor vehicles, electronic parts, Coverage: turbines motor vehicles, 3,361 items turbines (US$75 bil worth) Source: just-style 3
Macroeconomic impacts of trade wars What can existing academic research tell us? Trade wars are generally bad news for the global economy... Direct effects Indirect effects Drop in investment due to ● ● Lower global trade flows Trade increased policy uncertainty ● Lower global GDP growth Lower productivity as global ● Wars ● Higher consumer prices supply chains are disrupted ● Increased uncertainty Higher financing costs ● ISIS Malaysia, Berthou et al. 2019.; Handley & Limao. 2017. Welfare loss to US consumers Case study: Evaluation of the US tariffs ● US consumers bore the costs From higher prices Higher input prices from the tariffs were mostly borne -US$19.2 bil by US consumers Net loss to US consumers and US economy ● From reductions in real income Certain protected producers benefited, but overall net loss for the US economy and consumers -US$6.9 bil Source: Amiti, Weinstein & Reading. 2019; Faigelbaum. 2019.; ISIS Malaysia 4
Looking at potential impacts on Malaysia What can we speculate about Malaysia’s prospects? Why the Malaysian economy may be deeply affected... Small and highly Highly integrated with High exposure to open economy global supply chains Chinese economy 1. Small and highly 2. High integration 3. High exposure to 71% exports-to-GDP 50% M’sian SMEs and Top source of open economy with global supply the Chinese economy 132% trade-to-GDP 82% large firms are investment, trade, and globally integrated tourism chains ...but opportunities for trade and investment ‘diversion’? Many countries in US$165 3 channels for trade diversion: Asia have export billion * 1) Shifts in US import demand structures similar to the products Amount of goods 2) Shifts in Chinese import demand diverted per year to on the US tariff 3) Supply chain shifts avoid tariff incidence lists Source: Amiti, Reading, Weinstein, 2018 5
Methodology A primer on HS Codes How trade is classified internationally The Harmonized System is an international nomenclature for the classification of products. International standardisation goes up to the 6-digit level, anything beyond that, up to the 10-digit level, is decided by the countries themselves. 6
Methodology What we did in the Policy Brief US Tariff Lists 2 US imports data at the HS-10 level 1 Source: US Trade Representative’s Office Source: US Census Bureau 30,355 data points Match using R (US imports and Tariff Lists) 3 4 Analysis (Post-tariff average - pre-tariff average) 6
Empirical Analysis What does the data say? Change in Overall US imports post-tariff - pre-tariff monthly averages (% change) +25% +19% +18% +10% +6% -1% -2% -7% Source: Author’s calculations, US Census Bureau data 7
Empirical Analysis What does the data say? Non-tariff affected goods List 1 tariffs Change in US imports, by tariff list List 2 tariffs post-tariff - pre-tariff monthly averages (% change) List 3 tariffs Source: Author’s calculations, US Census Bureau data Note: does not include Tariff Lists 4A and 4B, as they only come into effect in October/December 2019 8
Empirical Analysis What does the data say? US imports from Malaysia, by tariff list Tariffs applied Index (July - Sep = 100) (List 1, 2, 3) Source: Author’s calculations, US Census Bureau data 9
Empirical Analysis Which products have gained? Top 10+ gainers (US imports from Malaysia) Average monthly gain (RM mil) Photosensitive semiconductor devices +36.3 Memory parts (RAM) +12.2 Printed circuit assemblies +11.6 Radio receivers used in motor vehicles +9.0 Medical rubber gloves +8.3 Non-medical rubber gloves +7.2 Electronic integrated circuits: processors and controllers +6.4 Telecommunications instruments and apparatus +3.5 Instruments and apparatus for for measuring or checking +3.4 semiconductors Tantalum fixed capacitors; electrolytic capacitors +3.3 Electro-medical instruments and appliances; nesoi +3.3 Bedroom furniture +3.2 Source: Author’s calculations, US Census Bureau data Note: does not include Tariff Lists 4A and 4B, as they only come into effect in October/December 2019 10
Empirical Analysis Which products have gained? Top 10 gainers (US imports), East Asia Japan Taiwan Korea Motor vehicles (1500-3000cc) Circuit assemblies Circuit assemblies Machines for semiconductor Processing units Motor vehicles (1500-3000cc) manufacturing Motor vehicles (1000-1500cc) Machines for audio/image processing Jet fuel Phosphides, Inorganic compounds Electronic integrated circuits Motor vehicles (1000-1500cc) Parts of aircraft ADP control/adapter units Vehicle parts Track-laying excavators ADP machine aprts Semiconductor devices Marine-propulsion motors Metal tanks, reservoirs Parts of aircraft Transport vehicles Metal screws Plastic sheets, foil Jet parts Radio/navigational apparatus Electric motor vehicles Compression piston engines Office furniture Aircraft turbojets Source: Author’s calculations, US Census Bureau data 11
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