Malaysia: Trade gains amid supply-chain diversions and pandemic

Trade Tensions And Pandemic Prompted Rethink Of Global Supply Chains

The US-China trade tensions that started in early 2018 and the outbreak of the global COVID-19 pandemic since January 2020 have disrupted global manufacturing activities and prompted global investors to rethink their supply chain resilience and diversify trade.

In a nutshell, studies show that more businesses are either keeping their main production base in China while extending operations into a new country with ASEAN being the most favourable of locations due to geographical reasons (China Plus One strategy). Nearshoring is another option as labour costs in China creep higher.

Before the COVID-19 pandemic, higher labour costs in China and new tariffs on China imports entering the US have led some companies to relocate their manufacturing assemblies outside China or back to their home country (also known as reshoring).

A Gartner Inc. survey of 260 global supply chain leaders in February-March 2020 found that 33% had moved sourcing and manufacturing activities out of China or plan to do so by 2023 (also known as nearshoring).

Some corporates decided to extend their operations into a new country with ASEAN economies being the most favourable locations, while concurrently maintaining production bases in China (also known as China Plus One). Other options include China, for China strategies to tap into China’s domestic market.

Studies showed that the pandemic has accelerated the “China Plus One” strategy and nearshoring with fewer opting for reshoring due partly to the effects of the multilateral trade agreement signed in recent years. The US-Mexico-Canada Agreement (USMCA) and the Regional Comprehensive Economic Partnership (RCEP) are the two most impactful trade pacts signed recently (see report for details).

The new proposed economic model by China in May 2020 or Dual Circulation Strategy (DCS) also signals the continued importance of China as one of the largest global trade partners (see report for details).

The DCS is a new two-pronged economic model that will boost the country’s domestic demand (internal circulation) and intensify cooperation with global markets (international circulation). It is also preparing China for changing global trade patterns amid lingering trade tensions with the US and the pandemic.

Malaysia’s Trade Gains Amid Supply-Chain Diversions And Pandemic

The US-China trade tensions led to sluggish direct demand for imports from each other. However, it has created opportunities for other Asian countries particularly semiconductor-oriented centres (e.g. South Korea and Taiwan) and relatively low-cost labour-intensive manufacturing countries (e.g. Vietnam, Malaysia, Thailand, and Indonesia).

This reaffirms the prognosis of, global trade diversion to avoid tariffs from both the US and China and global supply chain diversification to mitigate supply chain disruptions even during the COVID-19 pandemic.

Vietnam was the clearest beneficiary in the ASEAN space as Vietnam’s import demand from the US and China surged nearly 80% between 2016 and 2020. Meanwhile, Malaysia still managed to outperform some of its regional peers and rank 8th on China’s import list and 10th on the US imports list.

Based on US imports data, imports from Malaysia gained USD7.6 billion between 2016 and 2020.

Based on China’s import data, China’s imports from Malaysia grew by USD25.7 billion in the same period. Using Malaysia’s export data, exports to China rose by RM60 billion (or 9.3% compounded annual growth) between 2016-2020, while the US grew by RM28.6 billion (or 8.1%) and Singapore expanded by RM27.7 billion (or 5.6%). Top export products were electrical & electronics (E&E), mineral fuels, as well as machinery & transport equipment.

Exports of optical & scientific and rubber products also saw increasing demand from both the US and China following the pandemic. Nevertheless, both US-China trade tensions and the COVID-19 pandemic did not hinder Malaysia’s exports to its top three countries (China, Singapore, and the US), whereby export shipments to these countries have consistently increased across the three specific periods (pre and during the US-China trade tension, and COVID-19 pandemic).

Malaysia’s Approved Investments Signal FDI Interest

The approved foreign manufacturing investments between 2016-2020 showed improved interest from overseas investors (particularly China and the US) in either expanding or setting up their production plants in Malaysia to cater to global and regional demand amid lingering trade tensions and the COVID-19 pandemic.

Foreign manufacturing investments approved by MIDA have risen markedly by 130% to RM112.5 billion in 2018-19 (during US-China trade tension) and RM56.6 billion in 2020 (during the pandemic), compared to RM49.0 billion in 2016-17 (pre-trade tension).

The increase was mainly due to new capital injections since 2018. During the period of heightened trade tensions (2018-19), foreign investments were primarily channelled into electrical & electronics, refined petroleum, basic & fabricated metal, paper, printing & publishing, chemicals, non-metallic mineral, machinery & equipment, as well as rubber manufacturing sub-sectors.

During the pandemic year (2020), basic metal and machinery & equipment industries continued to garner higher foreign investments than those during the trade war period. The other three manufacturing sub-sectors, namely chemicals, paper, printing & publishing, as well as wood & furniture also attracted higher foreign interest.

Attracting Quality Investments To Uplift Malaysia’s Growth Potential

Challenges remain to strengthen Malaysia’s investments and trade linkages to attract high-quality investments. Investment approvals have been encouraging though actualised investments and type of investments matter to secure higher potential growth. Malaysia’s investment growth has slowed in recent years partly due to declining cross-border investments and increasing competition to attract FDIs.

Business sentiment and investment decisions have also been affected by uncertainty in the global and domestic landscape. This poses a risk to Malaysia’s future potential growth as underinvestment in capital and technology can lead to slower development of key sectors of growth, labour productivity, and income levels.

According to UNCTAD, Malaysia is seen to be gaining trade competitiveness in only one sector apparel, out of 14 sectors during COVID-19. Meanwhile, Vietnam’s competitiveness improved across four sectors (apparel, communication equipment, office machinery, and textiles).

Thailand also reported higher competitiveness in two sectors (communication equipment and office machinery) during the pandemic. Despite the pandemic effects, China recorded the highest increase in competitiveness across many sectors including some of the most negatively affected sectors due to the pandemic such as transport equipment and road vehicles.

Going forward, recovery of global macro conditions will be the prime driver of actualised investments over the next 2-3 years. Other potential catalysts include the technology upcycle with the rollout of 5G network and accelerated digital transformation.

Malaysia has (on February 19) launched its Digital Economy Blueprint 2021-2030 that targets to roll out 5G deployment by end-2021 and aims to attract RM70 billion investments in digitalisation to lift the digital economy to 22.6% of GDP.

Malaysia is also part of the Regional Comprehensive Economic Partnership (RCEP) that is targeted to be in force by 1Q22 after it has been ratified by at least six ASEAN countries and three non-ASEAN signatory countries. This trade pact will establish the largest regional supply chain in the world with the growing role of intra-regional economic activity.