This article first appeared in The Edge Financial Daily on June 3, 2019

KUALA LUMPUR: Asean, including Malaysia, is benefitting from investment and trade diversions as US-China trade tensions escalate, according to economists.

“Even as the US-China trade war escalated in 2018, Malaysian exports to the US rose by 2.3% to RM90.73 billion — the highest recorded since 2008 — while that to China expanded 10.3% to RM138.88 billion. These results reflect the fact that Malaysia, thanks to its high degree of trade openness, has benefitted from trade diversion caused by the reconfiguration of global supply chains triggered by the US-China trade war,” Malaysian Rating Corp Bhd (MARC) said in a statement.

The country is similarly benefitting from investment diversion that arises from the reconfiguration of global supply chains, it said.

“The diversion is already reflected in foreign direct investment (FDI) data provided by the Malaysian Investment Development Authority. In 2018, total approved FDI increased by 48% to RM80.5 billion from RM54.4 billion in the previous year.

“On a sectoral basis, manufacturing saw the largest improvement with approved FDI rising 169.3% to RM58 billion. China, with RM19.7 billion, was the largest contributor,” it noted.

Notably, the substantial increase in approved FDI in Malaysia was achieved against a backdrop of falling global FDI, it said, citing the 19% fall in global FDI in 2018, based on data from the United Nations Conference on Trade and Development.

Realised FDI for the first quarter of this year — actual investments that were made — increased by 94.8% to RM21.7 billion, the highest quarterly level ever recorded, MARC noted, citing a statement dated May 18, 2018 by the finance minister.

“Malaysia remains an attractive FDI destination given its considerable advantages in terms of, among other things, institutions, infrastructure quality, location and resource endowment. In terms of ease of doing business, for example, Malaysia is ranked at No 15 out of 190 economies in the World Bank’s Doing Business Report 2019,” MARC noted.

Apart from trade and investment diversions, MARC believes rising trade integration and infrastructural development augmented by China’s Belt and Road Initiative should help sustain Malaysia’s FDI inflows.

But pace of growth ‘pales in comparison’ with peers

Similarly, UOB Global Economics & Markets Research noted there has been a rise in FDI entering Malaysia since trade tension first escalated in April 2018.

“However, the pace of increase pales in comparison with the flows entering Vietnam and Indonesia,” its senior economist Julia Goh, and economists Loke Siew Ting and Manop Udomkerdmongkol, wrote in a note last Friday.

“Arguably, Malaysia may also be more selective in the type of FDI as the country would not be keen on low value-added, labour-intensive and polluting industries,” the trio said.

Malaysia’s economic fundamentals remain strong and it ranks higher than most of its regional peers in terms of competitiveness and ease of doing business. “Malaysia’s economic strengths include a relatively younger population, low borrowing cost and ease of doing business. However, other regional countries, particularly Vietnam, Indonesia and Thailand, are fast in catching up,” the trio added.

Vietnam’s success in attracting FDI was notably expounded. “In Vietnam’s case, education reforms with emphasis on mathematics, science and technology under the Doi Moi policy placed Vietnamese students in line with developed countries like Japan and South Korea. Today, Vietnam has the advantages of a large labour force and low wages, similar to China 20 to 30 years ago,” they noted.

Besides a large supply of high-quality labour, Vietnam has the advantage of competitive wages alongside high productivity, a business-friendly economic environment, growing domestic demand with an expanding middle class, as well as diversity of export markets and tax incentives.

As US significantly reduced its imported goods from China — based on trade flows since 2018 — with its import share from China plunging to a six-year low of 15% in March, it has been substituting these goods with higher imports from Mexico, the European Union, Canada, Vietnam, Singapore and Japan, the three said.

“Similarly, as a result of higher tariffs on imported US goods, China slashed its imports from the US, with its import share from the US dropping to 5.8% in April from an average of around 8% to 9% before the trade disputes started. Instead, China raised its imports from Japan, Malaysia, Thailand and Singapore. As such, the share in China’s imports from Malaysia increased to 3.2% in April from 2.9% in early 2018.

“In sum, among Asean members, it appears that Vietnam and Singapore have benefitted from higher export orders from the US, while Malaysia, Thailand and Singapore has also benefitted from higher export demand from China,” they noted.

While there was a pick-up in shipments to the US and China in March to April, suggesting a recovery in trade and demand at the start of the second quarter of 2019 as talks between the two countries were still constructive, the turn of events after trade talks broke down in early May and tariffs is likely to weigh on demand, they added.