The Looming US-China Trade Deal Likely To Affect Chip Exporters

The ongoing trade talks between the US and China are expected to bear fruit sooner or later.  One of the key negotiation points that Washington has been stressing on is reducing the tremendous trade deficit between the US and China. In 2018, the trade deficit was reported to have skyrocketed to a whopping $891 billion. The staggering figure has been giving Washington sleepless nights, which is why President Trump is determined to lower the trade deficit. The US hopes to achieve this through the looming purchasing deal with China, where the US will be looking to export more products to China in a bid to streamline the existing conditions.

Late last year, the US and China agreed to a  90-day extension, which saw them both promise not to increase the existing tariffs against each other’s exports. This was agreed in order to quell the then brewing trade hostilities amid talks to reach a favourable consensus. Shortly before the two global economic giants declared a truce, the Chinese president, Mr Xi Jinping had promised the Trump administration that China would buy a considerable amount of energy and agricultural products from the United States.

In addition, China is said to have committed itself to increase orders of the American Semiconductors. The semiconductors industry will face a massive disruption if this happens. The world semiconductor market has been noted to be slowing down in recent times. According to the World Semiconductor Trade Statistics report released last month, the chip market is expected to experience a 3% decline this year. Contrary to this, the chip market grew by an impressive 13.7% last year.

A new report by Goldman Sachs released early this week shows that some of the Asian countries that supply these chips are likely to lose from the US-China deal, especially if China begins to buy more chip from the United States. Among these countries, Malaysia and Taiwan will be the hardest hit. Japan and South Korea will also have a lot at stake.

The report estimates that Taiwan would lose a huge chunk of their GDP estimated to be more than 1%. On the other hand, Malaysia would be expected to lose about 0.7% of its GDP. However, the report was compiled under the assumption that China would increase its import of the United States products, to at least surpass the $125 billion mark annually. In such a case, Japan and South Korea would also suffer an estimated loss of  $8 billion each.

South Korea is home to some of the most respected semiconductors supplying firms; Samsung Electronics and SK Hynix. Nevertheless, it has recently seen its exports decrease continuously for three months in this sector. Similarly, Taiwan Semiconductor Manufacturing Co, which is one of the largest chip suppliers saw its revenue dip year over year persistently for a period of three months.

Top analysts at Goldman Sachs argued that Taiwan and South Korea would be the most affected if China went ahead with its decision to buy more chip from the United States, resulting in the excessive supply condition. Additionally, the report found that apart from the major players in the chip business, Singapore, Malaysia, and the Philippines would also lose this sector. This would mostly happen through the United States tech Supply chains.

According to a report compiled by the Malaysian Department of Statistics, the electrical and electronic products sector made a huge contribution estimated to be almost 40 % of the total exports. This was a significant contribution, that if reduced, the negative effects would be noticeably manifested in the country’s export business.

Nonetheless, Goldman Sachs further emphasized that the report paid more attention to the near-term repercussions of the US-China trade consensus.  For the longer term, the report pointed out that fundamental factors such as investment rates and domestic savings would be expected to drive the trade balance more. This is because these factors offer more sustainability than what bilateral purchase agreements would.

The US-China trade agreement seems to be getting much closer as the negotiations intensify. The talks between the two global economic giants are said to be more frequent as they work to finesse the details. The United States team hopes that these are the last weeks of reaching an agreement.