PRESIDENT Donald Trump’s decision to impose tariffs on steel and aluminium imports into the United States will have a wider impact than just the industry he is protecting, and comes after the January decision to impose tariffs on solar panels and washing machines. The tariff will take effect 15 days after March 8 when the order was signed.
The supply chain on which the global economy relies on to move goods and services from source to the end-customer will be affected by this latest move. As an example of how this will impact the supply chain, manufacturers who buy their machinery from the United States will now face higher costs, at least for the forseeable future until US steel and aluminium producers are able to meet domestic demand.
Because many of the components that make up these machinery require steel and aluminium, the cost of these machinery will rise, thereby increasing costs for the manufacturers, who will pass on the price increases down the line of the value chain.
Pentamaster Corp Bhd chairman and co-founder Chuah Choon Bin believes that the tariffs will have unintended consequences. “Frankly, while the United States is protecting only one industry, there’ll be repercussions along the supply chain. There are lots of steel and aluminium components in all machinery,” he tells StarBizWeek, adding that 80% of Pentamaster’s automated and semi-automated machinery is exported. These machinery is used by other manufacturers to make the finished products that are then exported.
“I ship less than 5% to the United States, but I sell a lot to US companies based in China,” Chuah says, noting that manufacturers using cheap Chinese steel will have an advantage over those who see their raw material cost going up.
He also is unsure if that advantage will hold for those who export to the United States since there could be rules on how much components must be locally sourced and how much can come from outside.
But the supply chain impact is the underlying problem to what may become a full-blown trade war that pundits have warned of. Reuters reported International Monetary Fund managing director Christine Lagarde fearing the escalation from retaliations against the US tariffs. “It is that escalation that is in and of itself dangerous for the impact that it has on all those economies, and furthermore, for the impact that it has on confidence,” she said.
China and the European Union (EU) have responded to tariffs by saying that they will protect their own interests. The EU has threatened to retaliate by imposing tariffs on items ranging from Levi’s jeans to US agricultural products and Reuters reported that China will take “strong” measures to protect its own interest.
Globetronics Technology Bhd chief executive officer Datuk Heng Huck Lee says tariffs in general are bad and against World Trade Organisation rules, where baseline agreements on competition have been set. He says for now, the export-driven electrical and electronic (E&E) subsectors remain safe.
“If Trump widens the tariff net and includes E&E products, then we’ll certainly be affected, but for now we’re still the most competitive as far as E&E component manufacturing is concerned,” he points out. Heng, whose company produces components used in smartphones, says, for now, it depends on which E&E subsector a company is operating from to assess the impact.
“As far as the local E&E subsectors are concerned, if a company is producing assembly and testing components, then there is little impact as most of the components are made from alloy and copper. But companies which source their process-equipment machinery from the United States will be affected due to the higher costs since these machinery have steel components,” he says. Alternatively, Heng says these companies can source from China or Japan.
E&E shipments make up the largest source of Malaysian exports, at roughly 35% annually. E&E exports come under the manufactured goods component of the country’s total exports, which totalled RM935.39bil last year. Other manufactured goods include gloves and furniture, as well as higher value-added downstream products derived from petroleum and other petroleum-related chemicals together with wood- and timber-based products.
Trump’s trade policy
Ever since Trump became president, talk of friction over trade has always been around the corner. Soon after being sworn in as the 45th president, he released a video in which he talked of “fair, bilateral trade deals that bring jobs and industry back onto American shores”.
Three days after becoming president, he signed an executive order to withdraw the United States from the 12-nation Trans-Pacific Partnership trade agreement, which he considered bad for US interests.
The North American Free Trade Agreement (Nafta) is also being renegotiated with Canada and Mexico.
Trump has also threatened to impose tariffs of between 15% and 35% on US companies which move their operations to Mexico, a reminder of the economic nationalist underpinnings of his “America First” platform.
The Wall Street Journal reported that the United States is also weighing broad trade and investment penalties against China, as it completes a probe into allegations of Chinese theft and expropriation of American intellectual property. This is on top of officials asking China to cut its annual trade deficit with the United States by US$100bil. The tariff on solar panels was widely seen as a move against Chinese manufacturers, although Malaysia is the top solar panel exporter to the United States.
Escalation and exposure
AmBank Research does not rule out the risk for more tariffs being imposed by the United States, given Trump’s view on tariffs as a “reciprocal tax” on imports from countries that charge higher duties on US goods compared to what the country charges for their goods.
“A trade war is a zero-sum game although in the interim period, such noises can add more pressure on the US dollar to weaken partly due to being a net debtor and sitting in twin deficits. We see the downside risk to the US dollar around the 83 to 85 levels, while the ringgit could hover around the 3.78 to 3.80 levels against the US dollar,” it says.
AmBank Research expects potential trade retaliation from the EU and other steel producers, thus heightening fears of a trade war. “Although Mexico and Canada are exempted, this is merely temporary, while the US and its neighbours renegotiate the Nafta,” it says.
“We foresee the possibilities for Europe to likely retaliate. Exposure of selected key European countries to total US imports of all steel products is around 9% or 3.23 million tonnes. We estimate the loss will be around 1.75 million to 1.78 million tonnes, if the European countries maintain their current market share of 9%. Europe has indicated a retaliation by imposing tariffs on a list of US products, ie, the US Harley-Davidson motorcycles, bourbon whiskey and blue jeans,” it says.
It says China’s exposure to the United States is around 2.2% of the total US imports of all steel products, as trade barriers are already in place since May 2016 on some Chinese steel products. “From our estimation, the potential loss will be about 390,000 to 400,000 tonnes while maintaining China’s market share of 2.2%”.
AmBank Research says Malaysia’s exposure to the steel tariff escalates only when the United States decides to impose tariffs on all imported steel products on a group of countries that includes Malaysia, which exported 96,000 tonnes of steel products to the country last year.
The tariff will be imposed should these group of 12 countries fail to meet the target of reducing 13.3 million tonnes of all steel product imports to the United States.
In this scenario, Malaysian steel exports will drop by 75,000 tonnes to 21,000 tonnes going by last year’s shipments.
Apart from import tariffs, these countries will also experience anti-dumping or counter-vailing duty collections applicable to any steel product.
Meanwhile, UOB Kay Hian Research believes that the US imports of steel (which was equivalent to 8% of the total steel imported globally in 2016) should be easily absorbed by firm steel demand and also supported by massive capacity cuts undertaken by China.
“We are of the view that excess steel supply from US imports (the United States imported 26.9 million tonnes of steel in January to September 2017) may not be fully diverted into Asia after taking into consideration the logistics cost for the United States’ top steel suppliers such as Canada, Brazil, Mexico and Russia. In addition, China is also committed to cutting steel capacity by 30 million tonnes in 2018, which should help to cushion the impact of excess steel supply,” it adds.
The research house has an “overweight” call on steel stocks. “We think the negative sentiment arising from the imposition of tariffs is only temporary, and investors should remain invested given the promising earnings outlook supported by effective capital management,” it recommends.
Sourced from : thestaronline