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REENA KAUR BHATT chats with industry experts KC Lau and Andy Gan to find out what are some of the possible effects of the Trump administration.

 

President Trump recently decided to scrap the Trans-Pacific Partnership Agreement (TPPA), the largest regional trade accord in history, comprising of 12 countries, Malaysia included.

How will abandonment of the TPPA affect Malaysia?

(KC) Business will still run as usual since the free-trade agreement was still under discussion and there was no official partnership, to begin with. Nevertheless, there are some parties which will be on the losing end - in anticipation of the TPPA, some local manufacturing companies have jumped the gun and expanded their business operations by establishing factories/plants in neighbouring countries, particularly Vietnam.

These firms were banking on the TPPA being pushed through and thought to tap into US market by capitalising on the Vietnam’s cheaper labour cost and lower tariff (taxes) on imported products. With the trade deal abandonment, however, this move will not quite create the desired effect.

On a more macro level, Malaysia’s trade market will lose complete access to the USA’s 800 million strong population. Meanwhile, local consumers will no longer reap the benefits of free trade – imported cars, clothing and food will still have the existing tariffs imposed on them.

(AG) Upon the TPPA abandonment, there has been pressure from the government for American manufacturers to bring back jobs to the US. So much so, the new President had threatened a homegrown air-conditioning manufacturer, Carrier with a hefty 35% tax should the company go ahead with its plans to shift its manufacturing facility to Mexico.

Should Trump continue to religiously pursue his ‘protectionism rhetoric’, quite a few Asian countries will be hit by the migration of American manufacturers –  for Malaysia, a significant number of American manufacturers might move out of the country,  especially those in the electronic and healthcare device industries.

Penang especially houses one of the largest concentration of American manufacturers in Malaysia. The oil and gas industry will not escape unscathed as well - Oilfield giant Haliburton’s equipment production line in Senai, Johor is one among more than three dozen American oil and gas manufacturers operating in Malaysia.

China is now pushing its own trade deal, the Regional Comprehensive Economic Partnership (RCEP) – how will Malaysia stand to benefit, or otherwise, from it?

(KC) The Beijing-backed RCEP plan which covers 16 countries spans a total trade population of 3.4b billion people – that is 4.25 times more than the original TPPA’s market share. Admittedly, the percentage of global GDP encompassed by the RCEP is lower than TPPA’s by almost 10%.  However, there is the greater potential for a bigger and more ambitious trade deal in the future – as the RCEP includes China and India, two economies with booming middle class and upper middle-class households.

Conversely, it is speculated that RCEP will ban export taxes between RCEP countries – this move might bring more harm than good as explained in a research paper on bilaterals.org, a collaborative clearinghouse site which shares information on bilateral free trade agreements (FTAs) and investment treaties being negotiated and signed across the globe.

Export taxes on raw materials such as crude palm oil, timber and minerals are used by a number of RCEP countries to encourage value-added processing. In the TPPA, Malaysia and Vietnam were given exceptions to the ban on export taxes for listed products; however, no such exceptions have been proposed in the RCEP.

This export tax is to encourage value added services being carried out locally, benefiting downstream businesses here. They stand a better chance to compete when exporting refined palm oil – selling material in its raw state will not get the value that you need on the international market. Also, if the export tax between RCEP countries is banned, local palm oil refiners might be hit pretty hard.

The research paper highlighted another red flag - The RCEP includes proposals to restrict the ability of RCEP governments to require investors from any country to undertake activities that benefit the country they are investing in. This restriction on 'performance requirements’ will make it tougher for the Malaysian government to make sure foreign investment benefits our economy by linking to local service suppliers, using local labour and materials, transferring technology as well as having regional/global headquarters located in the country.

These limitations imposed on governments were not in the TPPA – the RCEP proposals give even more rights to foreign investors and restrict governments more tightly as compared to the TPPA.

The Trump administration plan to roll back parts of the Dodd-Frank Financial Regulations that were enacted in response to the US’s financial crash in 2008. Dodd-Frank, which created oversights for mortgage loans and credit lines, was put in place to prevent another financial crisis. Trump also released a memorandum calling on the Department of Labor to reconsider its fiduciary rule which requires financial advisers to act in their clients’ best interests — as opposed to steering them into investments on which the advisers get big commissions.

What are the consequences and/or benefits should these regulations/oversights be removed?

(KC) It is believed that a highly regulated financial industry will prevent growth and hamper competition. But loosening it beyond a certain point might cause another financial crisis caused by greedy and unscrupulous financial institutions who will have free rein to adopt an extreme ‘risk-friendly’ appetite. 

(AG) In simple terms, deregulation translates to easier credit – lending requirements will be more lenient and it will be easier for businesses to borrow money from banks. The American government is already bankrupt, even though it does not appear so in the country’s balance sheet due to ‘control measures’ carried out by the Federal Reserve System (central bank of the US), i.e currency (note and coin) creation.

Creating money makes things look rosy as it boosts stocks and other market indicators. The Treasury creates money in the accounts of the central bank, who then lends it to banks at near-zero interest rates who dare not invest in the economy – these banks then deposit the money back in the central bank, creating demand for treasury bonds. That is why the interest rates in the US have been kept at near-zero for the past 8 years – hence, why I think the next big financial ‘bubble’ will happen sooner than later.

I envision that the US Dollar will see a further decline in value – since the Feds establishment in 1913, the currency has fallen by almost 95%. Why though does it seem that the greenback (US Dollar) has maintained its strength over the years? – the reason being the Dollar has been measured against other falling currencies instead of commodities such as gold, silver, copper and zinc.

Malaysia should be expecting more (temporary) inflation coming our way until a real deflation sets in. This is not good as deflation is worse of for the economy – as prices fall, production slows and inventories are liquidated; demand drops and unemployment increases which will result in higher debt defaults and so on.

 

DISCLAIMER: The opinion stated in the article are solely of KC Lau and Andy Gan and are not in any form an endorsement or recommendation by iProperty.com. Readers are encouraged to seek independent advice prior to making any investments.