Malaysia’s strong exports performance, especially the manufacturing sector, has supported economic growth since the late 1980s. However, since 2000 our manufactured exports performance has been on a decline. Part of the reason was the downturn of our E&E industry. Furthermore, our manufacturing exports also face a number of challenges. Most notable is China and at the same time, the increasingly stiff competition from our Asean peers.

At the country level, we still enjoy comparative advantage between 1998 and 2017 vis-à-vis our peers amongst the selected Asean-6 countries. However, we are losing our comparative advantage, critically to both Thailand, which surpassed us in 2015, and Vietnam in 2017. Meanwhile, Singapore further widened its comparative advantage against us.

This suggests the risk of Malaysia falling into a “lose-lose” situation unless we prioritize our manufactured exports and at the same time adopt a more effective and aggressive export promotion strategy. Trade liberalization is seen as one of the measures. But if our trade liberalization is focused only on lowering tariffs for final goods, it will not improve our competitiveness. So, it has to be more comprehensive and should focus on both final and intermediate goods. At the same time, we need to aggressively promote Malaysia as the regional services hub for global multinationals.

A. Losing our comparative advantage

• Strong exports performance, especially the manufacturing sector, has supported economic growth since the late 1980s. This sector accounts for about 80% of our total exports. Between 1997 and 2000, manufacturing exports grew on average by 7.8% per year as shown in Chart 1. The non-resource-based manufactured exports grew on average by 7.7%, mainly coming from electrical and electronics (E&E) that expanded by 10.5% compared with resource-based manufactured exports which rose on average by 2.9% during this period as shown in Table 1.

• However, since 2000 our manufactured exports performance has been on the decline. Between 2001 and 2017, manufacturing exports on average grew by 5.1% per annum as reflected in Chart 1. Part of the reason was the downturn of the global electronics industry. Our E&E contribution dropped to 21.0% in 2017 from 75.1% in 2001 as presented in Chart 2 with an average growth of only 2.7% as illustrated in Table 1.

• Our E&E is hurt because it caters more for further processing in regional production networks which in turn produce for the world market. Also, not all of our exports are inputs to production networks. While we do export consumer electronics, especially to developing countries, they are increasingly facing competition from lower cost producers.

• Furthermore, our manufacturing exports also face a number of challenges. Most notable is China. Its growing dominance in the global export market of manufactured goods, and at the same time the increasingly stiff competition from our Asean peers are causing headwinds to our manufactured exports.

• It is because our exports are trapped in low value-added activities, making it difficult to move up the value-added chain. We still depend on low-level technology with little innovation or creation of new technology that provides a new competitive edge to our industries. Hence, we notice the average growth from non-resource-based activities is only 4.1% compared with 8.8% from resource-based activities between 2001 and 2017 as pointed out in Table 1.

• Given the weaker contribution of manufactured exports, we examine our export competitiveness in manufacturing amongst the selected Asean-6 countries (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) using the revealed comparative advantage (RCA).

• The RCA shows the ability of a country to produce goods at a lower cost vis-à-vis other countries, enabling it to specialize in goods in which it enjoys the relative advantage. In short, it suggests that factor endowment plays a key role in ensuring competitiveness since there is a relationship between the use of factor endowment and its location to produce goods to reap optimal production. If the RCA is greater than one (>1), there is evidence of comparative advantage, while if it is less than one (<1), it indicates no comparative advantage.

• At the country level, we still enjoy comparative advantage between 1998 and 2017 vis-à-vis our peers amongst the selected Asean-6 countries. However, we are losing our comparative advantage with the slide in the RCA to 1.98 in 2017 from 4.15 in 1998 as reflected in Table 2. Critically, both Thailand and Vietnam presented evidence of “catching up” with Thailand surpassing us in terms of the RCA in 2015 and Vietnam in 2017. Meanwhile, Singapore further widened its comparative advantage against us.

B. Is there a growing risk of falling into a ‘lose-lose’ situation?

• The emergence of China as an exports powerhouse has caused deep anxiety among many countries, including Malaysia, especially in relation to its export competitiveness. Within Asean, fast-growing countries like Vietnam pose a strong challenge to Malaysia, besides Thailand and Singapore.

• Trade liberalization is seen as one of the measures that can be taken to push our producers towards increasing their efficiency and competitiveness. The propagation of FTAs will forge closer economic relationships and improve market access for exports. But despite us having embarked on trade liberalization at multilateral, regional and bilateral levels in a move to improve our competitiveness and market access for exports, we continue to lose our comparative advantage.

• It could be due to a situation where we are still experiencing market access barriers for selected export products, particularly resource-based manufactured products in the form of tariff peaks and quantitative import quotas. Besides, we need to further address issues like lowering the cost of domestic production that includes business facilitation, freight and port charges which are important elements that determine competitiveness. If our trade liberalization is focused only on lowering tariffs for final goods, it will not improve our competitiveness. So, it has to be more comprehensive and should focus on both final and intermediate goods.

• Meanwhile, we need to raise our competitiveness in order to compete with current and new rivals in the same market. With globalization, added with the rapid spread of technology, the competitive environment in this region is accelerating. Markets will become more open with the increasing number of new entrants. Both competitiveness and comparative advantage will have to be equated quickly in order to raise productivity, meet global demand and become more sustainable in the long run. Otherwise, we risk falling into a “lose-lose” situation.

• Hence, we need to prioritize our manufactured exports by adopting a more effective and aggressive export promotion strategy. Our focus should be in areas where we currently enjoy a strong rising comparative advantage like in areas such as petroleum products; natural gas and manufacturers, and base metal in resource-based activities, and E&E in the nonresource-based segment. We should also look at areas where we had no comparative advantage before but now gaining comparative advantage like in the areas such as beverages; paper & paper products; chemicals; coal, coke & briquettes in resource-based activities, and others under the non-resource-based segment as presented in Table 3 with Table 4 (showing sub-industries comparative advantage).

• Also, we need to continuously assess our performance against the Asean-5 countries which are also enjoying comparative advantage in the same areas as us such as Singapore (petroleum), the Philippines (E&E) and Vietnam (E&E) as presented in Table 5. See Table 6 for an illustration of the sub-industries.

• As for competitiveness, it is vital to secure our market share. Increasing the market share alone is inadequate to achieve sustainable competitiveness. Other conditions such as: (1) ability to diversify exports; (2) achieving high exports’ growth over time; (3) upgrading technological contents of exports activities; and (4) expanding domestic industries’ base are necessary. Therefore, we need to address structural issues like technology and productivity to be able to extract maximum benefits from China’s greater integration into the world.

• At the same time, we need to aggressively promote Malaysia as the regional services hub for global multinationals. The focus should remain on high-quality investments such as the setting-up of: 1. Regional headquarters (principal hubs) for brand management and marketing, treasury and fund management, JV and acquisitions, and management and business unit management; 2. Regional supply chain hubs for strategic sourcing, purchasing/procurement, supplier development, supply chain management and logistics, and imports/exports; 3. Centres of excellence in areas like robotics and automation, engineering and commission, product development, corporate training centres and project management; 4. Global business services like procurement and supply chain, big data analytics, finance, human resource, information technology and administration; and 5. Medical tourism and education.

• Given that we are in a critical stage, especially when we aspire to become a high-income nation, much will depend on our ability to restructure the economy to become highly competitive and sustainable. Therefore, we need to focus on greater levels of specialization not only in goods, but also in services.

Source: AmInvest Research - 19 Apr 2019