What to do, as giants rumble

What to do, as giants rumble | Daily Tribune

Early Wednesday, US President Donald Trump’s imposition of double-digit tariff rates on dozens of countries across the world took effect only for him to halt their implementation for 90 days later in the day.

However, Trump didn’t only keep new tariffs on China but indicated that he would raise these even higher, to 125 percent, for China’s “lack of respect,” when Beijing retaliating by boosting tariffs on all American goods to 84 percent.

This effectively shreds much of the remaining trade between the world’s two superpower economies, forcing global supply chains to reorganize post haste.

In explaining China’s move for further retaliation against the US, Ian Bremmer, head of the risk advisory outfit, Euroasia Group said, “It (China) is the one country with the leverage to hit back.”

Both Beijing and Washington have now taken steps within just a week that until very recently would have been almost unimaginable. The escalation of tariffs has unraveled trade relations forged over decades by the US and China and now threatens to drag down the global economy.

An expanded trade war between the two superpowers could have significant deleterious effects on the world, including Southeast Asia, with the region’s deep integration into global supply chains and economic reliance on both the US and China.

The Philippines and other member countries in the Association of Southeast Asian Nations (ASEAN) are part of China-centric manufacturing networks and US tariffs on Chines goods could reduce demand for Philippine intermediate exports such as semiconductor parts sent to China for final assembly before export to the US.

Uncertainties resulting from US-China trade war could slow Chinese and US investments in the Philippines, particularly the latter, with China redirecting capital to domestic production.

Likewise, US firms diversifying away from China could benefit Vietnam or Malaysia rather than the Philippines, particularly if infrastructure and ease of doing business in the latter do not meet investors’ expectations.

In terms of currency and the financial market situation, there could be a weaker peso if investors flee emerging markets such as the Philippines amid global risk aversion.

Also higher import costs, such as those with regard to fuel and machinery, could worsen inflation, forcing the Bangko Sentral ng Pilipinas to keep interest rates high.

The Philippines heavily imports products like electronics, construction materials, consumer goods, from China and tariffs and supply bottlenecks could raise prices, hurting low income Filipino households.

Meanwhile, a recession in the US resulting from its trade war against the Chinese would be certain to lessen overseas Filipino workers’ remittances, a critical Philippine economic lifeline.

Also to be affected is business process outsourcing (BPO) sector since, with US firms cutting costs. the demand for Philippine call centers and IT services wold be drastically reduced.

Perhaps with the exception of the Philippines, countries within ASEAN would face much pressure to pick sides, complicating the regional bloc’s balancing act between the US and China.

Tension in the South China Sea is expected to continue, and even escalate, with the presence of more American military forces coming to the aid of its ally, China bully-beleaguered Philippines.

On the positive side, China-based manufacturing firms could relocate to the Philippines which was imposed the second lowest tariff rate among ASEAN nations, especially if infrastructure and ease in doing business here are improved.

Also strong Philippine domestic demand may cushion export declines even as even stronger ASEAN solidarity at this time could help negotiate better regional trade terms.

The Philippines can ease the effects of a protracted US-China tariff war by diversifying trade and economic partnerships, e.g. strengthen ASEAN and regional trade, with other partners like Japan, South Korea and the European Union, to be less reliant on US (and Chinese) markets.

More than ever now, the Philippines should negotiate more free trade arrangements with the EU and other Regional Comprehensive Economic Partnership member countries to secure alternative markets.

More effort must be expended to diversify and improve the quality of the country’s export products by shifting from low-value exports (raw materials) to higher-value goods (processed foods, tech components).

Steps should be taken to promote the country as an alternative manufacturing hub by, among others, leveraging competitive labor costs and English proficiency to attract firms relocating from China and other countries in the region that are slapped with ginormous tariffs.

Ease of doing business must be enhanced, bureaucracies streamlined, ports and power infrastructure improved and built and tax breaks offered for export-oriented investments.

Those goals should be met in the fastest time possible to take advantage of the Philippines’ low-tariff state status and shield the country from whatever other disruptive curveballs could be thrown its way in these unpredictable, volatile times.