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International trade refers to the exchange of goods and services between countries. The most
fundamental reason that leads to international trade revolution is the desire to obtain the
benefits of specialisation. It enables the principle of the division of labour to be extended to
the international sphere.
Malaysia embarked on trade liberalization to enhance its competitiveness and as an effort to
achieve its 2020 vision. Malaysia has signed many Free Trade Agreements (FTA) with
Australia, China and so on.
The openness of Malaysia to international trade and investment has been evident in a recent
speech by PM Najib Razak, stating that Bloomberg has rated Malaysia as the world’s 5th
most promising emerging market in 2015 and the only ASEAN country in its top 10. In
addition to that, the IMF and the World Bank have recently issued reports showing Malaysia
nearing the top of the rankings for competitiveness and ease of doing business. (BERHAD.,
NEW STRAITS TIMES PRESS (M), 2015)
The openness of Malaysia to international trade can be measured by the sum of export and
import values expressed as percentage of gross domestic product (GDP), whereas the
openness of Malaysia to foreign direct investment (FDI) can be measured in terms of the
value of FDI as percentages of GDP. Malaysia’s value of exports and imports is 139% of the
total GDP and the FDI value was 3.71% out of GDP. (Malaysia Foreign Direct Investment,
percent of GDP, 2015)
The main gain from international trade comes from an increase in output due to specialisation.
When countries concentrate on the production of goods in which they are best suited to
produce and trade, it is possible for them to obtain goods more cheaply. Besides, resources
become more efficiently allocated leading to lower production cost and greater output volume.
In addition, international trade allows Malaysia to enjoy goods and services beyond its
production possibility curve 1 . Malaysians are able to enjoy greater varieties of goods
including those that is not produced locally. Figure 1 gives an overview of the imports in
Malaysia.
Figure 1 Total Imports of Goods in 2014.
1
Production Possibility Curve is a curve which shows the various possible combination of two goods that a
country is able to produce given a limited amount of resources and a certain level of technology.
(Department of Statistics, Malaysia, 2014)
Moreover, international trade allows local businesses in Malaysia to venture into new market
in foreign countries, thereby allowing firms to produce in greater scale to meet domestic and
overseas demand. Consequently, firms can fully exploit the benefit of economies of scale
(EOS)2 and reduce cost per unit to remain competitive.
International trade has the tendency of stirring up competition and reduce the threat of home
monopoly. The inflow of similar goods from overseas helps in minimising market power
since consumers can easily switch to other substitutes. Despite being able to produce
processed food locally (Figure 1), the import of overseas processed food products help to
keep the prices of local products as competitive as possible.
It is generally believed that international trade act as a stimulus to economic growth 3. With a
wider range of consumer goods being made available through trade, people are often induced
to produce and earn more to purchase such goods. Moreover, exports create income. Based
on the multiplier theory, a change in the level of injection (consists of government spending,
investment and net exports) will bring a greater change in the level of national income. When
extra spending is injected into the economy, it will stimulate yet more spending. For example,
in the efforts of the Malaysia government to promote our tourist sector, which is a type of
exports of services, there is a boom in new business opportunities to the locals like hotels,
restaurants, transportation, and restaurants, leading to an increased in local employment.
However, some might argue that there is a need for protectionism4 so that there is a balance
between the drawbacks and advantages of international trade. Indeed, there has been an
ongoing controversial on the issue of intense competition that harms local infant industries.
These newly emerging industries in their early stages of development has only a small share
of the domestic market because of high overhead cost at the initial stage of development. The
argument is that these new industries have potential comparative advantage but when
confronted with well-established foreign competitors who are already benefiting from EOS,
such infant industries may be forced out of the industries at an early stage.
Moreover, international trade poses threat of dumping 5 . Dumping is normally achieved
through export subsidies or ensuring their domestic customer paying sufficiently high price to
cover total cost. Malaysia receiving dumped goods would be facing unfair competition from
abroad. The foreign companies that have strong financial ability are able to do so in order to
force the local firms out of business. The long-term effects of dumping would be a reduction
in domestic output and employment.
The openness to trade potentially lead to balance of payments (BOP) deficit. This occurs
when the international payments is greater than the international receipts. This is undesirable
as persistent deficit means a continuous depletion of foreign reserves.
2
Economies of scale refers to the reduction in unit cost of production due to an expansion in production scale.
Economic growth is a long-term expansion of the productive potential of the economy
4
Protectionism refers to the policy of sheltering the domestic industries from foreign competition through the
trade barriers on foreign goods and services.
5
Dumping refers to the practice of producers selling a commodity at below the cost of production in the
overseas market.
3
FDI is defined as cross-border investment by a resident entity in one economy with the
objective of obtaining a lasting interest in an enterprise resident in another economy
(OECDiLibrary, 2013). According to The Global Economy, if a country routinely receives
FDI that exceeds 5-6% of GDP each year, then this is a significant success. The diagram
below illustrates Malaysia’s FDI as a percentage of GDP.
(Malaysia Foreign Direct Investment, percent of GDP, 2015)
FDI can spur the growth of a country's economy in both short and long run. The several
famous multinational corporations (MNCs) in Malaysia would be Shell, Samsung, and
McDonald’s etc. The formation of MNC creates job opportunities in Malaysia and often, they
offer higher salaries than other local firms. This translates to increased income and
purchasing power as well as improved living standard. The best example is seen with The
Shell Company, which employs up to 6,800 employees in Malaysia alone.
FDI allows transfer of expertise, knowledge, skills and facilities. The transfer of technology
is not restricted to only actual technology. It involves sharing of production methods, and
manufacturing facilities. The Malaysia’s Ministry International Trade and Industry (MITI) is
in charge of handling and identifying potential commercially viable technology transfer. In
manufacturing industries, they are able to imitate and innovate the manufacturing method of
the MNC, which is cost efficient.
Human capital resources are also one of the positive outcome of FDI. The attributes gained
by sharing experience and training increases the education and overall human capital of a
country. For instance, a worker who is trained in Toyota’s assembly factory can eventually
work for other local car manufacturing companies. FDI does not only train up-skilled labours,
but also help with the growth of local firms. Therefore, Malaysia benefits greatly by
increasing the development of their human resources while maintaining ownership.
However, FDI has the tendency of exploiting the resources, leaving the resources vulnerable.
When Lynas Rare Earth Mining Company intended to set foot in Malaysia, there was strong
objection from the Malaysians because they believe that the company will harm the
environment and living standard in Malaysia.
Despite claiming the possibility of FDI to stimulate Malaysia’s economy in the short run
through productivity improvement and technological transfer, there are still critics doubting
the efficacy of purported benefits of direct investments. It is believed that in the long run, the
Malaysia’s BOP may be jeopardised once the investors recover their initial outlay and turn
profitable, since there will could be an outflow of profit back to their home countries.
Generally, most businesses reduce their cost of production to achieve maximum profit by
offering low wage rate. To address the issue of workers exploitation, Malaysia government
has implemented the minimum wage law in 2013 by introducing a wage rate level of RM800900.
In order to ensure Malaysia can reap more benefits than harm, the government plays a key
role in designing a sustainable and suitable framework to control international trade and
investment. For long, the MITI has successfully fulfil its responsibility in ensuring that
international trade works in a fair way. MITI continuously strive to provide a conducive
environment and ease of doing business. Likewise, MITI recently cooperated with Malaysian
Investment Development Authority to come out with new tax incentives ranging from
‘capital allowance to increase automation in labour intensive industries’ to ‘incentive for
industrial area management’.
On the other hand, ‘spare the rod of competition and spoil the industry’. Even though infant
industries should be protected, over-protectionism will lead to inefficiency. The Proton Car
Manufacturer is renowned to be an ‘old’ infant industry, which is still sheltered by high
import duties. Consistent fall in sales and recent fall-behind of Perodua’s sales performance
show strong indication of incompetence (The Economist, 2006). Instead of continuously
devoting more financial resources to keep the industry alive, it is time for the government to
gradually reduce protection for automobile industry. Should the government continues with
helping the inefficient industry, Malaysia will never be able to enjoy the full advantage of
international trade.
For the case of dumping, it is necessary for government to examine the appropriateness of the
price and implement anti-dumping law. Currently, domestic industry that identifies any unfair
pricing of imports can write a petition to the MITI to launch an investigation. However, the
government should take a pro-active role and carry out import price investigation from time
to time. Heavy fines and revoking the business’ trading license is likely to prevent firms from
engaging in dumping.
The fear for BOP deficit can be prevented by increasing the initiative of local firms to
improve their efficiency. The government can set a price for the exports. Firms, in an effort to
safeguard their profits will strive to achieve productive efficiency to lower their cost.
Likewise, government can gather market information about trend and pricing of exports and
imports through government agencies. This helps to enhance the understanding about market
trend and improve the product features. Subsequently, allocative efficiency is achieved since
goods that are wanted the most are provided.
In fact, Malaysian government encourage foreign companies to collaborate with local small
and medium-sized enterprises. This does not only increase the capital base of the
manufacturer, local business is given the chance to learn the technology skills and production
functions. The best example would be the collaboration between Mitsubishi and Proton. This
is a feasible measure when MNC is given the incentives of, say tax exemptions for the first
few years and government grants. The term of agreement should be long enough for local
firms to grow and mature enough to stand on its own.
To ensure Malaysia enjoy the benefits of FDI and free trade, human capital is an essential
part of a country’s enabling environment. Investment in general education and other generic
human capital is of the utmost importance in creating an enabling environment for FDI.
Achieving a certain minimum level of educational attainment is paramount to a country’s
ability both to attract FDI and to maximise the human capital spill overs from foreign
enterprise presence.
In the final analysis, Malaysia has undeniably benefited from the openness of international
trade and FDI despite some harm. Free trade and FDI are two important catalysts in the
attainment of Vision 2020 to be a developed country since they are able to improve
Malaysia’s long run production capacity. This is especially vital as it prevents Malaysia from
experiencing accelerated inflation rate. To ensure that Malaysia benefits from international
trade and FDI, the legislation and law should be design appropriately to prevent disincentive
to trade and invest, while at the same time, protecting the health of Malaysia’s economy.
References
(n.d.).
BERHAD., NEW STRAITS TIMES PRESS (M). (2015). Malaysia’s comparative advantage in the E&E subsector is declining: RAM. 1. Retrieved from http://www.nst.com.my/node/75241
Department of Statistics, Malaysia. (2014). Top 10 Major Import Products of Malaysia. MARTRADE.
Retrieved from http://www.matrade.gov.my/en/malaysia-exporters-section/33-tradestatistics/3185-top-10-major-import-products-2014
(2015). Malaysia Foreign Direct Investment, percent of GDP. TheGlobalEconomy.com. Retrieved
from http://www.theglobaleconomy.com/Malaysia/Foreign_Direct_Investment/
OECDiLibrary. (2013). OECD Factbook 2013: Economic, Environmental and Social Statistics. Retrieved
from http://www.oecd-ilibrary.org/sites/factbook-2013en/04/02/01/index.html?itemId=/content/chapter/factbook-2013-34-en
The Economist. (2006). Malaysia's crisis-ridden national carmaker faces a stark choice. Retrieved
from http://www.economist.com/node/8361634