Speech on US-China Trade War: How will Malaysia Benefit?
Good morning. I came home last night at 11 pm, after my talk at The Kuala Lumpur & Selangor Chinese Assembly Hall (KLSCAH). My interns Eun and Marcus were there too. Yesterday was a very long 15 hour day for me. For those who are interested in the US China Trade War impact on Malaysia, and willing to read 3,000 words on it, you can read below. The speech is written by me with research and admin help from my capable intern Marcus.
US-China Trade War: How will Malaysia Benefit? by YB Wong Chen 23 October 2019
1. The US-China trade war is a geo-political quarrel driven primarily by a rising China and correspondingly the decline of the world’s single global superpower, the United States of America. The core question here tonight is ‘can Malaysia benefit from this quarrel?’
2. The US-China trade war is ultimately about power and geo-politics. From the China government perspective, a strong pro-investment policy can be used as a geo-political play to outflank US interests in the region. The Belt and Road Initiative and related projects such as the ECRL are geo-political instruments.
3. Malaysia is small but extremely strategic in terms of global trade. We control half of the world's busiest shipping lane, the Straits of Malacca. In addition to that, we flank the South China Sea, which is extremely important to China’s military and strategic defence interests.
4. The conventional wisdom is China will pursue a policy of investing heavily in Malaysia, as a means to win over the Malaysian support for its interests in the region. Since Beijing has substantial control over Chinese corporations, Beijing could direct these corporations to invest in Malaysia. In this speech, I will also examine this conventional wisdom.
5. Generally, a slowdown in global trade from any trade war will not benefit anybody. What more, a trade war that involves the two largest trading nations in the world. A full blown trade war of this scale is going to be very disruptive. Every country will need to reassess its own internal strengths and capabilities. Highly export driven countries, like Malaysia need to do this reassessment urgently.
6. On the surface, and in the very short term, Malaysia may benefit from the initial phases of this trade war, in two different ways.
7. One, Malaysian goods currently produced and manufactured here may replace US goods going to China, and may also replace Chinese goods going into the US. In other words, we may see an increase in our current exports to both China and the US.
8. Number two, Malaysia may benefit from the relocation of US and Chinese manufacturing facilities to Malaysia, so as to avoid the tariffs imposed by both China and US.
9. My speech tonight will try to answer these two big questions. I also want to drive home the point that irrespective of the impact of this trade war, all Malaysian industries and to some extent the new government, need to carry out fundamental economic policy reforms to make our economy more resilient and sustainable.
10. There is also a high likelihood that a serious global recession is coming next year, and as such we must prepare for higher economic volatility and challenges in the next few years. Looking beyond that immediate timeline, in the coming decades, we will also face further challenges from climate change, the rise of artificial intelligence and major disruption to employment. 11. Let me address my first point regarding Malaysian exports. Have we seen our exports grow dramatically in the initial stage of the trade war? The answer is a resounding, yes. Since July 2018, the US government has slapped 5% to 25% tariffs on a variety of Chinese goods entering the US such as solar panels, washing machines, steel and aluminium. And correspondingly, China has returned the favour with tariffs imposed on US products such as peanuts, airplanes, cars, pork and soybeans.
12. On a very simplistic analysis of the situation, we can ask ourselves, are we supplying these goods that are on the tariff hit lists of the US and China. In other words, are we supplying peanuts, washing machines, cars, pork and soybeans?
13. For instance, China’s tariff on US peanuts has had zero impact on us because we do not export peanuts. In fact we import peanuts from Shandong, China. Nevertheless, there may be some benefits that Malaysia can gain by acting as a transhipment hub for US peanuts, a grey area that I do not condone, but happens as a course of business.
14. The obvious product that will benefit Malaysia resulting from this trade war is Malaysian palm oil. When China imposes high tariffs on US soya oil, Malaysian palm oil becomes more competitive. According to China’s National Grain and Oils Information Centre, China’s total palm oil consumption rose more than 20% in the first seven months of 2019. According to the centre, imports in the current year are estimated at 6.5 million metric tons, already up from 5.3 million metric tons a year earlier.
15. Based on our own MPOB data, Malaysian palm oil exports to China were at 1.86 million metric tons in 2018, and by September 2019 our exports hit 1.62 million metric tons. Looking at the trends of the last quarter, we can make an educated guess that Malaysian palm oil exports to China will hit approximately 2.3 million metric tons by the end of 2019. This represents a 22% growth in palm oil exports to China, a gain that results primarily as a consequence of this trade war.
16. What about other goods? The Bank Negara Q2 2019, Quarterly Bulletin report noted five specific products where Chinese products going to the US have reduced or stagnated and Malaysian products going to the US have increased. The data shows that in the photosensitive semi-conductor devices sector, China exports dropped 10% and Malaysia had a 12% increase. For diodes and transistors, China exports stayed at status quo and Malaysian exports in this sector increased by 6%. For radio broadcaster receivers, China exports dropped by 3% and Malaysian exports grew by 5%. For Vacuum cleaners, China’s exports dropped 2% and Malaysia gained 3%. For non-surgical rubber gloves, China’s exports dropped 1% and Malaysia gained 2%. Based on these five items we can see the average growth for Malaysia was 5.6% on the back of China’s average 3.2% drop to the US.
17. Now, let’s consider Malaysian products going into China at the expense of the US. For petrochemicals, the US saw a decline of around 5%, whereas Malaysian exports increased 22%. For oil and oil products, the US dropped by 1% whereas Malaysia grew by 13%. For electrical measurement instruments, US exports dropped by 3% whereas Malaysia’s grew by 5%. Finally, US cleaning agent exports dropped by 9% whilst Malaysia’s grew by 5%. Based on these four items we can see the average growth for Malaysia’s selective goods was 11.25% and the US dropped by 4.5%.
18. In conclusion, the trade war, at this initial skirmish phase, has actually helped Malaysia to increase its exports, at around 5.6% at the expense of China, and 11.25% at the expense of the US. So the average growth experienced by Malaysia on selective goods, is very strong at 8.4% from the trade war.
19. However, very recent developments in the trade war have signalled a cooling down of tensions, with Donald Trump feeling internal domestic pressure from the Bible belt states, where the trade war is clearly hurting farmers, who are his core supporters. And since Trump faces re-election next year, I believe the US-China trade relations would improve before the US elections. Moreover, the trade war may also abruptly end in the event of a serious global financial crash next year. In other words, I don’t expect this 8.37% gain for Malaysia for selective exports at the expense of China and the US, to continue beyond next year due to geo-economic and geo-political considerations.
20. Now to the second and bigger question. Will the trade war influence US and Chinese corporations to increase manufacturing FDI to Malaysia by relocating their factories to Malaysia (to bypass the tariffs)? My opinion is somewhat neutral, and since I don’t have a crystal ball, I will try to present a few likely scenarios. Let me deal with this difficult question by segregating China’s FDI from the US’s FDI, and then analysing both separately.
21. Let’s start with China. At the very start of the trade war, the Chinese government put a positive spin by saying that the trade war will force Chinese manufacturing corporations to expand overseas, in the same way that, Japanese and Korean manufacturing corporations have expanded manufacturing facilities decades ago. Reflecting this spin, the Malaysian government announced an exponential increase of proposed manufacturing investments coming from China. As we speak now, in early Q4 of 2019, it is still early days to see any realization of these investments.
22. Nevertheless, the overall planned investment numbers have been supremely positive. In March 2019, YB Lim Guan Eng, the Minister of Finance stated that the proposed total manufacturing FDI from China for 2018 was RM19.7 billion, a massive 410% higher than the RM3.9 billion planned in 2017. These numbers reflect the intentions of Chinese manufacturers back then in 2018. We must remember that the trade war has just started in July 2018. So this surge of interests may be a case of a knee jerk reaction to the start of the trade war.
23. What we have as a certainty, is that Chinese corporations have shown strong interests to invest in Malaysia in 2018 but that hasn’t actualise yet in 2019. This indecision by the corporations is largely due to the erratic policy announcements from Donald Trump. By consistently behaving in an inconsistent and bewildering manner, the Chinese corporations are trying to figure out Trump’s real policy play on the trade war. The generous view is that Trump has “a method to his madness”, the less generous view, being he is just clueless. On some months, Trump is all hell and brimstone and on other months he is offering olive branches. This, in turn has created deep seated investment uncertainties, and corporations, be it Chinese or American, as a rule, do not invest hundreds of million to build manufacturing facilities based on uncertainties.
24. There are five more “big picture” considerations that China will factor in when considering investing in manufacturing in Malaysia. The first big picture issue is that China is now at a strategic manufacturing crossroads. Should they invest in automation technology in China, to improve their internal domestic productivity, or should they relocate to cheaper labour intensive countries such as Vietnam and Ethiopia? If they choose to relocate to cheaper labour intensive countries, does Malaysia fit this profile of a cheap labour intensive country? If we continue to bring in millions of cheap foreign workers, then yes, we will probably fit that profile. But that policy to downgrade our productivity with foreign workers, is just plain wrong and will ultimately weaken our economy.
25. In all likelihood, if Chinese corporations decide to move some manufacturing bases to Malaysia, it will be for medium end goods with less labour intensive inputs. And this scenario leads us to the second big picture consideration. Currently Japan and Korea are just barely ahead in electronics and technology, with the Chinese corporations fast catching up. Huawei is a case in point. Huawei is an innovative, dynamic and extremely cost efficient corporation. But Huawei and other high tech Chinese corporations are now facing major trade “sanctions” from the US and its allies. Irrespective of the status of the trade war, irrespective of the status of the country of manufacture, Huawei goods faces a complete ban in certain parts of the world.
26. In other words, even if Huawei sets up a manufacturing base in Kuala Lumpur, its phones and telco equipment will not be allowed to be sold in the US or its staunchest allies. While I am extremely sympathetic to Huawei’s predicament, for the purposes of our talk here today, this unfair trade practices will further discourage Chinese tech corporations to move their manufacturing to Malaysia, simply because such a move will make no difference whatsoever to the marketability of Huawei goods.
27. The third big picture consideration is the issue of Foreign Direct Investment decisions of China are largely influenced by geographical location; how proximate is it to China. It is not by accident, even before the trade war started, that Chinese corporations have been investing heavily in Vietnam, an immediate neighbour of China. Having close business and political ties with your neighbour provides additional geo-political security to China. Chinese executives also find it easier to visit their factories in Vietnam, and Vietnam has an additional advantage of a sizeable, fast growing and hungry internal market population of 95 million. So, compared to Vietnam, Malaysia will be a distant 2nd choice for most Chinese corporations.
28. The Fourth big picture. There is also great uncertainty and threat from Trump that he may expand the trade war to include other trade surplus countries. In May 2019, Trump threatened to slap tariffs on South Korea’s automotive industry as an extension of his America-first policy. Then, in July 2019, similar threats were made towards Vietnam were made with Trump accusing it of being “almost the single worst abuser of everybody” on global trade. With these comments fresh in mind, it is important to understand where Malaysia fits into this equation.
29. The top ten countries that have a trade surplus with the US in descending order are China, Mexico, Japan, Germany, Vietnam, Ireland, Italy, Malaysia, South Korea and India. It is important to note that Malaysia has the second highest trade deficit per capita with the US, effectively this puts us squarely in the firing line, along with Vietnam should Trump choose to expand the trade war to other trade surplus countries. This is yet another factor that works against the prospect of Chinese corporations relocating their factories to Malaysia.
30. Now to the fifth big picture. Specifically, I want to focus on the manufacturing sector; which can take the shape of either brownfields and greenfields. I am made to understand that foreign direct manufacturing investments coming into Malaysia from China, tend to be more brownfields rather than greenfields. Overall Chinese corporations are interested in taking equity stake in Malaysian’s corporations so to secure longer term partnerships, and to basically lock in the supply chain of raw materials to China. Compared to the large construction and property investments by Chinese corporations, the foray into our manufacturing sector is somewhat small. This initial stage of the trade war, is not likely to change the landscape very much.
31. Let me now deal very quickly with the prospects of US corporations expanding their manufacturing operations in Malaysia. We know that US corporations such as Dell, Intel and ON Semiconductor are currently big brownfield investors in Malaysia. In a Reuters report in September 2019, the proposed US investments in the manufacturing sector primarily to expand capacities, jumped from RM307 million in 2018, to an astonishing RM 11.69 billion within the first six months of 2019. Since the trade war was unilaterally started by Trump and is still being shaped by him, US corporations are probably more “in the know” than say Chinese corporations. As such, in my opinion that the likelihood of the actualisation of manufacturing investments by the US corporations, is greater than that from Chinese corporations. This is also simply because of economics and not s much geo-politics. US wages are substantially higher than that of Malaysia, whereas China wages are almost on par as Malaysia.
32. Ultimately, if Malaysia really wants to grow its economy and attract more FDIs, whether from China or the US or anybody else, the key selling points are the same – skilled workers, good infrastructure, cheap and available land, rule of law, efficient judiciary, non-corrupt politicians. In all these things, Malaysia needs improvements.
33. So how do we move forward in this contested geo-political trade war? Ironically, the more we improve our geo-political ties with China, the more likelihood we will be frowned upon by the US, which then defeats the whole purpose of Chinese corporations investing in Malaysia. It is a catch 22 situation. A good case study is Vietnam. Vietnam is both an ally and a competitor to China. Vietnamese policy makers understand how to exploit Chinese ties for business and yet lean towards the US on issue of security. Vietnam has played its balancing act extremely cleverly and well. Malaysia is also good at this balancing act, but we can improve with less talk, will result in more for us. For example, the recent political scolding of India has resulted in threats to cut our palm oil exports.
34. In the final analysis, in the scenario where China and the US intend to move 10 manufacturing factories to ASEAN (to avoid the trade war tariffs), I would imagine 5 would go to Vietnam, 2 to Malaysia, 1 to Thailand, 1 to Indonesia, and 1 to either Myanmar or Cambodia. That is the real state of play, we can pray for more but we should gear up to receive 2 out of the 10 new factories. This means we have to prepare our labour, water, electricity, transport infrastructure to welcome these factories.
35. My concluding remarks. FDIs are important. However, the Malaysian government should stop being overtly and disproportionately fixated on foreign direct investments. We should instead be more fixated on developing our own domestic direct investments. We need to have our own Samsungs, our own Mitsubishis, our own Apples and our own Huaweis. The Malaysian Baharu is supposed to address systemic and fundamental economic issues. While I am happy to see exports our grow and am looking forward to welcome manufacturing facilities from China and the US, overall, I intend to continue to push the agenda of supporting our own domestic direct investments much more. Thank you for listening.
