Key Drivers That Will Shape Malaysia’s Trade Over Medium Term And Policy Imperatives

The COVID-19 shock is yet another example of the country’s agility to capitalise on the surge in global demand.

Bank Negara Malaysia Quarterly Bulletin for 2Q, released today, cited that exporters of selected products have benefited immensely from their investments in retooling and rolling out new product lines as well as leveraging on their deep integration in the GVCs.

Moving forward, Malaysia could benefit from riding on emerging megatrends to ensure our continued competitiveness.

(1) Reshoring of GVCs by major economies

The pandemic revealed that over-reliance on GVCs can increase the economy’s exposure to systemic risks from geopolitical, environment, economic and health disruptions. A clear example of this is the shortage of microchips creating knock-on effects globally across many durable goods sectors such as automotive and consumer electronics.

In response, major economies have considered and even embarked on protectionist measures. This includes reshoring of production for key manufacturing inputs such as microchips, medical supplies and food.

The move towards self-sufficiency was part of a new strategy to strengthen economic resiliency against global supply disruptions.

The reshoring of manufacturing production, however, could pose even higher and new risks to production and economic activity. According to an IMF study, there is already over-concentration of intermediate inputs in home countries.

As a result, reshoring could increase vulnerability to disruptions through higher concentration risk.

Another study by the World Bank (Chepeliev et al, 2022) shows that in a world where countries re-shore their production, global trade would decline by as much as 17 percent by 2030, with adverse effects on incomes and welfare.

It is also difficult to disentangle or reconfigure the GVCs due to their positive externalities and efficiency gains to participating countries.

Firms have made significant investments in infrastructure, relationships and networks spanning suppliers, producers, consumers and local communities. As benefits of GVCs continue to outweigh potential costs, firms will find it very hard and costly to abandon these investments or shift to alternative modes.

Studies have shown that during the Covid-19 crisis, strong trade relationship along the value chain helped to cushion the impact of economic shocks. Espitia et al. (2021) shows that the export performance of sectors that are integrated in the GVCs are less negatively impacted than sectors that primarily rely on domestic inputs.

This will open up new opportunities for Malaysian firms as outlined in the National Trade Blueprint 2022- 2025. One of the global trends identified in the Blueprint is the rapid population growth in the African continent, which currently accounts for only 2.5% of Malaysian exports.

Ultimately, given the intense competition among GVC players, efforts to strengthen Malaysia’s position should be a key priority.

Malaysia needs to move away from reliance on low-cost production models to higher value-added activities. Resiliency factors like logistics, inventory management and access to substitutable inputs, flexibility and skills of workforce will be key in driving the country’s competitive edge.

Quality investments that are aligned with the National Investment Aspirations (NIAs) can deepen Malaysia’s contribution that will also increase economic complexity, expand domestic-linkages, develop new economic clusters, create high-value jobs and improve inclusivity.

Also, by aiming for sectors that are knowledge driven, tech-intensive and low carbon, these investments would encourage R&D and innovation, which would incentivise horizontal and downstream diversification into more complex export products.

This is particularly relevant for the palm oil sector, which has a high potential to advance into higher value-added downstream segments such as agrochemicals and food products.

(2) Technology and digital services present significant opportunities for future sources of growth and exports Firms’ adoption of digitalisation and e-commerce accelerated during the pandemic, even among smaller enterprises.

The use of online platforms is likely to be a persistent trend. The automation of industrial processes allowed firms to meet low-touch and social distancing requirements while ensuring production continuity. For example, through remote monitoring capability, engineers in Malaysia were able to guide the staff in Beaumont, Texas for an orderly shutdown of its facility before being impacted by Hurricane Laura in August 2020 (Greenfi eld, 2021).

Additionally, usage of digital technology such as Internet of Things (IoT) and cloud computing has effectively become the new norm. Other than production, technology was also deployed in sales and marketing, payment methods, supply chain management and production planning. This also means bigger opportunities for small and medium-sized enterprises (SMEs) to participate in the GVCs.

Adoption of new technologies into GVCs can improve efficiency while providing new growth opportunities. For instance, blockchain technology is increasingly being employed to record transactions in shipping logistics, thus improving bureaucratic efficiency.

By automating forms and bills of lading, this would expedite the administrative processes and customs procedures and clearance. Importantly, it will minimise errors and delays as well as reduce revenue leakages for the Government.

Recently, it was reported that the Royal Malaysian Customs Department has begun using the blockchain-enabled ‘TradeLens’ platform in Malaysia to modernise the shipping processes. This should create the pathway towards greater transparency, more efficient trade activities and higher customer satisfaction.

Policies that encourage digitalisation as outlined under the ‘MyDigital’ initiative will enable more local players, particularly MSMEs to participate in GVCs. To complement this, a highly-skilled and digital-ready workforce is required to supply firms with the talents needed for them to digitalise their operations and increase productivity.

(3) Making trade greener and sustainable into the future

The post-pandemic era also presents opportunities to accelerate the shift towards the green and sustainability agenda. As the pandemic exposed fragilities in the global economy, there has been greater focus to ‘build back better’ by paving the way towards a greener and sustainable recovery.

In the automotive sector, more countries are shifting towards energy efficient vehicles (EEV) such as hybrid cars and electric vehicles (EVs). Global sales of EVs doubled in 2021 from the previous year to a new record of 6.6 million (International Energy Agency, 2022).

In addition, demand for green technology such as solar panels, electric vehicles and lithium batteries has seen a strong increase.

In 2021, renewable electricity capacity additions increased by 6% globally, reaching a record-high of 295 gigawatts (GW) and is expected to increase by over 8% in 2022. Solar photovoltaic is forecast to account for 60% of the increase in global renewable capacity this year, a 25% gain from last year (International Energy Agency, 2022).

Increasing demand for cleaner energy sources also implies new market opportunities for biofuel exports. This provides opportunities for Malaysia to shift towards exporting more renewable energy. Therefore, there should be greater emphasis towards green and sustainability compliance across export industries with clear environmental, social and governance (ESG) targets and measurable outcomes moving forward.

To encourage the transition to low carbon practices for SMEs, the Bank has established the Low Carbon Transition Facility (LCTF).

The implementation of the Government Green Procurement policy and the provision of alternative financing such as green sukuk are also encouraging developments.

Beyond this, there should be increased coordination between agencies to attract investments in low carbon industries. Measures to enhance export capacity and branding and promotion strategies for green products are also paramount.

For example, palm oil products in the downstream segments that promote RSPO-certifi ed crude palm oil could expand opportunities to tap into the global markets for sustainable products.

Furthermore, effective policies including targeted incentives could also encourage businesses and exporters to adopt green practices.

On that note, the policy implementation should be well-calibrated to align ESG ambitions with different ESG risk levels for different export sectors. Overall, these efforts should enhance Malaysia’s trade competitiveness.

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