What is a trade war?
Image from World Affairs.
A trade war, specifically trade between countries is where the government imposes taxes on the imports of goods from the other country. The motive behind this measures is usually economical in nature. A country that is importing more than it exports is effectively spending more than it earns.
Therefore to curb this problem quickly, the affected government may impose hefty taxes on imports. This effectively causes the cost of imported goods to rise which results in higher prices for consumers.
So instead of relying on the plain old free market of supply & demand to determine market prices, the government is trying to manipulate the market. A sinister move if you’re looking from the exporting country.
In this case of trade wars between the USA and China, USA has for at least the past half a century been riding on consumer demand to drive its own economy. As the population grows, so do demand for goods & services. Stiff competition to get on top of this US market includes not just innovative technological advances but also cheaper prices for that winning edge. Competing for cheaper prices usually means lowering manufacturing costs and sourcing for cheaper goods from other developing countries in the likes of China.
How did China become the target of America?
Image from toonpool.
China in the earlier years was the only country in the world who could manufacture goods at the required lower price target as well as of the huge quantity for production. With China’s massive population of over 1.3 billion, labour costs are insanely low. Fast forward to the 21st century, China is now a manufacturing hub and also an economic powerhouse. It is arguably the second largest economy in the world if not the largest right now.
For the USA, rushing forwards from the manufacturing powerhouse that they once were from 1945 until the 1970’s has since seen trade deficit. Meaning the difference between making money from exports to spending by imports. As of for the year 2017, US trade deficits are at USD566 Billion and furthermore, the USA has been on deficits for every year since 4 decades ago!
Therefore to combat this problem, USA chose to restrict imports from China via taxes levied.
How did Malaysia got involved?
Image from OEC.
It’s not just Malaysia, many export-reliant economies of most developing countries exports to China. China would be the main assembly factory of the world, almost everything is made in China! But the raw materials are sourced from developing countries. For example, the manufacturing of electronic goods, from smartphones to laptops. Most are assembled in China, but there are many critical parts that are sourced from Malaysia, Japan, Vietnam & Korea. Therefore if China’s export numbers fall, so will the demand for parts from the countries mentioned above.
This is only covering one industry, which is electronics. Many other bits and bobs that we use daily and take for granted are made in China. From furniture, shoes, clothing to even household products like detergents and such. Recreational types of equipment such as bicycles, toys, fishing rods are mostly manufactured there. Cosmetics and medicine/medical equipment are made in China but many raw materials are sourced from developing countries like Malaysia.
According to MIT Media Lab, Malaysia exports not just circuit boards & microchips, but also palm oil, Petroleum & gas, crude oil, Metals & minerals like copper, aluminium, rubber products & animal products. Malaysia does trade heavily with China.
How will this affect you?
With import demand for materials from Malaysia waning, so will our Ringgit. And furthermore, Chinese manufacturers will want to maintain their price margins and with main exports to the USA affected, they will have no choice but to raise prices of their finished goods as well. Thus potentially making china-made products pricier than they are now. Which will definitely affect our living costs & standards.
The point here is that, even before factoring the trade wars between USA and China, Malaysia is already experiencing weakness in the ringgit, or how we feel it as inflation. Even if it's not as low as 2016, but it is still worrying. What will happen to our Ringgit then when the US-China trade war goes into full bloom? Let’s just hope those two giant elephants can sort out their differences before the rest of us jungle animals are stomped to a certain demise.
So what can we do as Rakyat? One of the ways is to support locally-manufactured products so we can keep supply and demand within our own economy. And it goes without saying the importance of saving, and if you have the means, start investing and diversifying your portfolio be it property, insurance, alternative investments and many others.
We hope to write more articles about investment in the future. In the meantime, if you find this article useful, do share it with your friends!
READ MORE: 5 Ways the Falling Ringgit Is Affecting YOU, the CONSUMER