Taiwan: Growth outlook lowered on higher trade tensions
- We are lowering our GDP growth forecasts by 0.1ppt for 2018 and by 0.2ppt for 2019
- We also expect the central bank to postpone monetary policy normalisation …
- … to the latter part of 2019
- An outright shift towards monetary/fiscal policy easing remains unlikely
Impact on Chinese exports will be bigger this time
The impact of the USD200bn tariff list on Chinese exports to the US will be bigger than the USD50bn hit during the first round. The list covers a wider range of products, from agricultural goods to air conditioning machines, refrigerators, vacuum cleaners, television components, bicycles, parts of motor vehicles, etc. Thankfully, the key electronics products, such as computers and mobile phones, continue to be excluded.
America believes that many of the Chinese products in the expanded tariff list can be sourced from other trade partners. For example, China accounts for less than 10% in the US’s total imports of agricultural goods, food, minerals, chemicals, and transportation equipment, and 20-25% in plastics & rubber, wood, and metals. Substitution, however, will not be smooth in the products that America relies heavily on China to supply. They include leather, footwear (55-60%), textiles & clothing and machinery & electrical equipment (35-40%).
The ripple effect on Taiwan will remain limited
Taiwanese manufacturers in China do not focus on producing goods that that are easily substituted in the US market. Taiwan’s overseas production ratios are low (in a 5-15% range) across the chemical, plastic & rubber, metal, machinery, and transportation equipment sectors.
Taiwanese firms producing in China and those exporting intermediate goods to China are mostly from the electronics sector. Semiconductors, flat panels, various other types of electronic components, together with the finished electronics products, account for 65% of Taiwan’s total exports to China. Most of these products are spared from the USD200bn tariff list.
Taiwanese manufacturers have also been diversifying their overseas production bases in recent years to meet the challenges from rising labour costs and other structural changes in the Chinese economy. For instance, in the labour-intensive textile and clothing sector, Taiwanese firms have reduced investment in China and expanded production facilities in Southeast Asian countries like Vietnam.
Meanwhile, Taiwanese firms have increasingly penetrated China’s domestic market and reduced engagement in the traditional processing trade. The correlation between Taiwan’s exports to China and China’s exports to the US has halved to 0.30 in 2010-17 from 0.60 in 2000-09. The correlation has, for the comparable period, fallen to 0.45 from 0.65 for electronics products, and to 0.08 from 0.30 for non-electronics products.
All in, we reckon that the macro-level impact of the USD200bn tariffs on Taiwan will be modest, at a circa 0.3% of GDP. This will be reflected in next year’s growth numbers more than this year’s. Accordingly, we are trimming GDP growth forecasts to 2.7% (from 2.8%) for 2018 and to 2.2% (from 2.4%) for 2019.
Taiwan’s central bank (CBC) has been tolerating negative real interest rates this year due to a slower growth outlook dampened by deteriorating trade environment. The CBC will not be in rush to normalise monetary policy and opt to bolster sentiment and shore up the domestic economy. We no longer expect rate hikes during the 4Q18-1H19 period.
The government has maintained a neutral stance on fiscal policy during the recent FY19 budget proposal. The latest escalation in trade war may lead it to pursue fiscal tools selectively to mitigate the impact on exports and boost domestic demand. Apart from providing subsidies to the affected industries, the government can also consider accelerating the implementation of a special budget on infrastructures. An outright shift towards monetary/fiscal policy easing remains unlikely, in our view.
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