Singapore could be the first casualty of a looming trade war

The worst case scenario spells doom as Singapore could lose $22b in GDP.

As a heavily export-dependent economy, Singapore stands to lose as much as $22b in the case of a full-blown trade war which could smash financial markets and hit domestic manufacturing sectors in the city-state, according to analysts.

This comes as US President Donald Trump issued hefty tariffs of 25% on steel and 10% aluminium imports which raises the possibility of a trade war should other countries raise their own rates in retaliation.

“Trade war could trigger the risk of a recession. Risk assets will likely to be depressed for an extended period, until a ceasefire is reached, and typically when the economic losses are significant for all parties involved,” Bank of Singapore senior investment strategist James Cheo said in a report.

The city’s promising growth prospects are also marred by the possibility of a global trade war, which was revealed by the Monetary Authority of Singapore (MAS) in its survey of professional forecasters. 

“The possibility of a global trade war scenario present significant concerns for a large proportion, or 88%, of respondents. This is more than double that in the December survey,” MAS noted.

However, such a massive loss would only occur in the worst case scenario, said Sian Fenner, ICAEW Economic Advisor & Oxford Economics, Lead Asia Economist. In an interview with Singapore Business Review, she noted that this would only occur if the Western superpower defaults on its trade obligations and pulls out of the North American Free Trade Agreement and imposes blanket trade tariffs on China, South Korea and Taiwan, prompting the countries to retaliate. 

“This would hit world trade and global financial markets adversely affecting Singapore’s domestic manufacturing sectors and export-dependent services such as transport and storage,” said Fenner.

This could lead to as much as $22b loss in end-2019 GDP to the extent that the the central bank would have to intervene to avoid subsequent market shocks. “In the event that this worse scenario played out the MAS could loosen monetary policy by adopting a depreciation bias or at the very least maintain its current zero appreciation bias in SG$NEER into 2020,” she added.

Against this bleak outlook, economic growth will inevitably slow down to 1.8% in 2019 from 3.6% in 2017 because even if tariffs are not imposed directly on Singapore, exports would still reel from lower Chinese and regional trade.

“Being a small, open, and trade dependent economy, Singapore will likely be negatively affected should a trade war erupt. This could weigh on exports, with exports accounting for a significant part of the economy of 173% of GDP in 2017,” Chia Shuhui, BMI Research senior analyst told Singapore Business Review. 

Alicia Garcia Herrero, chief economist at Natixis echoes this sentiment, "Although the directed impact on Singapore maybe more muted thanks to FTA, the reality is that Singapore is really an entrepot so it is affected by reduction in demand for goods of neighbouring countries. In addition, the war that the US is conducting is not only a trade war but also an investment word (Broadcom has become one of the first victims) as well as currency war, talking down the USD."

Also read: Trump to Singapore's Broadcom: "You're a national security risk"

However, the likelihood of such an extreme scenario remains low with Fenner estimating the probability of a full-blown trade war at 12%.

Moreover, the adverse effects of higher tariffs will depend on which sector the levy is targeting so electronics - which constitute a key economic area for Singapore - is unlikely to be hit as the US will be hurting its own companies if it chooses to either impose blanket tariffs or target China alone, Fenner added.

She also notes that rising intra-regional trade from trade partners in the ASEAN and long-standing free trade agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) with trade allies in the economic bloc will also provide some level of protection from the US tariff hike. 

"Singapore cannot do much to shield the impact of Trump’s policies except for remaining very flexilble and try to create a group of core partners to serve to. ASEAN is the most obvious one," Garcia Herrero added.