Column - Trump’s trade challenge and opportunity

22 Feb 2017 / 20:03 H.

    CAN exports continue to power the Malaysian economy? Recent data suggests continuing reliance on exports in the long term may be unsustainable. Before Malaysia's export engine sputters and stalls, top policymakers must find a new and equally dynamic generator to turbocharge the economy.
    Adding urgency to the search for new growth propellers is US President Donald Trump's belief that trade is a zero sum game, that a trade deficit means America is the loser while the counterparty enjoying a surplus is the winner.
    Furthermore, to fund Trump's proposals to cut the US corporate tax rate, rebuild ageing US infrastructure and implement other key elements in his agenda – including the infamous Great Wall between the US and Mexico – the Republican Party has proposed a "border adjustment tax (BAT)".
    Under BAT, profits are calculated by deducting domestic costs from domestic sales; a formula that effectively taxes US imports and subsidises its exports.
    Trump's trade policy offers "emerging market economies a great opportunity to enhance South-South trade and investment," said Tan Sri Andrew Sheng, Distinguished Fellow at the Asia Global Institute, at a talk titled "Trump and New Asian Challenges", in Kuala Lumpur organised by Kenanga Investment Bank recently.

    In his talk, Sheng highlighted one salient fact: data compiled by Esteban Ortiz-Ospina & Max Roser in International Trade 2016 show South-South trade has more than tripled over the 1980-2011 period with China as the key driver in this dynamic.
    BAT's possible implementation underscores the need for an immediate rethink about Malaysia's continuing reliance on low value-added electrical and electronics (E&E) manufactured goods to generate a hefty proportion of this country's gross export earnings.
    Although the world's largest economy accounted for only 10.2% of this country's exports last year, this figure could be understated. A significant proportion of Malaysian E&E exports to countries like Singapore, China and Japan could be intermediate goods destined for the US market.
    Last year, Malaysia's gross exports edged upwards from the previous year by a miserly 1.1% to RM785.9 billion – a deceleration from the lacklustre 1.6% export growth in 2015. Although exports are expected to enjoy faster growth this year, the momentum could remain unexciting.
    Minister of International Trade and Industry Datuk Seri Mustapa Mohamad predicts exports could inch up by between 2% and 3% this year.
    UOB Bank economist Julia Goh is more bullish. She foresees a 3.5% uptick in exports this year, an optimism based on the positive impact of a weaker ringgit and the recovery evident in recent data.
    That both Mustapa and Goh's predictions for export growth are lower than the World Bank's forecasts that this country's economy could expand by 4.3% this year suggests exports are unlikely to offer significant stimulus to the Malaysian economy this year.
    E&E manufactured goods' increasing share of Malaysian exports is worrying – because it underlines this country's continuing dependence on low-value items.
    In December 2016, exports surged by 10.7% to RM75.6 billion due to faster growth in E&E goods – a trend that bolstered E&E's share of Malaysian exports by nine percentage points to 35.8% or RM27.08 billion in value terms.
    Manufacturers of Malaysia's E&E exports face enhanced competition from lower-cost countries like Vietnam. An increasingly important global hub for E&E, Vietnam is fast climbing the value-added ladder.
    Furthermore, 70% of E&E manufacturers in this country are foreigners. What this means is the decision to shift towards higher value-added E&E products will be determined by foreigners rather than Malaysian policymakers.

    For these reasons, Malaysian policy planners should redouble their efforts to broaden the range of goods manufactured and exported from this country beyond the E&E sector. Developing agro-based manufactured goods is an often overlooked and underutilised option.
    Although this country is a major exporter of hardwood timber, why is a more determined effort to develop a high-value and highly automated wood-based manufacturing industry lacking?
    Like Indonesia, Malaysia is a major producer of palm oil. Last year, Indonesia rolled out a mandatory policy to blend 20% of palm oil to produce biodiesel, a decision that could boost domestic use of biodiesel by a hefty 30% to 40% this year.
    In contrast, Malaysia's biodiesel programme has yet to leave the starting gate.
    Palm oil could also be used to develop pharmaceuticals. Tocotrienol is part of the Vitamin E family and palm oil offers a high concentration of tocotrienol. A two-year study published in the American Heart Association Journal, Stroke, suggests tocotrienols could inhibit the onset of strokes.
    Despite the potential, why haven't more Malaysian companies ventured into manufacturing pharmaceutical products like tocotrienols?
    Admittedly, challenging pharmaceutical giants is daunting. However, Malaysian entrepreneurs have the option of manufacturing vitamin E capsules certified as halal. Regionally, the Muslim market (including that in China) is large with escalating disposable income.
    In short, Trump's trade policies are a challenge and an opportunity.
    Opinions expressed in this article are the personal views of the writer and should not be attributed to any organisation she is connected with. She can be contacted at siokchoo@thesundaily.com

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