Malaysia stands to benefit as trade diverts from China

By SHAHEERA AZNAM SHAH 

MALAYSIA is likely to gain some advantage from the global tension between the US and China as the trade feud is expected to redirect investments away from China to other trading nations.

Moody’s Investors Service Inc said the diversity of export destinations will provide some mitigation to the near-term softening prospect of the global economy as a result of the trade tension.

“Asian export growth has slowed substantially in recent months as the global economy has cooled and trade volumes decline, driven by ongoing and broad-based tensions between the US and China.

“Gains from trade and investment diversion will depend on industrial structure, scalability and labour costs, potentially benefitting Malaysia along with Thailand, Vietnam and Taiwan,” Moody’s said in a statement yesterday.

It added that the possibility of diverted regional supply chains heightens as businesses are expecting to relocate production away from China to minimise the tariff burden and avoid the concentration risk.

“Beyond the near-term cyclical impact, there is an increasing likelihood of a reconfiguration of regional supply chains over the next few years.

“Trade frictions may serve to accelerate a trend of manufacturing and investment being diverted away from China that was previously set by other factors, such as the rapid rise in Chinese wages,” it said.

The credit rating agency added that while the reconfiguration of the supply chains will not occur immediately, countries that have an extensive manufacturing network will likely to secure new supplier networks.

“The reconfiguration of supply chains will only occur over a number of years. Countries with already large manufacturing bases are likely to have domestic supplier networks, as well as deep pools of labour, that will support further investment,” it said.

Moody’s said countries with similar export products to China will have a significant advantage to be the investment substitute businesses in filling the gap.

“We construct an Export Similarity Index to measure the similarity of exports between China and individual economies in the Asia-Pacific region.

“Unsurprisingly, countries that already participate in the regional manufacturing supply chain have the greatest export similarity to China, notably Malaysia — along with Vietnam, Korea, Thailand, Taiwan and Japan,” it said.

However, Moody’s added that specific hindrances Malaysia is facing could limit the benefits of the investment shifts and trade diversion.

“Nevertheless, country-specific hurdles, such as protectionist policies and political risk, will limit the gains from potential shifts in production chains in some cases,” it said.

It said Malaysia is also exposed to some vulnerability due to the country’s direct trade with China as the latter’s economy is expected to moderate.

“The transmission of a slowing Chinese economy to other parts of Asia Pacific through trade is significant, given China’s role as a source of final demand and its position in the regional supply chain.

“Assuming demand from China weakens equally for all goods types, we estimate a direct impact on its trading partners. Hong Kong and Mongolia, including Malaysia, are the most exposed given the high concentration of their exports that are absorbed by China,” it said.