Currently, the US contributes about 25% to the global economic output, followed by China at 15%. Combined, they produce about 40% of the global output, whereas Malaysia produces about 0.4%, or one hundredth of the combined output of both countries. However, it ought to be remembered that the standard of living between the US and China differs significantly.
The current international system with its Bretton Woods Institutions was conceived towards the end of World War II. Following the fall of the Berlin Wall and the end of the Cold War, nearly 25 years ago, the US-sponsored liberal international order seemed to be the sole dominant system and hence, the terms Unipolar World and Unipolar
In its recent publication, Foreign Affairs magazine argues that the prevailing system is in crisis and the future is up for grabs. There are many elements of the story — military and economic blunders, stagnation for the middle and lower classes in the developed world, a populist backlash against globalisation, dizzying technological change — but a shifting balance of power may be the most important of all. It is arguably a case for a transition from unipolar to a multipolar world with the US being the troubled hegemon and China the confident challenger.
Richard Haass, a veteran American diplomat and president of the Council on Foreign Relations, is of the opinion that the order cannot be revived; Washington must accept the emergence of multi-
lateralism as a fait accompli.
Meanwhile, there are those who argue that China is not trying to replace the US as a hegemon. Instead it is merely trying to check the US globally while expelling it from a Chinese sphere of influence in the Indo-Pacific.
Why this matters to Malaysia?
There is growing concern that the Malaysian economy will shift into lower gear and the global economic outlook is not very promising. To substantiate this point of view, for example, the International Monetary Fund has cut its 2019 growth forecast for this region from its earlier estimate of 3.9% to 3.7%. Similarly, the Asian
Development Bank has put the region’s growth rate expectation at 5.8%, down from an earlier forecast of 5.9%. The underlying concern that contributed to these downward revisions is the US-China trade war and how it could upset markets.
According to Shankaran Nambiar of the Malaysian Institute of Economic Research, there are two reasons why the US-China tension matters to Malaysia. First, because it affects global markets and the resulting global demand for Malaysian exports. Second, and more directly, because China is Malaysia’s most important trade partner. Consequently, any trade policies that harm trade between these countries could affect Malaysia’s trading position, especially since Malaysia’s intermediate goods exports to China are significant.
Malaysia’s export profile will also be impacted by the state of the global electronics industry this year. At least in the near term, the global electronics industry is expected to grow at a slower pace, although one cannot rule out a downturn in electronics exports.
Another important export item, palm oil, does not seem to have a bright outlook, despite India cutting its import tax on the commodity, simply because other factors tend to moderate that action. The price of another commodity, crude oil, is also a cause for concern. Analysts are inclined to think that oil prices could take a tumble, and while this has repercussions for export revenue, it also matters for fiscal soundness.
A slowdown in exports will result in the current account surplus narrowing this year. The exchange rate could fall. If it does happen, that may be a blessing in disguise because a weak ringgit would make Malaysian exports more attractive. In a weak external environment, a softer ringgit will turn out to be a positive. Taking all things into consideration plus the much-to-be-desired external environment, 2019 will certainly see lower growth figures. If there is any good news, it is that we are headed for a slowdown and not negative growth.
The months ahead will need to see more forward-looking guidance on the government’s policies. On the fiscal side, the government has maintained its commitment to a prudent fiscal policy. That is surely commendable. On the monetary side, the central bank has maintained the benchmark interest rate at 3.25%.
As for international trade as a share of gross domestic product, Malaysia’s trade has been consistently more than 100% since 1988 and is currently above 130% (as at 2017). In comparison, the world average was less than 60%. And so, international trade is of great importance to the Malaysian economy, generating income through imports and exports.
One observation that deserves attention is that our exports have a very high import content and this is clearly reflected in Bank Negara Malaysia’s latest annual report, which was released recently. What this means is we do not add much value to our exports despite our very active participation in globalisation, particularly through global value chains (GVCs).
It seems that we are predominantly engaged in low value-added activities such as assembly work rather than high-end manufacturing activities.
So, who do we trade with? Our biggest trading partners in descending order are China, Singapore, the European Union, Japan and the US, although some 15 years ago, the US was our largest trading partner. It has been noted that trade with Japan and the US is usually accompanied with a significant transfer of technology.
The Thucydides Trap
As the rising dragon China challenges the American eagle, which does not want to be knocked off her perch, misunderstandings about each other’s actions and intentions could lead them to a deadly trap. This trap was first identified by the ancient Greek historian Thucydides. It was Graham Allison at the Harvard Kennedy School who reminded us of the immediate danger of a Thucydides Trap — he postulated that war between a rising power and an established power is inevitable. Paraphrasing Thucydides from The History of the Peloponnesian War, it was the rise of Athens and the fear inspired in Sparta that made war inevitable.
In more recent times, we have to thank Japan for being the strategic counterbalance between China and the US.
Against this backdrop, change is inevitable, unrelenting and overarching. In this context, the proverbial Malay sang kancil or mouse deer is known for its agility and wit. Strategy and timing is of essence as we dance along with the Goliaths. We must be careful not get trampled by them. We ought to play according to the accepted rules and reap maximum benefits.
In the final analysis, while we actively participate in globalisation, we must ensure that our economic sovereignty is not compromised. Being a small open economy, Malaysia is highly interconnected with the global economy through its active participation in GVCs. However, this would also mean that its economy is vulnerable and highly susceptible to external shocks and disruptions, such as volatile movements or fluctuations in global commodity prices, or in this case, risks arising from a trade war between two of the world’s largest economies.
Samirul Ariff Othman is an analyst with local think tank, MIER. He completed his graduate studies at Macquarie University, Australia. The views in this article are his own.