Malaysia can benefit from trade diversions, increase in investments - MIDA | Malaysian Investment Development Authority
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Malaysia can benefit from trade diversions, increase in investments

Malaysia can benefit from trade diversions, increase in investments

21 May 2024

Malaysia may gain from the recent tariff hike by the United States on imports from China, which could divert trade and increase foreign direct investment.

Hong Leong Investment Bank Sdn Bhd (HLIB Research) pointed out that imports from Malaysia to the US grew at a five-year compound annual growth rate of 7.7 per cent (using 2017 as the base year) during the US enacting tariffs on China under Donald Trump’s administration in 2018, as opposed to 1.2 per cent from China and 6.7 per cent from the rest of the world.

Following the start of the US-China trade war, approved foreign investments into Malaysia increased significantly; from RM54 billion in 2017 to RM188 billion in 2023, this amount increased by 3.5 times.

“From another perspective, prior to the trade war (i.e., from 2013–2017), the foreign composition of total approved investments was 26 per cent; however, this has risen to 59 per cent over the trade war period (2018–2023). 

“We believe these trends are in part a reflection of Malaysia benefiting from the “China+1 strategy,” which has seen a revival, fuelled by the trade war and Covid-19 pandemic,” it said in a note. 

Last week, the US introduced or increased tariffs on US$18 billion of imports from China. The firm stated this sum was relatively small as it represented four per cent of US imports from China and six per cent of existing tariffed Chinese imports, which is far less than the previous ones imposed by Trump, which stood between US$34 and $300 billion. 

“Given the relatively small quantum of this recent tariff decision, the market reaction was unsurprisingly muted. Political observers interpret this recent tariff move as politically motivated, given the impending US presidential elections in November, rather than a precursor to another episode of “tariff tantrums.”. 

“Nevertheless, this serves as a useful reminder that the US-China trade war is very much still ongoing.” 

To recap, when the US-China trade war broke out and escalated in 2018–2019, the FTSE Bursa Malaysia KLCI lost 10.4 per cent over those two years, though domestic factors such as the unprecedented 14th general election outcome may have also played a role. 

Meanwhile,the firm highlighted that tariffs on medical and surgical rubber gloves imported from China will be increased from the current 7.5 per cent to 25 per cent effective 2026. 

“While at first glance this appears positive for Malaysian glove makers, we believe that Chinese glove makers would likely choose to lower their pre-tariff pricing in order to remain competitive. 

“For the more immediate term, we reckon that Chinese players will start to gradually shift their focus from the US to Europe and Asia; this will lead to US glove imports being diverted from China to Malaysia.”

Tariffs on certain steel and aluminium imports from China will also see an increase from 0–7.5 per cent to 25 per cent this year. We expect the impact to be relatively neutral for the aluminium market and Press Metal Aluminium Holdings Bhd, as China is a net aluminium importer and China only made up five per cent  of US aluminium imports in the fourth quarter of 2023 (Q4 2023).

In the property sector, the ongoing US-China trade war has prompted companies to embark on the “China+1 strategy,” with some of these “plus ones” coming to Southeast Asia, including Malaysia. 

Tariffs on solar cells, assembled or not assembled into modules, imported from China will be raised from 25 per cent to 50 per cent starting in 2024. 

“Wood Mackenzie estimates that the US imported less than 0.1 per cent of its solar modules directly from China in Q4 2023. 

“Therefore, we believe the impact of this latest tariff hike on direct imports from China to be mild, if any.”

It added tariffs on semiconductors imported from China, which will increase from 25 per cent to 50 per cent in 2025. The first wave of tariff imposition (back in 2018–2019) led to capacity relocation, on- or friend-shoring manufacturing pants, and diversifying supply chain redundancy. As such, this latest tariff move should lead to continued acceleration in such trends.

Source: NST