Date: August 19, 2024
Location: Kuala Lumpur, Malaysia
Background
Economically, Malaysia is currently benefiting from two main external headwinds – the trade war between China and the United States, as well as the global supply chain reorganisation trend. The former has been brewing over time since the Trump presidency and came to a head in the last two years. In addition, the spectre of a hot war in the Taiwan straits looms as a possibility overhead.The situation has pushed companies that serve US markets and are embedded in global supply chains towards strategic actions to cushion the risks against this geopolitical backdrop. Concurrently tariff hikes and rising trade restrictions has catalysed a domino effect where industrial policy and protectionism are back with a vengeance. For example countries have since 2023 scrambled to jump on the bandwagon in issuing their own version of the American CHIPs act to ring fence their share of the highly lucrative semiconductor industry.
While Malaysia has benefited from some of these developments as seen in its increased prominence within the global semiconductor supply chain ecosystem, a cohesive national strategy is crucial to ensure optimal response to future geoeconomic developments. The supply chain shocks that occurred during the COVID-19 pandemic revealed the vulnerabilities of the world’s “just in time” supply model and has since shaped how businesses are conducted globally, of which some developments have benefited Malaysia.
2024 has also seen Malaysia take a strong stance internationally on the Gaza conflict, announced the decision to join BRICS+ and OECD as well as unveiled a National Semiconductor Strategy among other things. As geopolitical and geoeconomic impacts are increasingly intertwined and hard to disentangle, Malaysia’s foreign policies and position in global affairs will most certainly influence our economy and trade growth.
There is a need for a wider debate on how Malaysia can adapt its overall strategies to these changing environments. To deliberate on the challenges facing Malaysia and how the nation should best respond, Research for Social Advancement (REFSA), with the support from Friedrich Ebert-Stiftung (FES) Office for Regional Cooperation in Asia, convened a diverse group of national thought leaders from international relations, economics, policymakers to industry players for a full-day roundtable. Through analysing the global order of the day, the roundtable facilitated discussions focusing on three major trends: the US-China trade war, global supply chain reorganisation and impact of technological change.
Current state of play
Geopolitics and Geoeconomics
The event kicked off with an open discussion on the current geopolitics and geoeconomics dynamics facing South East Asian countries such as Malaysia. The unifying conclusion is that Malaysia faces the challenge of adapting to a more complex and competitive global environment. This requires strategic positioning and policies to safeguard its interests while maintaining stability in an increasingly polarised world.
The global precarious dynamic is currently playing out in three interconnected theatres of conflict: Eastern Europe, the Middle East, and East Asia. Eastern Europe tensions remain high through the conflict in Ukraine. The Middle East conflict continues to escalate, while East Asia’s tensions in the South China Sea and recently Taiwan, represents another flashpoint. Participants agreed that these regional tensions are not isolated but rather intertwined, with each conflict potentially triggering ripple effects across the others.
Participants observed that geoeconomic trends are driven increasingly by geopolitical logic, and are reshaping global trade practices. Politicisation of market access through protectionism, sanction regimes, and trade agreements is becoming more prevalent. This resulted in a reorganisation of the global supply chains as companies focus on a “Just-in-Case” approach. Now, “resilience” is the keyword as companies bolster the security of their supply chain by increasing the diversity of their sourcing and establishing bases in new locations to better prepare for future uncertainties. Operational strategies such as China+1 and Taiwan+1 resulted in companies reshoring, nearshoring or friend-shoring though there are increasing trends moving towards a “Not China Not Taiwan” approach. At the same time, the US-China technology bifurcation and subsequent technology war creates a new stage for uncertainties, for example signs of the semiconductor supply chain gradually geared towards a slow separation of a US or China controlled supply chain.
There is general consensus that the global economy grows more fragmented and vulnerable. The neoliberalist approach towards growth via free trade is increasingly being abandoned as advanced countries become nervous about the rising technological prowess of China. On the other hand, some low income and developing countries find free trade brings little advantages at best and exploitative at worst. Today’s geopolitical situation has also prompted governments and analysts to seek new frameworks to navigate the megatrends. Development models that once relied on industrialization, export-driven growth, and cheap labour models are becoming obsolete. Countries find that they can no longer rely merely on these “business as usual” approaches.
Emerging trends
Geopolitics
Participants discussed the inevitable multi-polarisation that arises due to the tensions between the superpowers, not just US or China, but also the “rise of the rest” in the form of other regions such as the Arab countries, East Asia or South America.
Discussions touched on potential hegemonic conflict between the US and China that could escalate into a regional or hot war. More likely, the possibility of a cold / proxy war could be a main battleground for strategic tussle in areas such as technology or supply chain dominance of crucial sectors. For example, rising tensions in the Taiwan straits continue to increase the risks of supply chain disruptions especially in the tech sector of which much of Asia plays a pivotal part.
Separately, the various mini-laterals pose interesting dynamics as hedging and balancing acts amongst countries see groupings such as BRICS, G20 etc taking stance in global conversations from climate change to digital acceleration and technology transfers. To that aspect, ASEAN is a crucial platform barring its imperfection as it allows smaller countries to manoeuvre between the bigger countries and blocs.
Geoeconomics
There are concerns of a fragile and fragmented global economy in the coming decade, prone to shocks and crises.
The US-China trade war has caused companies worldwide to embark on supply chain reorganisation and replication which has been a windfall to Malaysia’s electrical and electronics industry. Yet risks remain that require Malaysia to manage its position through strategic foreign and industrial policies.
As more companies look to manufacture in and export from Malaysia, some can be seen as a way of circumventing trade restrictions. Too much of this and Malaysia runs the risk of being blacklisted by other countries as merely a proxy for Chinese made goods.
Participants observed that following weak demand at home and being cut off from the US market, the risk of cheap Chinese goods flooding the local market also needs to be managed. While this can be positive for consumers, it can be potentially damaging to local industries. Chinese firms are hypercompetitive due to the domestic economic structure of China. The ambition to win market share means that China goods are typically cheaper because their companies have the added competitive edge of large economies of scale as well as copious amounts of government subsidies. As such, their lower unit costs may threaten to disrupt the local market players who do not benefit from similar incentives and are less exposed to the hypercompetitive Chinese players.
Lastly, discussions on building domestic capacities also touched on competing for resources with international companies setting up in Malaysia as they are able to offer much lucrative salaries and benefits, at times pinching whole teams from local companies. While this is seen as positive for the workforce, it also risks slowing the prospects for local companies to develop due to slow build up of skilled workforce within the companies.
Technological advancement is an area that brings risks and opportunities to Malaysia, ascountries who are ahead in terms of technological development will have the opportunity to move ahead of others. Participants raised the possibility of technological bifurcation which could result from worsening US-China relations and whether this would be positive or negative for the country. The pace of technological change is also highly disruptive with the risk of AI displacing many jobs worldwide, where participants agreed that technological advancement is creating an environment where the winners would be the holders of the IP while the rest of the world become price takers. The goal of more global income convergence is at risk as countries’ GDP trajectories become more divergent along the lines of the tech haves and have nots of the world.
Environment, Social and Governance (ESG) standards were also discussed in the context of the commodities industries. Participants shared that the tightening standards of global trading blocs such as the EU impacts greatly on Malaysian domestic players and smallholders and keeps them at a relatively weak bargaining position.
Strategies and policy recommendations
Throughout the entire roundtable, participants emphasised the importance of active management of Malaysia’s neutral foreign policy stance.
Participants deliberated on Malaysia’s active non-aligned approach that meant that it could exercise its own agency to be friendly towards the West as well as China. However this requires very careful management of perceptions across all spheres of influence. There should be constant engagement with all sides simultaneously to actively reassure, reiterate and remind foreign partners and companies of Malaysia’s stance to be open for business and trade with all parties. Decisions such as joining BRICs may be seen to the West as a pivot to China, even though domestically, Malaysia is seen as exercising her right as a sovereign nation to join a club that served its own interests. Such nuances need to be strategically managed.
Malaysia should continue to enhance its strengths through positioning itself as an indispensable trade player and partner on the global stage, as seen in the global semiconductor supply chain. Firmly indispensable within the supply chain, locations such as Penang successfully captured a huge part of the back-end services required for the chip-making processes. Many Malaysian companies embedded in the supply chain are now seeking to move up the value chain toward providing front-end services and solutions. In that aspect, industrial policies such as New Industrial Master Plan (NIMP) 2030 plays a crucial role to facilitate growth but more detailed incentives and policies are required for implementation.
Unlike the 1990’s, participants cautioned that Malaysia should be more selective on the types of foreign direct investments (FDIs) allowed into the country. Policies such as ensuring localisation – of knowledge, talent and know-how – through integration of global corporate activities with domestic players is a way to ensure positive spillover to the economy.
Participants also deliberated that Malaysia continues to strengthen its position through increased commitment to regional or international economic initiatives that could widen its circles of global partnership and allow adaptability to new dynamics. There should be a focus on vertical integration with other countries such as those in ASEAN to move towards cohesive economic cooperation instead of competition. Such endeavours may include more government and multi-layered participation in engagements, but closer to home, Malaysia can lead in significant ways to strengthen economic collaborations and discussions among ASEAN countries to promote complementary and mutual benefits within the region. Malaysia chairing ASEAN in 2025 is a great opportunity to do so.
Overall, Malaysia’s natural advantage through its geographical location, multilingual population and traditionally neutral diplomatic relations gives it an advantage in navigating the emerging new global order. What it should do is strengthen its economic position through more active communication on the world stage, as a nation that is stable, reliable and business friendly. Simply put, Malaysia should position itself as the ideal country to do business with in this region.
To do so, participants called upon Malaysia to ditch the “race to the bottom” model, and compete instead on talent building, increasing domestic capabilities and attracting high value investments to secure long term economic growth. The new narrative is that the country not just provides for its own internal market, but to serve global markets in various future looking industries, from chip-making to EV cars, medical equipment making to agricultural or aerospace.
To do so, Malaysia’s identity as a state with autonomy is crucial to cement its position as a nation that is open to participate and contribute to the global economy.
