““Go Local!”: Mixed Signals in Malaysia’s Trade Policy”, a Commentary by Tham Siew Yean

Commentary 2016/54, 5 September 2016

Is Malaysia sliding down the slippery road of trade protectionism? The Star Online, Friday 2 September 2016 reported that the Prime Minister of Malaysia wants mega project developers as well as the automotive and aerospace industries to use more locally made products and components to keep a check on imports.

The rationale behind this move can be seen in the declining trade surplus in the country. Understandably, the emergence of a trade deficit when the longstanding fiscal deficit has not yet been resolved can affect the rating of Malaysia. This has prompted the government to discuss the outlook of Malaysia’s current account at the Sixth National Export Council Meeting. The reported outcome of this meeting is a two-fold strategy to pre-empt the occurrence of a current account deficit. First, the call to “go local” for mega project developers and second, to increase exports.

 The call for increasing local content is not new nor is it a strategy peculiar to Malaysia. Developing and developed countries have used similar strategies in the past as well as the present. For Malaysia, a clear example of the continued use of local content policy is the automotive sector. This sector is a classic case of infant industry protection, based on similar strategies that were used by some East Asian economies to build their respective automotive sectors. Except that export targets were not imposed from the beginning nor were there clear sunset clauses built into the strategies used to develop the national car. It should not be surprising that the national car is unable to export much and it is plagued with a shrinking domestic market share.

The second strategy of increasing exports correctly identifies the need to enhance the competitiveness of local manufacturers, diversify product and amplify export promotion for the automotive sector. But this sits at odds with the first strategy as imports of more cost competitive inputs can help car manufacturers to manage their costs better. Clearly, imports of more cost competitive final goods pose severe competitive challenges in the domestic market. But if domestic producers cannot overcome competitive pressures within their home territories, how will they be able to compete with global peers to penetrate the export market?

Moreover, the decline in Malaysia’s global export position cannot be attributed to an ailing world economy alone; others in the region have thrived and grown their global export shares. Attacking the declining current account surplus requires a reality check at Malaysia’s export competitiveness relative especially to its neighbours and a sombre confrontation with the negative impact of continued protection. Why are Malaysian firms unable or unwilling to penetrate the export market? Closer policy attention to the factors constraining export competitiveness will help to restore Malaysia’s global export position and reverse its shrinking current account. Can “going local” be a part of such a solution?

Dr Tham Siew Yean is Senior Fellow at ISEAS – Yusof Ishak Institute.

The facts and views expressed are solely that of the author/authors and do not necessarily reflect that of ISEAS – Yusof Ishak Institute.  No part of this publication may be reproduced in any form without permission.