Analysing Trade pattern of an ASEAN country

ANALYZING TRADE PATTERN OF MALAYSIA
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Analyzing Trade Pattern of Malaysia
Introduction
Considered to be among the most dynamic economies found in the region around the Asia Pacific, the Malaysian economy has proven to be one of the fastest growing economies in the world. Malaysia is endowed with abundant natural resources which in turn support mining and agricultural activities (Djubairn, Hameed, and Othman, 2015, p.7). The country’s proximity to the Strait of Malacca has also boosted its potential to engage in international trade. Malaysia also has a well-developed manufacturing sector that provides a base for the production of a range of consumer goods that are demanded globally.
Over the past few decades, the economy has experienced different forms of transformations regarding its structure in operation and diversification of production activities. Due to the size and the open nature of the Malaysian economy, it is not possible for the country to perform well without engaging in trade. Malaysian economic growth largely depends on both domestic and international trade (Saw, and Kesavapany, 2006, p.11). The trade involves the importation and exportation of goods and services to other business partners. Additionally, the sustained growth that the country’s economy has experienced over the past few decades has led to the shift from being import substitution-based to being an export-led economy (Devadason, 2002, p.

6). This paper focuses on the nature of the trade pattern in Malaysia and how the trade design has changed over time concerning international trade and trade barriers.
Trade patterns
The Malaysian import and export sectors have evolved significantly over the past five decades. The country has embraced the importance of foreign trade due to its rising level of openness to other nations (Ariff, 1994, p.98). A consistent increase in the ratio of imports and exports to the Gross Domestic Product (GDP) has been registered over time. The increasing amount of exports of the country can be attributed to external demand of its products, ease of access to the market, and other forms of foreign direct investment (Bradford, and Branson, 2007, p.13). Considering the economic industrialization goal of Malaysia, it is clear that the economy has gradually moved away from focusing on exporting majorly mining and agricultural products to exporting manufactured goods (Devadason, 2002, p.17). Due to the rapid developments in the manufacturing sector, Malaysia experienced substantial growth in the export of manufactured goods. For example, by 1990’s the share of manufactured goods was approximately 90% of the total exports (Devadason, 2002, p.5).
Fig. 1 Malaysian international trade over the period 1980 – 2000 (Figures given in %)
Year Exports/GDP Imports/GDP Total Trade/GDP Share of manufactured goods in exports
1980 53.56 54.41 107.98 85.01
1981 51.42 47.06 98.48 78.21
1982 56.33 38.59 94.93 61.67
1983 56.67 51.44 108.12 76.70
1984 62.11 56.40 118.51 83.00
1985 63.11 51.15 114.26 78.67
1986 42.24 46.18 88.41 88.10
1987 51.17 51.57 102.75 92.00
1988 81.05 57.72 138.77 92.67
1989 82.79 63.73 146.52 89.76
1990 99.10 71.89 170.99 90.26
1991 102.93 80.39 183.32 88.81
1992 87.76 74.34 162.11 88.29
1993 110.45 74.77 81.96 185.22
1994 120.21 85.70 205.91 81.87
1995 123.57 94.38 217.95 81.80
1996 119.10 87.50 206.60 79.50
1997 121.18 89.62 210.80 79.17
1998 182.60 104.86 287.46 82.26
1999 197.61 106.61 304.21 81.20
2000 201.16 123.50 324.66 85.93
Source: Calculated from the Malaysia: External Trade Statistics, various publications
The table reveals a trend in which manufactured exports remained to be higher than those of the imports beginning the year 1987. The increase of exports is due to the emphasis on an export-oriented industrial growth following the import substitution period of 1986. Additionally, Malaysia managed to gain a competitive position for its export products over this period due to the lower value of the ringgit compared to the other currencies (Hamid, 2010, p.266). Also, the government had put in place strategies that are aimed at cutting down on the costs of doing business and other export incentives. Over the given period, the country developed a technological base that emphasized on an industrial system that is export oriented (Yunus et al., 2010, p.279).
Similarly, an increase in the domestic production of manufactured goods has led to improvement in external demand from other trading partners and other developing countries located in South Asia (Saw, and Kesavapany, 2006). However, a series of currency depreciations was reported in late 1997 which forced the country to raise import duties so as to reduce imports while correcting the trade deficit (Mien, 1999, p.73).
Conversely, at the beginning of 2000, the export structure has gradually changed from the concentration on exporting electrical and electronic materials and moved towards manufactured commodities (Hamid, 2010, p.263). Also, Malaysia has managed to diversify its export markets (Alavi, 1996).
Fig. 2 Malaysian progression from being a primary commodities exporter to being a major exporter of manufactured goods

Source: Malaysia and Bank Negara Malaysia, Department of Statistics
Even though electrical and electronic products still contribute to the total exports, there has been a rise in the exportation of non-electronic materials from 23.4% to 33.8%. The share of commodities contributing to the total exports has also increased from 13.3% to 22.2% (Bank Negara). The changes in the trend of trading patterns can be attributed to several economic factors. For instance, the abundance of natural resources in both the agricultural and mining sectors has positioned the country at an advantaged position due to the global demand for raw materials (Lim 1987, p.457). It has translated to an increasing demand share of exports in commodities during this period. Such products include palm oil, crude oil, natural rubber, and liquefied natural gas (Bradford, and Branson, 2007).
Another contributing factor to the shift in export activities is due to investments in capital-intensive manufacturing sectors (Bayoumi, 2011). This coupled up by the availability of raw materials has improved the competitive advantage of Malaysia in the exportation of rubber products, petroleum products, and other chemical related products (Athukorala, 2002, p.1302). Changing investment patterns concerning the nature of Malaysia’s manufacturing sector has led to more emphasis being put on the non-electronic products (Djubairn, Hameed, and Othman, 2015, p.17). Direct foreign investment in non-electronic products has also increased over the years (Ramasamy, and Yeung, p.1198).
Apart from investments in the manufacturing sector, Malaysia has greatly diversified its export destination markets over the years (Soutar, 1977, p.290). Whereas the demand from the traditional market destinations such as the United States and Japan remain to be high, the economy has experienced increased demand for its products in other East Asian economies (Lim 1987, p.456). A key market for Malaysia’s export products continues to be ASEAN which consumes about 25% of the goods (Pinheiro-Alves, and Zambujal-Oliveira, 2012, p.67). Further Malaysia has improved its trade linkages with other countries beyond Asia which include New Zealand, Australia, and other Latin American countries (Schwab, 2009).
In the same manner, Malaysian imports have increased over the years with a record value of $204 billion being recorded in 2014 (MIT, 2016). The large volume of imports puts Malaysia in the 26th position among the largest global importers. A significant share of the imported products is integrated circuits constituting 13.8% of the total imports. Refined petroleum closely follows it at 10.9% of the gross imports. The main countries that Malaysia imports from are Thailand, Singapore, Japan, the United States and China (MIT, 2016).
The current trade pattern in the Malaysian economy can be ascribed to the rise of emerging economies that are projected to contribute largely to the overall global growth (Michaely, 1958, p.729). The emergence of middle-class consumers has changed the consumption pattern which has further influenced global trade (Devadason, 2002, p.9). It has resulted in a shift in the export sector with a focus on emerging economies to avoid over-reliance on specific regions as the export destinations.
Trade impediments
Trade barriers are those policies that are put in place by the governing body of a given country to help in protecting the economy from adverse effects that may arise from foreign competition. Even though trade barriers may in some cases improve a country’s competitiveness, it may discourage other business partners from engaging in commerce with that particular country (Findlay, and Warren, 2013).
Malaysia has implemented several policies to guide trade operations such as the use of tariffs. Tariff peak is utilized in some sectors such as the textile, clothing, automotive, leather products, and beverages (European commission, 2016). In some instances, tariff escalation has been reported in cocoa products. An example is the use of a zero tariff rate on cocoa while its preparations require a 15% rate of the levy. Also, Malaysia uses tariff quotas on 19 categories of imports which must pass through TRQ control. Such products include poultry products, tobacco, sugar, milk, and eggs. Tariff rates that are higher than the access commitment are subjected to high specific duty that may rise to 160% (World Trade Organization, 2015).
The tariffs coupled up by import restrictions has been a matter of concern to some trade partners such as China (China, 2006). Some goods such as vegetable products and machinery are not given automatic licensing administration. Heavy machinery that is brought into the country are monitored and only approved in case the equipment cannot be found in the local market (China, 2006). Such import restriction strategies have prevented some products from other markets from entering the Malaysian market.
Another factor that has acted as a primary source of the barrier to trade is the use of discriminatory taxes on goods that are imported from other destinations (European Commission, 2016). For instance, when the import tariffs were reduced for vehicle components in 2005, automobile excise taxes we increased by the Malaysian government by figures ranging from 60% to 250% (China, 2006). However, the local automakers were given tax rebate relating to excise taxes.
Fig.3 Malaysian tax revenue (given as a percentage of the GDP) between the periods 1996 – 2012

Source: The World Bank
A report by Forbes on ‘2015 Best Countries for Business’ ranks Malaysia at number thirty-four regarding the tax burden (Forbes, 2015). On the other hand, export taxes are also charged at a rate of 10% to 30% which discourages the exportation of products such as crude palm oil. The main aim of imposing the taxes is to encourage the development of the local refinery sector since the already refined palm oil products are not subjected to the export taxes (Galantucci, 2006, p.1083). Also, foreign factories that are based in Malaysia are exempted from the tax making them have the upper hand compared to other compared to companies operating in other overseas markets such as in the United States (Galantucci, 2006, p.1083).
Investment barriers may be seen in extensive restrictions in critical sectors such as in mining, petroleum and gas, and telecommunications. In some cases, foreign equity is limited as there is a requirement for foreign firms to partner with local enterprises. Regulations and policies may acts as obstacles to investment due to the complicated nature of the approval for investment.
Fig.4 Best Countries for business 2015 rankings
Rank Name GDP Growth (%) GDP per Capita ($) Trade Balance/GDP (%) Population (Millions)
1 Denmark 1.1 44600 6.3 5.6
2 New Zealand 3.3 35300 -3.2 4.4
3 Norway 2.2 67200 9.4 5.2
4 Ireland 5.2 51300 3.7 4.9
5 Sweden 2.3 46200 6.2 9.8
6 Finland -0.4 40700 -1.8 5.5
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31 Cyprus -2.3 30900 -4.9 1.2
32 Spain 1.4 33,800 0.8 48.1
33 South Korea 3.3 35400 6.3 49.1
34 Malaysia 6 25100 4.4 30.5
Source: Forbes
Correspondingly, the Malaysian Industrial Development Authority has the responsibility of analyzing and approving projects that are considered to benefit the local economy regarding the size of investment and social diffusion concerning technology and capital generation (Malaysian Investment Development authority, 2015). In instances where a local and a foreign firm have proposed similar investment proposals, the local company has a higher likelihood of being given the go-ahead to the project. Investment programs are also handled by several ministries thereby requiring several approvals that may be discouraging to international investors.
In the same way, Malaysia faces barriers to trade in its service sectors such as in financial and telecommunication services. Even though foreign firms may be allowed to have some shares in the Malaysian banking and insurance institutions, foreign shareholding is limited to 30% for the case of banking institutions and 51% for insurance firms. Additionally, any foreign business is not allowed to have a share of more than 49% of a local communication company.
Conclusion
International trade remains to be an integral component of Malaysian economic growth. Even though Malaysia has gone through various changes in its trade patterns, continuous investment in the manufacturing sector and a focus on a technologically based industrial system has made Malaysia competitive among its trade partners regarding its exports. Whereas Malaysia has grown its export sector, it still heavily depends on imports from other countries such as the United States, Thailand, Japan, and Singapore. The trading patterns of Malaysia has a lot of similarities with other business partners within different levels of development. The trade between Malaysia and Singapore is majorly an inter-industry trade (Ganesan, 1998).
Compared to Singapore, Malaysia has better endowments regarding natural resources which act as the primary driving sector for economic growth. However, Singapore mainly depends on its strategic location as an international port to engage in trade (Hu, 2010). Singapore is recognized as the easiest place to start up a business compared to Malaysia that is ranked at number eighteen according to the ‘2016 ease of doing business report’ by the World Bank. Based on such factors as taxes, cross-border trade, and business start up the report reveals that company formation in Singapore involves only two steps and takes a day to complete while in Malaysia, there are nine steps involved which could take as long as eleven days to complete. When it comes to taxes, Malaysia has a complex tax system concerning indirect taxation and charges higher rates on income taxes in comparison to Singapore. The ‘2015 – 2016 World Competitiveness Report’ by the World Economic Forum ranks Singapore in the tenth position and Malaysia in the seventy-sixth position concerning the total tax rate.
Also, the ‘2010 Global Trade Enabling Report’ by the same body indicates that Singapore has a better preference to trade compared to Malaysia. It is associated with factors such as the regulatory environment, the ease of access to the market, and the regulatory framework among other factors. In order to gain the level of competitiveness as Singapore, it is necessary for the Malaysian market to adopt favorable trade policies in its tax system and company formation procedures. Having a better regulatory environment can improve the preference of the economy as an investment and trade destination.
Even though Malaysia has registered considerable progress in its efforts at diversifying the export markets over the years, it still faces some challenges regarding barriers to trade that may slow down its corporation with other trade partners. Further, the increased uncertainty of global demand for exports may affect the performance of the Malaysian export sector and industries.

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