SINGAPORE (May 27): The escalating trade war between the US and China may not be entirely bad news for Singapore. After an initial dampening as trade through the city state slows, the country could actually benefit from this global turmoil as companies relocate parts of their supply chain to the Asean region, say experts.
That movement is already evident. The US business lobby in China, the American Chamber of Commerce of China, surveyed 239 of its members from May 16 to 20 — after both China and the US raised tariffs on each other’s imports — and found that 40.7% had relocated manufacturing facilities outside China or were considering doing so.
Manufacturing will shift from China to other Southeast Asian countries, says Abhineet Kaul, senior director, consulting, public sector and government practice at Frost & Sullivan. “This is evident in both Vietnam and Cambodia, with plans being made in Myanmar, Thailand and Indonesia. This would mean more diversified trade for Singapore, which is beneficial to our economy,” he says.
DBS economist Irvin Seah says Singapore firms are well placed to take advantage of these displacements if they leverage the country’s “more than 20 high-quality” free trade agreements. “As such unique comparative advantage will not be easy to replicate in the near term, the FTAs will provide local companies with the opportunity to gain a further foothold in the two key markets [the US and China],” he says.
Seah adds that Asean countries such as Vietnam, Cambodia and Thailand have manufacturing costs similar to China’s and could see more demand for their exports as well as investments by Chinese companies that want to circumvent US tariffs. “Singapore could see positive spin-offs in terms of demand for its re-exports, logistics and financial intermediation services.”
But given Singapore’s exposure to global trade — about 200% of GDP in real exports and about 20% in net trade — it will be hit in the near term as tensions between the US and China escalate. In fact, Singapore could be more badly hit than most economies in the region.
Deutsche Bank economist Vaninder Singh expects the country’s 2019 growth to slip to 2.1% from 3.2% last year. “The importance of global trade is hard to overstate for the country and the recent worsening of US-China trade tensions is likely to have an almost immediate impact on Singapore’s numbers,” he says.
In September last year, the US imposed a 10% tariff on US$200 billion ($276 billion) worth of Chinese imports, and China responded with duties on US$60 billion of US goods. The trade war briefly looked like it was going to be resolved until talks between the superpowers soured in early May. Since then, the US has further raised tariffs on US$200 billion of Chinese imports to 25% on May 10 and threatened 25% tariffs on another US$325 billion of as-yet untaxed Chinese goods. China has retaliated with a tariff hike, and the Trump administration followed up on that on May 16 by adding telecom equipment giant Huawei to a trade blacklist that restricts its ability to purchase US components and software and do business with other US companies.
The two superpowers will meet at end-June during the G20 summit in Osaka, Japan, but analysts are not expecting an agreement to be reached that soon.
Singapore would have to prepare for the unknown when it comes to retaliatory trade weapons, says Lim Tai Wei, senior lecturer at the Singapore University of Social Sciences. That includes currency devaluation, treasury bonds selloff, full tariffs on all China-made products and other decouplings apart from tech, he says.
What is needed to counter the effects of such a disruption is a regional focus, especially a diversification to the Asean region. That offers additional opportunities for Singapore companies and reduces exposure to China, says Seah.
Lim says Singapore should strengthen regional trade with Asean members, keep setting up tech infrastructures such as 5G networks and “be a pathfinder for European, American, Japanese and Chinese investors keen on investing in Asia and vice versa”.
Meanwhile, to mitigate the immediate negative effects on Singapore, Deutsche Bank’s Singh expects fiscal spending to be the only growth backstop this year in the form of infrastructure spending. He thinks the government is likely to accelerate spending plans while private construction might strengthen a little as developers start work on en bloc projects.
Deutsche Bank expects the Monetary Authority of Singapore to leave nominal effective exchange rate settings unchanged in October with a reduction of the NEER band slope to happen only next April. “Even if the situation deteriorates and MAS has to ease, we expect the Singapore dollar to continue outperforming its Asian peers on the back of safe-haven demand, and possible structural flows due to slowing overseas investments by Singapore public-sector entities, with funds likely being used to fund the budget instead,” says Singh.
