US -China Trade War Impact on Malaysia

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In this article, I will discuss the somewhat esoteric issue of the US China trade war’s impact on Malaysia. Most of my direct engagement with the community has been limited to community events and speeches that I make regarding local issues in Subang. However, in reality, I spend most of my time as your Member of Parliament, looking at national and international issues, in particular regarding the economy, international trade, policy reforms and also human rights. This article presents a slice of the type of policy work that I do on international trade. The full original article was written by me and presented in speech format at The Kuala Lumpur and Selangor Chinese Assembly Hall on the 23rd of October 2019. This is a summarised version of the original.

The US-China trade war is a geo-political quarrel driven primarily by a rising China and correspondingly the decline of the world’s single global superpower, the United States of America. The core question here is ‘can Malaysia benefit from this quarrel?’ Generally, a slowdown in global trade from any trade war will not benefit anybody. On the surface, and in the very short term, Malaysia may benefit from the initial phases of this trade war, in two different ways. Firstly, Malaysian exports may grow due to Malaysian products replacing US goods going to China, and Chinese goods going into the US. Secondly, Malaysia may benefit from the relocation of US and Chinese manufacturing facilities to Malaysia.

Have we seen our exports grow dramatically in the initial stage of the trade war? The answer is a resounding, yes. For Malaysia, the obvious product that has seen growth from this trade war is Malaysian palm oil. Based on our own MPOB data, Malaysian palm oil exports to China were at 1.86 million metric tons in 2018, and by September 2019 our exports hit 1.62 million metric tons. Looking at the trends of the last quarter, we can make an educated guess that Malaysian palm oil exports to China will hit approximately 2.3 million metric tons by the end of 2019. This represents a 22% growth in palm oil exports to China, a gain that has resulted primarily as a consequence of this trade war.

This strong export growth trend was also noted in a report released by Bank Negara in Q2 2019 which stated that several selected Malaysian products had grown at around 5.6% at the expense of China, and 11.25% at the expense of the US, resulting in an overall average export growth of 8.37% for these selected products.

Despite this seemingly positive outlook, recent developments have signalled a cooling down of US-China trade tensions. Moreover, there is speculation that the trade war may also abruptly end in the event of a serious global financial crash next year. With this in mind, I don’t expect this 8.37% gain for Malaysia for selective exports to continue beyond next year.

Now to the second and bigger question. Will the trade war influence US and Chinese corporations to increase manufacturing FDIs to Malaysia. In 2018, Chinese corporations showed strong interest to invest in Malaysia, but in 2019 this investment has yet to actualise. This indecision by Chinese corporations is due to a number of factors. As a result of erratic policy announcements from Donald Trump, Chinese corporations are trying to figure out Trump’s real policy play on the trade war and as such are hesitant to invest whilst this uncertainty looms large.

China is also at a strategic manufacturing crossroads, whether they should invest in automation technology in China to improve their internal domestic productivity, or whether should they relocate to cheaper labour intensive countries? Whilst there is scope for Malaysia to fit this profile (if we continue to bring in millions of cheap foreign workers) but such a policy to downgrade our productivity with foreign workers, is just plain wrong and will ultimately weaken our economy.

There is also the threat that Trump may expand the trade war to include other trade surplus countries. As Malaysia has the second highest trade deficit per capita with the US, this effectively puts us squarely in the firing line and further discourages Chinese corporations from relocating their factories to Malaysia. With this in mind, Chinese corporations seem more interested in taking equity stake in Malaysian corporations to secure longer term partnerships, and to lock in the supply chain of raw materials to China, thus leaving their foray into our manufacturing sector relatively limited.

Conversely, US planned investments in Malaysia’s manufacturing sector primarily jumped from RM307 million in 2018, to an astonishing RM 11.69 billion within the first six months of 2019. As such, it is my opinion that the likelihood of the actualisation of manufacturing investments by the US corporations is greater than that from Chinese corporations. This is also simply because of economics not geo-politics. US wages are substantially higher than that of Malaysia, whereas China wages are almost on par as Malaysia.

Ultimately, if Malaysia really wants to grow its economy and attract more FDIs, whether from China or the US or anybody else, the key selling points are the same – skilled workers, good infrastructure, cheap and available land, rule of law, efficient judiciary, non-corrupt politicians. In all these things, Malaysia needs improvements.

So how do we move forward in this contested geo-political trade war? Ironically, the more we improve our geo-political ties with China, the more likelihood we will be frowned upon by the US, which then defeats the whole purpose of Chinese corporations investing in Malaysia. It is a catch twenty-two situation. A good case study is Vietnam. Vietnamese policy makers understand how to exploit Chinese ties for business and yet lean towards the US on issue of security. Malaysia is also good at this balancing act, but we can improve with less loose talk from our ministers, which will result in more for Malaysia.

Lastly, the Malaysian government should stop being overtly and disproportionately fixated on foreign direct investments. We should instead be more fixated on developing our own domestic direct investments. We need to have our own Samsungs, our own Mitsubishis, our own Apples and our own Huaweis. The Malaysian Baharu is supposed to address systemic and fundamental economic issues. While I am happy to see our exports grow and am looking forward to welcome manufacturing facilities from US and China, but overall, I intend to continue to push the agenda of supporting our own domestic direct investments much more.