“There is no clear consensus of whether the ongoing trade war results in a net negative for Malaysia.” In the midst of this uncertainty, Harris Zainul proposes nuanced approaches through which Malaysia can be a beneficiary of the ongoing trade wars and its negative effects on development of Malaysia as a big palm oil exporter.
Geoeconomics is increasingly featured in policy and academic conversations in Malaysia. To no surprise, this is a result of the ongoing trade tensions between the US, EU and Japan with China. Nonetheless, how these wider geostrategic shifts are viewed in the country can differ from popular, and often, Western, opinion.
For example, there is no clear consensus of whether the ongoing trade war results in a net negative for Malaysia. In contrast, due to the potential gain from trade and supply chain realignments, some economists are optimistic that Malaysia can be a beneficiary of the larger trade war and any relocation of supply chains.
There are two reasons behind this optimism.
The first draws from Malaysia’s foreign policy and trade positions. Since independence, Malaysia’s external position has remained largely neutral – reflective of both its stature as a medium-size country and open-trading economy. As a result, Malaysia has largely promoted itself as being a strategically located reliable partner, manufacturing base, and investment destination for companies from the West and East.
To illustrate, the country was among the earliest signatories of the Belt and Road Initiative and hosts a Malaysia-China industrial park in its eastern seaboard, while it is also a member of the Indo-Pacific Economic Framework and party to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Moreover, the island of Penang is called the “Silicon Valley of the East”, and home to various large American semiconductor companies.
The second reason for this optimism is the entrenched nature of supply chains, optimised over years and decades for cost and efficiency. This means that despite governments having jurisdiction to dictate trade policies, the market ultimately decides on where supply chains are located. In other words, it remains unclear if shifting trade policies affects the location of supply chains by and large.
The clear exception to this is, of course, bleeding edge technology, such as advanced chips and the machines to produce them. Regardless, due to the position Malaysia occupies in both the chips’ supply and value chains – often in downstream activities such as testing and packaging – it remains relatively unaffected by geopolitical developments. By most accounts, this optimism will remain as long as the status quo holds stable and does not deteriorate further.
An adjacent cause for optimism is the fact that it remains unclear as to who would absorb any cost premiums should supply chains be optimised for geopolitical allyship rather than market efficiencies.
Nonetheless, there are developments over the horizon that give rise to concern in Malaysia. For example, the linking of trade policies with net zero and sustainability imperatives. While it is accepted that more needs to be done to address the impending climate crisis, it bears remembering that many developing countries have yet to receive sufficient funding for their decarbonisation, energy transition and climate adaptation.
Should this trade-sustainability nexus form prior to the above manifesting, and without responses to extraterritorial policies such as the EU’s Carbon Border Adjustment Mechanism (CBAM), then this would lower the export competitiveness of some sectors in developing countries like Malaysia. As a result, their room for trade may shrink with knock-on implications such as an increase in reliance on trading partners without similar CBAM requirements. This could then limit their room to hedge or balance between the great powers, thus limiting their room for any subsequent geostrategic manoeuvring.
This risk is well-known to Malaysia. The country’s palm oil industry faces persistent allegations of deforestation, despite having a domestic sustainability certification regime. As a result, it suffers from arguably unreasonable due diligence requirements by importers, adding further pressure on Malaysian palm oil exports. However, since the palm oil industry represents a significant vote base in Malaysia, the government consistently strives to secure favourable prices for the commodity. Therefore, buyers, primarily India and China in the current context, hold considerable leverage in this regard.
In moving forward for Malaysia, it is evident that the rules of free and fair trade must be upheld. The global trading order must be preserved and not hijacked by large powers for narrow domestic interests – whether in the name of geopolitical allyship or even sustainability. For countries that pursue an export-led growth model, like Malaysia, their continued development trajectories depend heavily on a free trading environment.
In the larger discourse surrounding geoeconomics, it bears remembering that the interests and concerns of developing countries may differ from popular, and again, Western opinion. In other words, countries are impacted differently depending on their foreign and trade policies, positions in the global supply and value chains, and geographical location.
Framing the growing discourse on geoeconomics around binary or zero-sum scenarios risks ignoring the realities of developing countries like Malaysia. Their interests and concerns vary widely from Western opinions, influenced by their distinct foreign and trade policies, positions in global supply chains, and geographical locations.
This article first appeared in FES Asia on 10 July 2024.
