Downside Risks To Malaysia’s Trade Outlook

By Professor Evelyn S. Devadason

The knock-on effects of the trade war between the United States (US) and China has been significant for Malaysia. The high degree of (direct) trade exposure to the Chinese economy through exports of intermediate goods, and the indirect linkages through global supply chains has rendered Malaysia less resilient to the trade war. Also, positive trade diversion effects from both US and Chinese import demand remained limited for Malaysia relative to its regional peers, and therefore could not offset the full impact of the trade war on the economy. Consequently, total trade of Malaysia contracted by 2.5 percent in 2019.

Hence, downside risks are expected to continue to dominate the trade outlook for Malaysia given the unfavourable external economic conditions. The global challenges that are likely to weigh on the country’s export demand include the following: unresolved trade tensions between the US and China and the phase one trade deal; the economic slowdown of China, the Covid-19 (or coronavirus) outbreak and the impending growth strategy of China; and the Brexit saga.

The US-China trade tensions unfortunately have not ended, as the phase 1 trade deal is considered as only a partial agreement between the two countries as it has only managed to roll back some tariffs. Ultimately, the outcome of this deal for Malaysia will depend on whether China is able to uphold its commitment to increase imports from the US, especially when its economy is already on low gear alongside with managing the outbreak of Covid-19.

The trade exposure of Malaysia to this trade deal should however not be ignored as it is estimated to be the highest in Southeast Asia. Approximately 83 percent of Malaysia’s exports to China include products at risk, as they are listed in the purchase agreement. The products include electronics and electrical parts and equipment; food and beverage-related products; industrial chemicals and metals; and energy-related (petroleum and palm oil) products. For example, if China increases its imports of soybeans from the US, this may potentially squeeze out Malaysia’s exports of palm oil to China. Having said that, it is too early at this juncture to make any sense or intuitive assessments from the new risks invoked by the phase 1 trade deal on Malaysia.

Recently, there is rising concern that China may deliberately dismantle more supply chains through domestic sourcing to reinvigorate its economy. The disruptions in supply chain networks that began with the trade war, is now also growing with the Covid-19 epidemic as factory shutdowns are ordered in industrial centres of China. The closure of these factories has hit countries like Malaysia that depend on China for the sourcing of intermediate goods. Worth noting here is that the Covid-19, relative to the trade war, seems to be causing changes that are far reaching with consequences for cross-border trade in multiple sectors, ranging from toys to automotive.

Predictably, a prolonged and compounding effect of the trade war and Covid 19 may see China unwinding its economic interdependence in the short to medium term. Whatever its cause, any temporary move by China to “decouple” from the region should not be taken lightly, as China is not only Malaysia’s largest trade partner, it is also strategically positioned at the centre of the regional production chain.

Relative to the above challenges, Brexit is seen as having a less fundamental risk and less unfavourable impact on Malaysia’s trade. This is because the United Kingdom (UK), though a traditional trading partner of Malaysia, only occupies less than 1 percent of Malaysia’s global trade. Despite the optimistic expectation for forging new alliances between Malaysia and the UK post Brexit, Malaysia may potentially be better positioned to exploit its trade relationship with the UK only if it ratifies the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), especially when the UK has already expressed its priority for moving ahead with members of the trade pact.

Clearly, weak external demand and disruptions to the global supply chain are the two real transmission channels for a highly trade dependent and deeply integrated economy like Malaysia. Malaysia’s trade outlook therefore remains muted, and in sync with external economic conditions. What is certain from the above global developments that continue to unfold, is that, Malaysia will now have to navigate both (new) risks and (fresh) uncertainties in 2020.

Evelyn S. Devadason is a Professor at the Faculty of Economics & Administration, University of Malaya. Her research focuses on international trade and regional integration. She currently serves as an Associate Editor to the International Journal of Social Economics and as a member to the Editorial Board of the Journal of Contemporary Asia. She has been engaged in a number of international and local collaborative research projects.  She received her Ph.D. (Economics) from the University of Malaya in 2006 and M.Soc.Sci. (Economics) from the National University of Singapore in 1992. 

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