The first round of tit-for-tat tariff raises between the US and China might have a limited effect on Taiwan, but a full-blown trade war between the two countries would have a material effect on their regional supply chains, which Taiwan is part of, DBS Bank Ltd said last week.
While export and consumption figures from Taiwan, South Korea, Singapore and Malaysia have been solid this year, tail risks to these Asian economies have increased, DBS said.
“It is time to think of tail risks,” DBS chief economist Taimur Baig said in a report on Tuesday. “While we still think that a full-blown trade war is unlikely, the harsh rhetoric and punitive measures have reached a point that warrants serious consideration of such eventualities.”
As many Asian manufacturers take orders in their home markets, but produce intermediate goods and assemble them into finished products in China before shipping them to the US, the escalation in trade skirmishes between the two sides, combined with soft global growth momentum and the US Federal Reserve’s interest rate hikes could add to further woes for emerging markets, DBS said.
The Singaporean bank estimates that an all-out trade war — defined as 15 to 20 percent tariffs on all products between the US and China — could reduce Taiwan’s GDP growth by 0.6 percentage points this year and the damage could increase further to as much as 1.2 percentage points next year.
For South Korea, the trade war between the US and China would pare the country’s economic growth by about 0.4 percentage points this year and 1 percentage point next year, DBS said.
Singapore’s GDP growth would be affected by 0.8 percentage points this year and 1.5 percentage points next year, while the downside risk to Malaysia’s economy would be 0.6 percentage points this year and 1.3 percentage points next year, the bank added.
“Given the trade openness and exposure to the supply chain, there will be no respite whatsoever for Malaysia, Singapore, South Korea and Taiwan in this tail risk scenario,” Baig said.
Taiwan’s exports grew 11.2 percent year-on-year to US$135.58 billion in the first five months of the year and the Ministry of Finance is today to release last month’s foreign trade data, with economists predicting that exports and imports continued to grow on an annual basis.
However, in the long term, an escalating trade conflict between the US and China could damage Taiwan’s manufacturing industries, including machinery, petrochemicals and electronic components, economists said.
Moody’s Investors Service on Wednesday said that underlying geopolitical tensions, particularly stemming from relations across the Taiwan Strait, and its exports being highly concentrated in several key sectors leaves Taiwan vulnerable to external shocks.
“As a key node in the regional electronics supply chain, Taiwan is also particularly susceptible to trade tensions between the United States and China. Combined with an aging population that will increasingly weigh on Taiwan’s growth potential,” Moody’s said in its latest Taiwan credit analysis.
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