Some take precautions, some fear onset of trade war: Singapore firms parse threat of US tariffs

SINGAPORE: Since the announcement of fresh tariffs on steel and aluminium imports into the United States, Kim Ann Engineering has been drawing up contingency plans. 

Even though it does not export any of the levied metals to America, the homegrown specialty metals supplier remains wary of an “indirect hit”. 

“We have many clients who prefer or have specific requirements to use US-made specialty metals,” said chairman and managing director Lau Tai San. The soon-to-be-imposed tariffs can bump up raw material costs for American producers who may, as a result, increase the prices of finished specialty metals, he added. 

“This will mean higher costs for us and our customers, and that is my concern.” 

To prepare for such a scenario, the company has been working out back-up plans with its customers. In particular, the aerospace and defence original equipment manufacturers that are reliant on such specialty steel and aluminium products. 

“We are asking them to be prepared for higher costs,” Mr Lau told Channel NewsAsia. “If not, they must give us new projections to either purchase more metals in advance or find replacements from Europe.” 

Scheduled to take effect on Friday, the latest move as part of US President Donald Trump’s “American First” agenda will see tariffs of 25 per cent being meted out on all imported steel and 10 per cent for foreign aluminium. 

This marked another round of US protectionist measures, following the import duties slapped on washing machines, solar energy cells and panels two months ago, and has since hung over the world’s stock markets like a dark cloud while prompting criticisms from countries across the globe. 

The Ministry of Trade and Industry (MTI) said Singapore is “concerned” by the US’ decision to impose tariffs on steel and aluminium imports, as well as the potential impact on companies here. 

It has also “registered (its) concerns” regarding the duties on imported solar cells and modules, and has been “engaging the relevant US departments on this”. 

“We are closely monitoring developments on this issue and will continue to engage the US and our companies on the next steps,” MTI’s spokesperson said in an emailed response to Channel NewsAsia. 

“TRICKY SITUATION”

Over at building materials supplier M Metal, managing director John Kong said he will likely be keeping an eye out for movements in the US dollar and prices of the base metals in the aftermath of the tariffs.

Both are “critical elements” for the company’s profit margins given that the local firm purchases steel and aluminium coils in US dollars, he explained.

While the greenback has come under pressure of late and is expected to remain so, the price direction of the metals has been less forthcoming. Some analysts believe a displacement of steel products to other parts of Asia could depress prices in the short term, but others say otherwise.

DBS chief economist Taimur Baig, for one, noted that the US tariffs would not change the global supply-demand dynamic for steel.

“It is also unlikely that producers in Japan, South Korea, and Taiwan will have to divert their steel exports elsewhere, creating a global supply glut outside of the US. China’s goal to reduce steel output will be a far more dominant factor in driving steel supply and prices in the coming years,” he said.

But even if lower prices for the imported metals do occur, few will be cheering.

“It will be short-lived and given the uncertainty, we won’t take the chance to buy more,” said Mr WF Chan, general manager of local precision engineering firm Clefton Precision.

And just like Mr Kong, Mr Chan reckoned that any tariff-related fall in costs will be overshadowed by fears over the possibility of foreign retaliation against American tariffs.

“If we see retaliations from the other countries, I think the repercussions will hit all the way so I would think I’ll be more concerned about that than what the tariffs alone can do.”

Mr Douglas Foo, president of the Singapore Manufacturing Federation (SMF), thinks that an escalation in American tariffs, which risk tit-for-tat moves from other countries, could see local firms that have manufacturing facilities elsewhere become “collateral damage”.

This boils down to how the local manufacturing scene has evolved. While processes like product design, as well as research and development, remain done in Singapore, homegrown firms are increasingly expanding their production bases overseas. 

“For example, a company that manufactures a solar panel can have the design done in Singapore, but the actual manufacturing is done in another country. If that country does not get an exemption from the US tariffs, there will be an indirect impact,” Mr Foo said. 

One SMF member company that thinks it could be caught in such a “tricky situation” is Watson E P Industries. 

According to group executive director Joyce Seow, the contract manufacturing firm is “particularly concerned” about its factory in China which assembles and manufactures products, such as professional loudspeakers. 

“Even if the tariffs are not targeted at China, we have shipments that are sent globally to the various distribution centers our clients have all around the world. There’s no direct impact for now but our main concern is a possible trade war. If that happens, could we get caught in between somehow?”

MINIMAL IMPACT FROM TARIFFS, TRADE WAR IS THE REAL WORRY: ECONOMISTS

Economists that Channel NewsAsia spoke to echoed similar sentiments.

Official statistics showed Singapore’s domestic steel and aluminium exports to the US totalled S$11.8 million last year, accounting for 0.07 per cent of US-bound domestic exports. It was a slight decrease from S$12.9 million in 2016. 

Meanwhile, US-bound exports of solar panels was approximately S$230 million in 2017, making up about 0.7 per cent of the country’s total shipments to the US. In 2016, the figure, which includes both domestic exports and re-exports, was about S$390 million. 

Singapore “does not have significant washing machine exports to the US”, according to the MTI. 

Given that the city-state is not a major exporter of the levied items, with most of the solar exports likely to be re-exports from the region, “a direct impact on Singapore, if at all, would therefore be very marginal,” said DBS senior economist Irvin Seah. 

Agreeing, Maybank Kim Eng economist Chua Hak Bin also noted that the percentages of steel, aluminium and solar panels in Singapore’s total exports to the US are “relatively minute”. Therefore, consequences from the latest tariffs will likely be “indirect” and “contained”. 

He added that “sector-specific tariff targets” also tend to have “very limited impact on overall trade” as they can be offset in various ways, including currency movements. 

As a small and open economy that is highly trade-reliant, the greater risk for Singapore therefore lies in whether the “current situation escalates into a full-blown trade war”. 

“Singapore has thrived over the years due to globalisation so the worry should be whether this is the beginning of a bigger shift towards a greater protectionist trend across the board; whether this will invite retaliation and erupt into a trade war that is specifically targeted at China,” Dr Chua said, referring to fresh comments from the White House about how US President Trump is mulling fresh punitive measures against Beijing over its “theft” of US intellectual property. 

“These are hints that Trump may adopt more tariffs that could hit out and invite China to retaliate. If that keeps escalating and marks the start of an inward shift, that’s the risk.” 

A GLIMMER OF HOPE?

But if the haunting spectre of a global trade war materialises, DBS’ Mr Seah said the US-Singapore free trade agreement (FTA) could come in handy as a safeguard. 

“If tariffs start getting imposed on things that originate from Singapore, like semiconductors or higher value-added components, that will be an issue. 

“But Singapore has invested significant resources over the decades to safeguard trading linkages with all our partners. Now that we see emerging trade protectionism, particularly from the US, that’s when all the legally binding agreements will be very useful,” he said. 

On a broader level, the inking of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) earlier this month also offers some hope that cooler heads prevail. 

“Protectionism and inward-looking policies are not sustainable solutions for the economic challenges plaguing many countries. Businesses, however, have good reason to be optimistic as opportunities can still be found in regional initiatives and agreements,” said Mr Ho Meng Kit, CEO of the Singapore Business Federation (SBF). 

When implemented, the CPTPP will serve as a “greater and easier access” for companies for both goods and services, added Mr Ho. 

“SBF will be doing its part to support the successful implementation of the CPTPP by promoting the new economic opportunities it offers to our companies, especially SMEs.” 

For Watson E P Industries, the CPTPP is a “positive news” and the company has begun research on how it can tap on the multinational agreement. 

But in the meantime, any announcement coming out of the White House will likely remain high on its radar.

“We are worried that this could be the tip of the iceberg and may lead to things that would impact us in a negative way,” Ms Seow told Channel NewsAsia. “We hope this ends even before it starts, of course.”