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

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

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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 (i) global trade diversion to avoid tariffs from both the US and China; and (ii) 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 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 US imports list. Based on US imports data, imports from Malaysia gained USD7.6bn between 2016 and 2020. Based on China’s import data, China’s imports from Malaysia grew by USD25.7bn in the same period. Using Malaysia’s export data, exports to China rose by RM60bn (or 9.3% compounded annual growth) between 2016-2020, while to the US grew by RM28.6bn (or 8.1%) and to Singapore expanded by RM27.7bn (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 COVID-19 pandemic did not hinder Malaysia’s exports to its top three countries (China, Singapore, and US), whereby export shipments to these countries have consistently increased across the three specific periods (pre and during US-China trade tension, and COVID-19 pandemic).

Malaysia’s Approved Investments Signal FDI Interest

The approved foreign manufacturing investments from 2016-2020 showed improved interest from overseas investors (particularly China and US) in either expanding or setting up their production plants in Malaysia to cater for global and regional demand amid lingering trade tensions and COVID-19 pandemic. Foreign manufacturing investments approved by MIDA has risen markedly by ~130% to RM112.5bn in 2018-19 (during US-China trade tension) and RM56.6bn in 2020 (during pandemic), compared to RM49.0bn 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 pandemic year (2020), basic metal and machinery & equipment industries continued to garner higher foreign investments than that of during trade war period. 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 in order to attract high quality investments. Inves tment approvals have been encouraging though actualised investments and type of investments matter to secure a 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 s lower 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.