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Do not fear a trade war (2) - David Galea

In our first article of last week, we mentioned that the world’s two largest economies had just initiated punitive duties to the tune of $34 billion on each other’s exports during the month of July. Many had thought, or better hoped, that President Donald Trump’s hostility would just be a warning shot and would stop there. Hope soon faded when the US announced tariffs on another $16 billion of Chinese exports. The Chinese obviously retaliated by declaring import tariffs on an equivalent amount of US produced goods. 

When is this going to end? The Trump administration is already threatening to add tariffs on another $200 billion worth of Chinese exports. That would bring the total to $250 billion. Economic data as at the end of 2017 shows that China exported a total of $505 billion worth of goods and services to the US whereas the US exported goods and services having a total value of $129 billion to China during the same year. If the latest threat comes into effect that would mean that circa half of China’s exports to the US and 11 per cent of its total exports would be taxed. In addition, exports comprise 22 per cent of China’s economy but just 12 per cent of the US’s.

Since the beginning of the year, the US main equity market went up by circa six per cent whereas the Chinese main market went down by more than 15 per cent.  In addition, the Chinese renminbi declined in value by more than six per cent versus the US dollar during the same period. This could be an indication of who could emerge as the ‘trade war’ winner.  That surely doesn’t mean that the US would emerge victorious or better-off in the long term. Building walls with China would probably result in both American and Chinese multinationals losing market share, to the benefit of others. The Europeans could probably be part of those who would end up benefiting.

Malta can aspire to become a truly open, diversified and competitive global economy as long as certain aspects like the environment, transport networks, infrastructure and labour shortages are addressed

The initial US trade restrictions on steel and aluminium were a shock for the European Union as a whole. Apart from the negative effects of tariffs, Europeans were shocked at how they were being treated by a supposedly ‘old’ friend. Then, late in June of this year, following a visit by European Commission President Jean-Claude Juncker to the White House, both sides pledged to work towards zero tariffs, zero non-tariff barriers and zero subsidies on non-auto industrial goods. For the time being, conflict escalation between the two blocks seem to have abated.

In the interim, the conflict between the US and China could prove to be a great opportunity for European multinationals.   While tariffs will hurt European business that export to the US, such businesses would be able to be more competitive in markets that are being heavily targeted like China. This could result in such companies gaining more market share at the expense of their American counterparts.  That could also be a catalyst for new trade agreements with other countries as it is unlikely that the US would be actively seeking to create new trade agreements at this junction. The EU is taking a proactive stance in this respect and has already initiated trade negotiations with Japan, China, Australia and New Zealand. 

Following the unprecedented monetary easing measures taken in the past years by the ECB, the EU is now passing through an encouraging patch with positive albeit moderate growth rates and an unemployment rate which although not uniformly across different EU Member states, is at its lowest point since 2009. 

Against this background, economic growth in Malta remained robust with above average real GDP figures during recent years. A winner for Malta has surely been diversification and foreign investment. From the low-value manufacturing industry of post-independence, Malta has been able to create a varied portfolio of industries. These range from the more mature financial, tourism, pharmaceuticals and shipping industries to newer ones like aircraft maintenance, online gaming and computer games development. Thankfully, apart from the fact that the majority of Malta’s exports go towards European countries, none of the above industries are directly impacted by US tariffs. 

The sustained improvement in the real GDP per capita is a testament of the robustness of the Maltese economy.   While it is still below the average figure for the EU, the margin is being curtailed year in year out.

The unemployment rate, has as a result, gone down to record lows. In order to address the labour supply shortage, successive governments have pushed for initiatives that incentivised women to join and elderly people to stay in the labour force. In order to address the shortage, tax incentives were introduced for foreigners working in Malta but this is still not enough. Probably it would be opportune to introduce incentives for Maltese nationals working abroad to return to their homeland. When compared to foreigners, given their Maltese roots, they would presumably be more inclined to stay in Malta for the longer term. 

The Maltese population has been steadily increasing due to net migration and it has reached 460,000, an increase of 18 per cent since the year 2000. This is having a ripple effect on the economy as demand for housing, food, communication, transport and recreation increases.  This has created a very stimulating environment for Maltese businesses. The public has been able to participate in this economic growth as well, directly through the local bourse or indirectly through locally managed funds. 

Malta has proved to be a European success story. It can even aspire to become a truly open, diversified and competitive global economy that attracts the best talent as long as certain aspects like the environment, transport networks, infrastructure and the labour shortages are fully addressed. In the meantime, while the import tariffs saga goes on, Malta should continue to reap the benefits of an open economy. This is particularly so since its main trading partners are not only endorsing the benefits of international trade but are actively seeking to initiate new relationships to counteract the US political and economic objectives.

David Galea is a portfolio manager at APS Bank Limited.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments.

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