ASEAN Roundtable Series: What Lessons Learned from Financial Crises of Recent Times
Published on 10 September 2018
Dr. Donald Hanna
Group Chief Economist, CIMB Group
Dr. Hanna is a Fulbright Scholar, and has a PhD in Economics from Harvard University and a BA, summa cum laude, in Economics and Spanish from the University of California at Berkeley. He is also a member of the Advisory Board of the Centre for Applied Macroeconomic Analysis at Australia National University and the Asian Development Bank’s International Advisory Group. He is fluent in both Spanish and Bahasa Indonesia.
Dato’ Muhamad Noor Yacob
Board Member, Malaysia Productivity Corporation (MPC)
Former Ambassador/Permanent Representative of Malaysia to World Trade Organisation (WTO)
Chief Executive Officer European Union (EU) – Malaysia Chamber of Commerce and Industry
Benetello started his career with EU-Malaysia Chamber of Commerce and Industry (EUMCCI) in April 2016 when he joined the Board of the Chamber and was later appointed the Chairman of the Board of Directors.
The valuable contributions he made during his chairmanship prompted the Chamber to appoint him as EUMCCI’s first CEO to further leverage on his capability and expertise in operations.
Benetello holds a Masters Degree in Marketing from Lincoln University, UK and an a Master in Business Administration from SDA Bocconi School of Management, Bocconi University, Italy.
Benetello’s vision is to make EUMCCI the go-to platform for members, other EU Bilateral Chambers and the EU business community in Malaysia, where to aggregate business critical issues into recommendations for relevant stakeholders to make Malaysia a friendly business environment for EU companies and investors to the benefit of all parties involved.”
Siobhan M. Das
Executive Director, American Malaysian Chamber of Commerce (AMCHAM)
She returned to Malaysia after almost 12 years in China, five of which she served as Director of Committees (Industry) at the largest American Chamber of Commerce in the Asia Pacific – Shanghai. There she directed and shaped the role of 26 Committees filled with volunteering senior executives, leading them to advocate successfully on behalf of the U.S. business communities they represent and address issues impacting day-to-day business.
Prior to moving into the non-profit sector, Siobhan spent more than 20 years in the film and television industry across Asia and the U.S., including owning her own production & corporate communications company in Kuala Lumpur. She holds two degrees from Boston University and, more recently, she was a Sloan Fellow at the London Business School where she earned her Master’s in Leadership and Strategy.
Tan Sri Dr. Munir Majid
Chairman, CIMB ASEAN Research Institute President, ASEAN Business Club
He has an extensive experience and is well known in the Malaysian corporate world. He had been the Group Editor of the New Straits Times, first executive chairman of CIMB and founding chairman of the Malaysian Securities Commission. After stepping down from the Securities Commission, he became Independent Non-Executive Director of Telekom Malaysia Berhad, Chairman of Celcom (Malaysia) Berhad and Non-Executive Chairman of Malaysian Airline System Berhad. He was Founder President of the Kuala Lumpur Business Club, established in 2003 and is a member of the Court of Fellows of the Malaysian Institute of Management.
Tan Sri Dr. Munir obtained a B.Sc (Econ) and Ph.D in International Relations from the London School of Economic and Political Science (LSE) in 1971 and 1978. He is an Honorary Fellow of LSE and continues the long association with his alma mater as Visiting Senior Fellow at the Centre of International Affairs, Diplomacy and Strategy. Tan Sri Dr. Munir is an associate of Southeast Asia Centre (SEAC) at LSE.
CARI’s ASEAN Roundtable Series on 14 August 2018 brought together a panel of speakers who discussed views and concerns on the tariff battle between the United States and China and how it will impact the economy in the region. Titled “Trade War and Its Impact on ASEAN”, the speakers acknowledged that a trade war is never good for the global economy in the long run and steps should be taken to uphold free-trade and a rules-based system. Also, speakers were reminded that apart from the trade war, there is the prospect of a ‘Capital War’ to the global economy that needs to be addressed.
The advent of Trade War between the U.S. and China has seen many markets fearing the effects it would have on the rules-based, free trade system and open global economy. What started with the United States imposing global safeguard tariffs on solar panels and washing machines, has now led to tariffs on steels, aluminium, automobiles, food, motorcycles, machinery, and electrical equipment and electrical equipment.
In 6 July 2018, the Donald Trump led administration imposed 25 per cent tariffs on US$34 billion worth of goods from China.
It further escalated when Trump’s administration issued a list of 10 per cent tariff on US$200 billion worth of Chinese goods on 10 July 2018.
The president up the ante by warning China on 2 August 2018 that further 25 per cent tariff will be imposed on the next US$200 billion of Chinese imports. On 3 August 2018, China also retaliated by announcing that it could add duties of 5 to 25 per cent on US$60 billion worth of goods from the United States.
On 23 August 2018, an additional US$16 billion worth of Chinese products were affected and the Chinese government retaliated with its own tariffs on American goods worth the same amount.
These moves have only raised fears and questions over the future of open, free market trade, and there is a great deal of uncertainty as to how the trade war would affect global markets. In order to bring some clarity these complex issues, the ASEAN roundtable series brought together a group of eminent speakers, namely, Dr. Donald Hanna, Group Chief Economist, CIMB Group; Dato’ Muhamad Noor Yacob, Board Member, Malaysia Productivity Corporation (MPC) and Former Ambassador and Permanent Representative of Malaysia to World Trade Organisation (WTO); Roberto Benetello, Chief Executive Officer, European Union (EU) – Malaysia Chamber of Commerce and Industry, and Siobhan Das, Executive Director, American Malaysian Chamber of Commerce (AMCHAM) and the session was moderated by Tan Sri Dr. Munir Majid, Chairman of CIMB ASEAN Research Institute.
Dr. Munir opened the session by saying that the historic paradigm of a rules-based, free trade oriented and open global economy is under attack, with some experts arguing that it is crumbling. For ASEAN, while some opportunities may arise from the fallout of the trade war, the effects for those countries are generally negative as they have benefited from a liberal trading environment. He said that open regionalism and economic integration is the answer and the rate of integration at the moment is not good enough.
1. Impact on ASEAN growth and inflation
The World Bank reports that a trade war between the U.S. and China will affect the Southeast Asian region as two-thirds of the products that the US was targeting with additional tariffs are connected to a value chain that stretches across ASEAN countries namely the Philippines, Malaysia, and Vietnam. For example, products such as electrical equipments and machinery, though assembled in China, use materials from several countries in ASEAN.
Figure 1: Possible impact on ASEAN’s GDP and inflation if a trade war happens
Based on CIMB Group’s projections, Singapore growth rate would be the hardest hit as a trade war would reduce the nation’s growth by 2.0 percentage points. Indonesia is next with a reduction of 1.6 percentage points, followed by Malaysia with 1.3 and Thailand with 1.2 percentage points.
Concerning collective impact, ASEAN-6, which comprises of Malaysia, Thailand, Brunei Darussalam, Indonesia, Singapore and The Philippines, growth would be diminished by 1.4 percentage points while nations bordering the Mekong Delta would see a reduction of 1.5 percentage points.
Deflationary pressures are expected in all the ASEAN nation as a result of slower economic growth. While not covered in the talk, this prospect might lead the governments of these nations to use monetary policy to counteract the negative price effects.
2. The current rules-based free market was created to counter trade wars during the Great Depression
Formerly the permanent representative of the World Trade Organisation (WTO), Muhamad Nor said the setting up of the organisation through its precursor, the General Agreement on Tariffs and Trades (GATT), is attributed to the lessons learnt from the trade war that took place during the Great Depression era in the late 1920s.
Muhamad Nor reminded attendees about the Smoot-Hawley Tariff Act, which increased the U.S. duties on imports to an average of 60 per cent had led to other major trading partners imposing retaliatory measures. The law which was enacted in 1930 aggravated the Great Depression, and in 1944, the Bretton Woods Agreement was the foundation for a cooperative economic environment system called the Bretton Woods System, which was in use after the World War 2.
The agreement also saw the establishment of the International Monetary Fund (IMF), International Bank of Reconstruction and Development (IBRD), which is now known as the World Bank and International Trade Organisation (ITO).
The establishment of ITO was to monitor the negotiations and administration of a new multilateral trading regime, but it never came into force due to objections from the US Congress. However, the formation of GATT was finalised between 23 nations in Geneva in 1947, and it was the multilateral trading body until the WTO succeeded it in 1995.
The GATT negotiations saw substantial reductions in tariffs, especially on industrial goods, from an average of 20 per cent to about 5 per cent in 1999.
Separately, Dr. Munir also said that structural market intervention by the US had occurred before. One example is the Plaza Accord, which forced the revaluation of the Japanese yen and the Deutsche mark, which resulted in a massive increase of Japanese investment in Southeast Asia.
3. Markets might have another war – called the capital war – to contend with
Many experts weighed in their thoughts on the trade war on how it is going to hamper global growth. The International Monetary Fund (IMF) in a report alerted that the escalating trade feud between the U.S. and the rest of the world could cost the global economy US$430 billion, with the latter more susceptible in the rising tariff war.
The IMF also estimates that the global economy will be 0.5% smaller by 2020 if the various tariffs threatened by the U.S., China, Europe, Mexico, Japan and Canada are all applied.
Dr. Hanna further reiterated the argument by stating that U.S. GDP growth would fall by 0.7 per cent in 2019. By 2020, the cumulative GDP losses would reach 1 per cent. As for Chinese GDP growth, it would be 0.8 per cent lower in 2019, with cumulative GDP losses of 1.3 per cent by 2020. Global GDP would fall by 0.5 per cent relative to Oxford Economics’ baseline of 0 percent by 2019.
However, he reminded the attendees that a capital war could change the complexion of global economics and how it could be used as a retaliatory tool by China, in addition to tariffs.
China only imports US$150 billion worth of goods from the United States while the United States imports US$500 billion worth of products from China. Thus, in the trade war situation between the two countries, China is disadvantaged in terms of relying solely on retaliatory tariffs.
China might then resort to using capital, rather than trade based methods of retaliation, against the U.S. According to Dr Hanna, China current owns US$1.2 trillion worth of U.S Government debt, making it the largest owner of U.S.Treasuries. This places the U.S. in a precarious position.
If China decides to sell even a portion of those bonds in the open market, it will cause ripples in the interest rates and bond market. Markets would likely see fixed income prices falling, and corresponding yields would increase. A rise in yields would raise the cost of borrowing for US companies and consumers and increasing the chances of a U.S. economic slowdown. The end result of that slowdown is likely to be a negative spillover effect on the global economy.
Figure 3: Real GDP Growth projections by CIMB in the event of a Capital War
4. Trade war is testing the effectiveness of WTO’s dispute settlement system
Muhamad Nor said the existence of the dispute settlement system in WTO should help ease the trade war between the U.S.and China. The system been described as the ‘crown jewel’ as it is the only system in resolving disputes in multilateral trade.
Under the WTO, the majority of disputes among member nation center on non-compliance with broken agreements. WTO members have agreed if they believe any member has violated trade rules or their commitments, they will utilize the WTO dispute settlement system instead of taking unilateral action. The system is managed by the Dispute Settlement Body (DSB), and it’s set of rules are embodied under the as the Dispute Settlement Understanding.
More than 500 disputes have been filed at the WTO by members since 1995, and the US alone, according to the dispute cases listed by WTO, has brought more than 129 conflicts (As of 5 September 2018) to the settlement system and been respondent to 164 cases (As of 5 September 2018).
According to Muhamad Nor, since the beginning of 2018, 18 new complaints of non-compliance with commitments have been filed with the DSB. The U.S has stated that the recently implemented tariffs are justified under Article XXI of the GATT – on grounds of national security. Complainants contend that the US actions are safeguard measures – which are permitted – but entitles affected countries to compensation. The U.S. has chosen to go against the laws of dispute settlement and justify its use of retaliatory tariffs by appealing to Article XXI of the GATT.
Even though the U.S. is a fervent user of the system, it has also been critical of it as it alleges that some rulings have been unfair and that the appellate body has engaged in judicial activism – rulemaking beyond what members signed up for in the system. Thus, to gather steam for its criticism, Muhammad Nor said in his presentation that the US has blocked appointments to fill vacancies in the 7-member appellate body. Muhamad also added that some observers are concerned that Trump Administration might pull the U.S. out of WTO.
In addition, Muhamad Nor felt that the system was being held back in part by the Trump’s administration blocking of those aforementioned vacancies. Thus, the ability of the system to settle disputes, was being held back by these obstacles.
Finally, Muhamad Nor said the DSB members should take punitive measures on those members who were not adhering to the DSU rules.
5. There are potential positive and negative impacts for EU companies in the trade war
An escalating trade war is likely to have negative spillover effects on EU companies. According to Roberto Benetello, many European firms would struggle if a trade war happens because these firms produce and sell goods in the U.S.and China.
For example, German carmakers Daimler and BMW would suffer since these two companies both make vehicles in the United States and export them to China. However, even Europe is not spared from tariffs as the US has threatened them with the use of tariff barriers. For the time being, U.S. and EU came to an agreement and agreed to avoid an all-out trade war, with even the European Commission chief Jean-Claude Juncker announced a new phase in its relations with the U.S. after Trump’s threat to place tariff on European vehicles was put aside.
But, there are potential positives too, says Benetello. He mentioned that China’s imports from the EU jumped 20 per cent year-on-year (YOY) in July 2018 and China hopes to import more from European firms as China currently purchases production equipments and machineries from U.S. firms.
Also, the EU and China improved bilateral ties by deepening commercial and trade relations. While products from Europe that are manufactured and assembled in China and shipped to the U.S. stand to increase in price after the application of tariffs, this may be an excellent opportunity to shift production facilities to ASEAN countries in order to minimise or even avoid tariff barriers.
6. Trade wars may bring negatives and positives impact on ASEAN
One fact is certain – for many ASEAN countries, China is a very significant trading partner and these nations are part of global supply chains with China and the US. There are bound to be challenges for the region if a trade war escalates.
Benetello said ASEAN nations in the region export most of its products to China, rather than the US and tariffs on Chinese products, especially on consumer electronics, by the Trump-led administration might see bleak consequences for Singapore and Malaysia as both these nations are part of the electronics supply chain.
Singapore, looks to be especially susceptible to the impact of the trade war, with the effects potentially significant in sectors such as transportation, storage, wholesale and retail. Also, the supply chains will be disrupted as Asian countries especially Singapore are wired into the supply chain and export intermediate products to China, which is the last processing hub.
Also, another consequence of the trade war could see China dumping its excess steel, aluminium and iron onto other nations, which might be negatively impact the Indonesian metals industry.
However, Benetello believes that for every problem, there is an opportunity. The dynamics of trade partnerships would change as China is expected to assess its trade alliances in Asia and forge closer ties with ASEAN. Global multinational firms would seek to expand its production centres in the region and reduce its capacity in China given the cost of the final product with tariffs being levied. Benetello said there is also the possibility for US-based apparel companies shifting their manufacturing plants away from China towards nations like Vietnam and Indonesia.
As a punitive measure, China may also deny production licenses to US firms. This situation would reduce competition for European or Asian companies in a wide range of sectors and industries, giving them a distinct advantage over the U.S.
Malaysia is seen as a competitive alternative to China when it comes to supplying the US with chemical products while China could also look to Vietnam’s labour-intensive consumer goods industry in a bid to raise market access, diversify risks and slash costs.
The Philippines could boost exports to the US by taking advantage of the tariffs on Chinese pork and Thailand, ASEAN’s most significant automotive player, could become a more attractive manufacturing venue for global automakers, including Harley-Davidson and Tesla if the US imposes tariffs on European vehicles.
ASEAN needs to uphold free trade and press hard for economic integration
Dr. Munir was forthright with his call for ASEAN to speed its integration progress. He emphasised that ASEAN has to be serious and honest about its integration and work on completing the RCEP. Since the economic integration initiative was announced in 2015, he said the number of non-tariff barriers has been increasing.
The danger is that ASEAN member states would respond to a trade war by safeguarding individual national interest, but it is also in its interest to collectively make ASEAN economic integration a priority and to place Southeast Asia as a bedrock of future expansion and prosperity.
A trade war which intensifies and if it is prolonged might lead to regional industrial restructuring. The challenge is keeping investment flows moving, and reinforcing the notion of free trade in the global economy.
Dr. Munir said this is the regional challenge for ASEAN members, in which they have to be part of a regional economic bloc to generate growth and to fill the gaps voided by a more protected US$19 trillion American market.
Siobhan’s echoed Dr Munir’s statements by urging ASEAN to work on its regionalism to ensure that businesses would have a more predictable environment to operate. The AEC 2025 blueprint should be fine-tuned and accelerated, and she said the various trade agreement in the pipeline such as The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and RCEP would help nations and consumers. She also reminded speakers that less global trade flows is never good.
Benetello expects ASEAN to call for accelerated negotiations on the RCEP, but a trade war might “slow down the effort”. In the end, a trade war between the U.S. and China magnifies extremely complex interconnectedness of global markets and trade flows. The concluding fact is that any disruption to such a complex system bears many and unexpected repercussions.