This article first appeared in The Edge Malaysia Weekly on February 5, 2018 - February 11, 2018

IN the one year since Donald Trump was sworn in as US president, he has made good on some of his campaign promises to “Make America great again”. But at the same time, he has made several moves that have caused uncertainty in the rest of the world.

Looking back over the last year, one question worth raising is whether these policies have ultimately benefited Malaysia or put her at a greater disadvantage.

One of the earliest moves by the Trump administration, which undoubtedly impacted Malaysia, was to spurn the Trans-Pacific Partnership agreement, which was seen as predecessor Barack Obama’s signature trade deal.

The agreement among 12 nations, which make up 40% of the world’s gross domestic product, was meant to lower tariffs and trade barriers among the countries that signed on. The US’ decision to pull out of the trade agreement was a big blow to Malaysia’s commodities, rubber-based products, textiles and the small and medium enterprise segments, according to Socio-Economic Research Centre (SERC) executive director Lee Heng Guie.

“Nevertheless, after the US withdrawal, the remaining 11 parties agreed on core elements of a new version of the pact — now formally called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. The parties aim to sign the new pact on March 8, with some modifications,” he adds.

According to news reports, the new pact, which constitutes 13% of the world’s GDP, can create additional growth of 1% in national income by 2030. So, perhaps, all is not lost.

In more recent times, Trump fulfilled his promise to bring down corporate tax rates. The corporate tax rate was slashed from 35% to 21%, even lower than what corporates in Malaysia currently pay. This is set to increase the US corporates’ after-tax cash flow by anywhere from 10% to 20%, according to an article in Harvard Business Review.

Sunway University Business School economics professor Yeah Kim Leng views this move as a positive for corporates in the US and overseas markets.

“It’s positive for the coffers of corporates. With the additional cash now, they may consider parking the extra funds in overseas markets,” he says.

When asked if Malaysia should be worried about the attractive new corporate tax rates luring American businesses with operations overseas back to the US, Yeah says that it is unlikely as there are many other factors, such as production cost and markets, to consider apart from corporate tax rates.

SERC’s Lee concurs, adding that US-based multinationals with a long investment presence in Malaysia are unlikely to uproot themselves and fully relocate back to the US.

“Businesses must consider other factors such as cost and strategic geographics when investing as we are operating in a global market and integrated global supply chain,” says Lee.

However, he adds that the bold tax cut by the US will pile pressure on emerging economies — including Malaysia — to enhance their competitive tax regimes and other “pull factors” to retain existing US businesses as well as attract new foreign direct investment from the US.

“The pull factors are a business-friendly investment environment, new areas of growth opportunities, adequate supply of skilled workers and a reliable network,” he explains.

Another policy change that affected Malaysia would be the steep tariffs slapped on imported solar panels, which are aimed at protecting local US industries and improving employment in the sector.

Malaysia is the largest exporter of photovoltaic (PV) cells and modules to the US, having a market share of 25% (by value), according to a CIMB Research report.

“UN Comtrade data shows outbound shipments of PV products to the US comprised 1.1% of Malaysia’s total exports in 2016. According to a Malaysia Investment Development Authority survey in 2016, 89% of Malaysia’s total PV production was exported,” adds the report.

The research house believes that Malaysian PV exporters may need to find new markets abroad to make up for the possibly displaced demand from the US. It does not expect a complete discontinuation of PV exports to the US, but thinks the increased competition with the new tariff could reduce Malaysia’s market share and margins in the near term.

So, the question now is whether the US will get tougher and become even more protectionist going forward.

Economists do not deny that this remains a risk for Malaysia, given that the US accounts for 10% of her total exports. More than half of exports to the US constitute electronic and electrical products and other manufactured goods.

MIDF Research sees further protectionist moves by the US hitting global trade activities as well as Malaysia’s external trade performance this year.

“After washing machines and solar panels, the Trump administration is expected to impose tariff hikes on the steel and aluminium industries. We foresee further protectionist moves by the US government in order to ‘protect’ its economy. On the other hand, such moves would spur market uncertainties, cause a drop in business confidence, affect commodity prices and, to some extent, could drag down global growth in the medium term,” warns MIDF Research.

The US administration is looking at “fixing” trade deficits with its major foreign trading partners — being China, Japan and North American Free Trade Agreement countries (Canada and Mexico), says Lee.

“Any unwarranted move by the US against Japan and China would indirectly have a negative spillover effect on Malaysia, which has deep trade linkages with Japan and China. A case in point is the US-imposed tariffs of 30% on imported solar panel technology and as high as 50% on imported washing machines in a bid to protect domestic manufacturers while signalling a more aggressive approach to China,” he says.

If a trade war occurs between the US and China, Anbound Research Centre analyst Fung Vun Ket believes the impact on Malaysia and the Asean countries would be minimal, as long as the country continues to strike a balance in foreign policy.

“For instance, we intend to reap benefits from Beijing’s Belt and Road Initiative but, at the same time, we did not give up on US relations. In fact, Southeast Asia is a strategic location for the US and China to expand their influence, so they should be the ones who are trying to ‘please’ us,” he says.

With three more years to go until the next US presidential election, the Trump presidency will likely continue to surprise, judging by its first year.

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