Angelo Taningco
Economist, Treasury Group
The US-China trade war may very well be negative for the peso given its potential to trigger risk-off episodes, constrict trade activity, and widen the Philippines’ balance-of-payments (BOP) deficit. At its current form, we think its growth and price effects on the Philippine economy are likely to be marginal. If it escalates, however, then this would be anti-growth and pro-inflationary, and would likely exert stronger upward pressures on both the USD/PHP and domestic interest rates amid financial capital outflows.
Trade war risk has intensified following US announcement last Friday to impose 25% import tariffs on up to $50 billion worth of Chinese goods starting next month, and thereafter, to announce restrictions on Chinese investments by the end of this month. China immediately responded by vowing to levy import duties on US products of the “same scale and intensity” and to void its previous trade negotiations with US. US tariff list would basically cover Chinese aircraft and parts, aluminum, chemicals, electrical machinery, glass, iron and steel, medical devices, railway equipment, rubber, semiconductors, ships, and vehicles. Initially $34 billion worth of US goods will be levied a 25% import tariff starting 6 July while the remaining $16 billion are still under consideration and could be added later on. On the other hand, Chinese tariffs will be imposed on US autos, chemicals, chicken, coal, crude oil, gas, medical devices, pork, seafood, and soybeans, among others.
We think such scale would have a modest negative impact on global growth due to some reduction in global trade. Market estimates depict marginal economic effects that could likely arise from the US-China trade skirmish: for instance, global growth may dip by 0.1-0.2 percentage point (pp), according to Barclays, while China’s GDP growth may slide by 0.1pp as per HSBC. But if the trade war worsens amid repetitive trade retaliations by the two economies, then global growth will likely slow down and global inflation will spike, leading to stagflation and possibly a global recession. We believe that US-China trade dispute will be a lengthy and intense process with both parties attempting to avoid a full-blown trade war.
For the Philippines, the US-China trade war at its current form will likely have a marginal impact on growth and inflation. However, past news of trade skirmishes between the two largest economies in the world have sparked risk-off episodes and contributed to the weakening of most emerging market currencies, including the Philippine peso. Moreover, we foresee the country’s trade deficit to widen further in part with more Chinese iron and steel that faces US tariffs to enter the domestic market as such entry would also be supportive of the government’s Build, Build, Build program. If the US-China trade dispute is prolonged amid lengthy bilateral trade discussions with possible intermittent retaliations, then this would trigger more risk-off events that in turn would lead to financial capital outflows, thereby expanding further the BOP deficit, which is negative for the peso. A full-blown US-China trade war would disrupt global production networks and could substantially impede Philippine trade and investment; with this scenario, we anticipate Philippine growth to moderate, inflation to climb, and both USD/PHP and local interest rates to face stronger upward pressures.
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