Covid-19: Emerging threats for Malaysia’s trade

By Evelyn S. Devadason

Monitoring the potential threats of the Covid-19 pandemic to international trade is important for a highly trade dependent country like Malaysia. The latest monthly trade statistics released by the Malaysia External Trade Development Corporation (MATRADE) revealed that exports and imports had declined by 11.5 percent and 14.2 percent respectively, between January 2020 and February 2020. In fact, export contraction had already begun in 2019; the first ever recorded decline since 2009.

The level of uncertainties in the growth of trade in Malaysia continues with the outbreak of Covid-19 due to disruption of supply chains, social distancing policy, production stoppages, slowdown in foreign direct investment (FDI) and rise in trade protectionism.

The first threat to Malaysia’s trade is the disruptions to the regional and global supply chains. The share of foreign value-added in Malaysia’s gross exports of merchandise goods is relatively high at 37.6 percent. The interruptions in the supply chains would adversely affect Malaysia and is expected to fall disproportionately on sectors like electronics and automotive, which are highly integrated with the global market through regional supply chains.  Social distancing in major import sourcing countries has disrupted the imports of intermediates or parts and components to Malaysia. In turn, the national social distancing measure has also affected exports, as production operations are halted, with the exception for essential products designated under the Movement Control Order (MCO). The result of factory closures is under-utilisation of capacity, a problem that already plagues the manufacturing industry.

The second threat to the country’s trade relates to its interlinkages with FDI. The export-oriented manufacturing industry is largely driven by inward FDI, and this explains why FDI uniquely parallels trade for a country like Malaysia. On the back of lower profits and weak external demand during this pandemic, existing multinationals in Malaysia are showing signs of slowing down their capital expenditures, and some may even plausibly consider reshoring their activities back to their home country if this pandemic prolongs. Worth noting at this juncture is that inward FDI has already been declining somewhat dramatically since the second quarter of 2019. A further drop in investment inflows to Malaysia can be anticipated especially with the projected drop in global FDI by about 30 percent to 40 percent. A slowdown in FDI or delayed investments will have profound implications for trade.

The third threat to trade is transmitted through disruptions in services (transportation and logistics), leading to general increases in domestic and international transaction costs. As services have become more tradeable now than before, identifying the ultimate impact of this pandemic on trade in services of Malaysia will also become more complicated than trade in merchandise goods.

The fourth threat to Malaysia’s imports is the rise in export restrictions among its major trading partners. Based on a recent database released on trade policies during this pandemic, Malaysia is reported to have a “very high exposure” to global export restrictions in personal protection equipment, namely, 78.5 percent of its medical masks’ imports alone come from countries imposing such restrictions.  “High exposure” to export restrictions by global producers is also noted for imported components of hygiene and case management, such as hand sanitisers (34.6 percent) and venturi masks (30.6 percent). The short-term policy response through export restrictions by most major global producers, enacted to fulfil the surge in their domestic demand, will impair the global supply of critical goods, cause shortages and subsequently price escalations. Shortages in personal protective equipment are already evident in Malaysia.

The unilateral or containment measures enforced globally are not just related to medical equipment and supplies, but are also extended to food supply, thereby threatening that access for countries like Malaysia.  Though Malaysia is ranked as a relatively food secure country, occupying 28th position in the 2019 Global Food Security Index, it is still a net importer of food. Therefore, the export bans in major food exporting countries, compounded by the logistic constraints mentioned above, could have potentially devastating effects on food imports, resulting in food insecurity in the near term.

The rise of uncoordinated trade protectionist policies, globally, even if they are temporary, will dictate and shape recovery in the aftermath of the pandemic. Short-term policy responses, undeniably, are a compromise to global trade over the long-term.

Questions arise concerning whether Malaysia’s trade will rebound in the post Covid-19 period closer to the pre-pandemic trend, or will it taper to a lower new norm. Any change in trade trajectory in future will inherently be subject to whether this pandemic is viewed as a one-time shock or a recurring shock by governments and businesses.  Based on the ways in which this pandemic could unfold, speculation about the trade impacts of Covid-19 remains rife.

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.

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