As the US and China continue to lob new tariffs at each other, the resulting loss of business confidence may become the biggest threat to Singapore's economy.
Poor business sentiment was possibly the "most worrisome" effect that could come out of the escalating trade tensions between the two superpowers, Ministry of Trade and Industry (MTI) Permanent Secretary Loh Khum Yean said at a media briefing yesterday on Singapore's economic performance for the latest quarter.
MTI stuck to its 2018 economic growth forecast for Singapore of 2.5 per cent to 3.5 per cent despite a strong performance in the first half of the year that exceeded expectations.
"There is a risk of a further escalation of the ongoing trade conflicts that could lead to a vicious cycle of tit-for-tat measures between the United States and other major economies.
"Should this happen, there could be a sharp fall in global business and consumer confidence and, in turn, investment and consumption spending," warned Mr Loh.
The trade war kicked off in earnest last month, with the US imposing higher tariffs on US$34 billion (S$47 billion) of imports from China. Another US$16 billion of Chinese goods will be hit with a second round of increased tariffs from Aug 23, prompting China to retaliate in the same vein.
The loss of confidence resulting from these moves is more worrying than the direct effect of tariffs on companies that trade with the US or China, and the indirect impact on the value chains that Singapore is part of, he said.
Singapore, which depends on trade, could be caught in the crossfire, especially if the trade war is protracted, observers said.
"The trade situation is increasingly grave. While we aren't there yet, with both America and China ramping up, these early skirmishes increasingly look like they could flip out of control into a fullly fledged battle, drawing other nations in as well," said Associate Professor of Practice James Crabtree of the Lee Kuan Yew School of Public Policy at the National University of Singapore.
Singapore has been spared the full impact of a trade war for now, but uncertainty is already weighing on the financial markets, said DBS senior economist Irvin Seah. The sharp rhetoric from the US, China and Europe - potential trade war participants - is hurting sentiment, he said.
"Potentially, if this trade war continues in the long term, it might affect our own trade figures too," said Mr Seah, adding that China is Singapore's top trading partner of non-oil domestic exports.
Singapore Manufacturing Federation president Douglas Foo said manufacturers with facilities in China, or those who depend on components from it, as well as those who deal chiefly with exports of steel and appliances to the US, may also take a hit.
Singapore Contractors Association president Kenneth Loo said the construction industry will also need to see how suppliers from these countries are affected.
The manufacturing sector grew by 10.2 per cent and the construction sector shrank by 4.6 per cent compared with the same period last year.
But not all is gloom and doom as a trade war could lead to overseas firms moving some production to South-east Asia to avoid tariffs in the short term, said Prof Crabtree.
Mr Loo said that steel and other building-material suppliers hit by the tariffs could diversify to alternative markets with free and open trade, such as Singapore, offering better prices than before.
Whatever happens, companies here will have to stay on top of the developments to avoid being caught out, business experts said. For example, someone bidding for a project at competitive rates may see costs go out of control if suppliers come from the affected countries.
Firms should also try to create value through innovation and research, said Mr Liang Eng Hwa, who heads the Government Parliamentary Committee for Finance and Trade and Industry.
The Holland-Bukit Timah GRC MP said: "As a small island economy and hence a price taker, we can only create conditions for others to continue trading and investing in us because our options are far more limited compared to many other countries.
"We have to see where the tides are and ride them, find ways to create growth opportunities and be ready always to react to changing circumstances."