First things first. A ‘trade war’ – a phrase that has unfortunately entered the popular lexicon – is said to occur when one country retaliates against another by raising import tariffs or placing other restrictions on the opposing country’s imports. A tariff is a tax or duty imposed on the goods imported into a country. A trade war can be very damaging to consumers and businesses in the countries involved as well as the wider global economy.
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The latest incarnation of the trade war, between the major powers US and China, continues. The last round of tariffs was imposed by the US in May 2019; tariffs were raised from 10% to 25% on selected Chinese imports worth US$200 billion. Both sides have already imposed tariffs worth billions of dollars on each other’s goods.
There may be light at the end of the tunnel. Multiple rounds of tariffs and the articulation of strong rhetoric have been followed by trade talks between the trade war’s chief protagonists. Both sides agreed to resume trade talks at a G20 summit hosted by Japan in June 2019. In the short term, the resumption of talks and pausing of more tariffs will be seen as positive for markets and businesses. But that does not mean the trade war is over as tariffs on hundreds of billions of dollars worth of goods are still in place, and both the US and China have much to agree on.
The Trade War in Context
The US-China trade war is negatively affecting the global economy, creating significant uncertainty for businesses and consumers. Businesses in the US, China and elsewhere are anxious about their investments and the viability of their existing supply chains, which to a large extent rely on the world’s two biggest economies. Across the Atlantic from the US, French Finance Minister Bruno Le Maire warned that the trade dispute escalation threatens jobs across Europe.
The trade tariffs, initiated by US President Trump, are borne of his displeasure at the trade imbalances between the two countries and Chinese intellectual property rules which he says handicap American companies. From a strategic perspective, observers in China, and elsewhere, see the trade war as part of an attempt by the US to curb China’s rise in the midst of Western governments’ getting increasingly nervous about China’s growing influence on the global stage.
The US wants Beijing to enact market reforms that fundamentally change the way China’s economy has grown over the past four decades – namely by getting rid of subsidies to state-owned enterprises and opening up its domestic market, including its financial and commercial sectors.
However, experts have observed that China seems to be going in the other direction. In order to keep China’s development on track, President Xi Jinping has slowed the pace of market reforms and reverted to greater support for state-owned enterprises, more state intervention in the economy, more restrictions on foreign investment, and greater CCP influence in private companies. The Chinese economic system no longer seems to be converging with capitalism in the American and Western mould. It increasingly looks like a different model altogether, albeit one that is still producing results.
Impact on Singapore Economy
Export-oriented Singapore is expected to take the biggest hit among major South-east Asian economies because of the trade war. The 2019 Singapore growth forecast range of 1.5% to 2.5% is being reviewed by government agencies, with a lower growth range expected.
Presaging the expected slowdown, gross domestic product shrank an annualized 3.4% in the second quarter from the previous three months, the biggest decline since 2012. This is exacerbated by the fact that both the US and China are among Singapore’s largest trading partners. The trade war aside, the global information and communication technology cycle is slowing down, which will invariably affect Singapore’s electronics manufacturing sector. Investment in machinery and equipment fell and firms had opted to reduce stocks.
In the finance sector, a key constituent of the Singapore economy, banks and other financial firms are particularly vulnerable to volatile market sentiments. In an economy with a positive outlook, companies big and small are willing to take on more debt to grow their business. Naturally, this benefits banks and the finance sector as lending figures increase. A better economy also means that companies are less likely to default on loans.
Conversely, a bear market with an ongoing trade war dampens the debt appetite of companies, and thus the lending prospects and returns of banks. There is also a greater chance of loan defaults. In Singapore, financial institutions with a significant footprint in Greater China face greater headwinds to their asset quality and profitability. There are also challenges due to the slowing growth of the Chinese economy.
The Silver Lining
A trade war need not mean all doom and gloom if due diligence and forward thinking are practised in spotting opportunities to adapt to the changing economic landscape.
According to Professor Locknie Hsu of the Singapore Management University, while the tariffs introduced as part of the trade war have been troubling for many businesses, one silver lining is that tariffs are transparent when compared to non-tariff actions which can be much more opaque and harder to deal with. As disruptive as they are, tariffs provide affected businesses, such as SMEs with affected supply chains, with measurable changes in costs.
While rising business costs are a challenge, firms in Singapore with strong fundamentals to weather the trade tensions should use the situation to seize new opportunities. Businesses which presently rely on manufacturing in only one country could consider the diversification of their production bases, while those currently without alternative supply chains may need to develop alternatives to improve their resilience and flexibility.
Furthermore, there are opportunities for businesses – SMEs and MNCs – to explore new markets through initiatives such as the ASEAN Economic Community, China’s Belt and Road Initiative and potential trade and investment opportunities under the US’ Indo-Pacific Strategy.
Opportunities in these areas can be capitalised on in various ways. While banks are one option, another viable channel for firms to consider are financing services by other lending institutions in the market.
Companies, in particular SMEs, can tap on business financing and business loans in Singapore if they do not meet the financing criteria of traditional banks or prefer not to deal with banks. A micro loan may be suited for small business owners who typically lack collateral or a strong credit history but require working capital to fund operations or ease cashflow.
A micro loan that is unsecured will not require companies to use their assets or resources as collateral, which could be ideal for an entrepreneur who sees a business opportunity amidst a gloomy business outlook.
Alternatively, equipment financing or equipment leasing would be a choice for businesses looking to automate or upgrade their equipment. This is a strategy often used if there is a business downturn and a forward-looking company sees it as an opportunity to make changes that boost the bottomline in the long-term.
Although it is far from clear when the trade war will end, companies should use this period of uncertainty to identify and capitalise on opportunities that boost their prospects.