Trade Gains amid Supply-Chain Diversions and  Pandemic – Part One

Trade Gains amid Supply-Chain Diversions and Pandemic – Part One

By Julia Goh & Loke Siew Ting Senior Economist & Economist UOB Bank julia.gohml@uob.com.my / jasrine.lokeST@uob.com.my

- Advertisement -Trade Gains amid Supply-Chain Diversions and  Pandemic – Part One

Since US-China trade tensions and the ongoing COVID-19 pandemic started, this has prompted global investors to rethink their supply chain resilience and diversify trade. We noted that trade tensions and pandemic has benefited Malaysia’s exports to its top three trade partners (China, Singapore, and US) whereby export shipments to these countries have consistently risen across three specific periods (pre and during US-China trade tension, and COVID-19 pandemic).

Malaysia’s export gains to China was the most notable as exports to China rose by RM60bn (or 9.3% compounded annual growth) between 2016-2020, while exports to the US grew RM28.6bn (or 8.1%) and exports to Singapore expanded by RM27.7bn (or 5.6%). Malaysia’s key export products that rose markedly include electrical & electronics (E&E), mineral fuels, machinery & transport equipment, optical & scientific, and rubber products.

Going forward, challenges remain to strengthen Malaysia’s investments and trade linkages particularly to attract high quality investments. Malaysia’s approved investments signal higher FDI interest (particularly from China and US). Global macro conditions will be the prime driver of actualised investments over the next 2-3 years. Policies should also be aligned to shifting global trends and ensure Malaysia remains a competitive investment destination. A holistic investment plan that engages investors to understand the issues hindering investments, improve investor services, and enhance the administration of investment incentives would help improve the investment climate.

Trade Tensions and Pandemic Prompted Rethink of Global Supply Chains

The US-China trade tensions that started in early 2018 and outbreak of the global COVID-19 pandemic since Jan 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.

Prior to the COVID-19 pandemic, higher labour costs in China and new tariffs on China imports entering 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 Feb-Mar 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 “in 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 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.

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 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 US and the pandemic.

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