Impact of escalating trade war on Taiwan
- Taiwan’s near-term growth outlook is sluggish, regardless of trade war developments
- Investment diversification by Taiwanese manufacturers is likely to continue in the coming years…
- …amidst persistent uncertainties in China-US relations
- We keep the 2019 and 2020 GDP growth forecasts at 1.9% and 1.8%, respectively, for the time being…
- …but see risks on the downside
Furthermore, the US President Donald Trump has threatened to impose tariffs on the remaining USD300bn Chinese goods entering the US. The US Trade Representative proposed the USD300bn tariff list on May 13, and said that it will hold a public hearing on June 17 to further decide. Whether these new tariffs will go into effect remains uncertain. Trade discussions between the two countries may still continue in the next one month, in the runup to the G20 Summit on June 28-29.
Tariffs on USD200bn of Chinese exports are not new
The US’s tariffs on USD200bn Chinese exports are not new. Tariff rate on these products was initially raised to 10% in September 2018 and scheduled to be raised further to 25% in January 2019. We had cut Taiwan’s 2018-2019 GDP growth forecasts by a total of 0.3ppt to reflect the resultant impact (here). The belated implementation of these tariffs does not affect our macroeconomic projections.
As elaborated previously, tariffs on USD200bn Chinese exports will mainly hurt China’s manufacturing sector rather than Taiwan’s. The Taiwanese firms producing in China and exporting intermediate goods to China are not concentrated in the sectors targeted by the USD200bn tariff list. The knock-on impact on Taiwan’s supply chain should be limited.
The USD300bn tariff plan is a bigger threat
The US’s tariff plan on the remaining USD300bn Chinese exports is a bigger threat. This new tariff list includes essentially all products not covered by the previous rounds of tariffs against China. In particular, it includes a wide range of electronics products, from cellphones, laptops, tablet computers, to video monitors, TV reception apparatus, etc. Taiwanese firms are highly involved in the China-centered electronics supply chain. About 20% of China’s electronics imports are sourced from Taiwan today. For Taiwan, electronics exports to China account for nearly 20% of its GDP (here).
Trade disruption risk could be significant. If 25% tariffs on the USD300bn Chinese exports are fully implemented later this year, we reckon that it could shave Taiwan’s GDP growth by close to 1ppt during the 2019-20 period.
Near-term growth outlook is sluggish
In any case, Taiwan’s near-term growth outlook is sluggish. Manufacturing PMI has fallen back to 48.2 in April from 49.0 in March, albeit still above the February bottom of 46.3. Export growth remained in the negative territory in April, on both the YoY (-3.3%) and MoM basis (-8.4% sa). This coincided with the dip in China’s April PMIs, suggesting that the boosting impact from China’s policy stimulus has started to fade.
The re-escalation of trade tensions will likely further weigh on the near-term growth outlook through dampening business sentiment and augmenting financial market volatility. In particular, the regional stock markets had rallied earlier this year and Asian currencies had stabilised, presuming a China-US trade deal in 2Q. The risk of a pullback can’t be underestimated.
Investment diversification will continue
From a longer-term perspective, the recent setback in China-US trade negotiations serves as a reminder that the uncertainties in China-US relations could become a new normal. Even putting aside trade disputes, the two countries’ competition in the high-tech space will likely remain intense in the coming years, surrounding the sensitive issues like cybersecurity, IP protection and forced technology transfer (here).
A rising number of the China-based Taiwanese manufacturers may find it necessary to diversify risk. Taiwanese companies have diversified investment from China towards Middle & South America and the US in the past couple of years. Some have also opted to return to Taiwan. Reportedly, about 40 Taiwanese companies with offshore operations committed to invest TWD205.7bn (USD6.7bn) in Taiwan during the first four months of this year. Investment relocation and supply chain reshuffling will involve costs in the short term. But companies may still want to pursue a diversification strategy, in order to manage the trade war uncertainties and sustain competitiveness in the long run.
We keep the 2019 and 2020 GDP growth forecasts at 1.9% and 1.8%, respectively, for the time being. Risks are clearly skewed to the downside, given the tariff threats on another USD300bn Chinese exports. Taiwan’s central bank is expected to stand pat on monetary policy through 2019-2020 under our base case forecast. But rate cuts will become likely, should a full-blown trade war occur and recession risks increase.
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