Published on 03 Oct 2019.
RAM Ratings expects the growth performance of Malaysia’s exports and imports to remain sluggish at a respective -0.1% and -6.4% in August. This will translate into a narrower overall trade surplus of RM6.5 bil. The lacklustre showing will be underscored by subdued global trade and industrial performance in the same month.
Meanwhile, the Regional Comprehensive Economic Partnership (RCEP) - a regional trade agreement, which Malaysia is a part of - is slated to conclude negotiations by year-end. “Malaysia already has existing trade agreements with participating RCEP members in one form or another. As such, the main incentive of being part of this trade pact lies in the potential to de-tangle the “spaghetti bowl” effect of these existing overlapping free trade agreements, by standardising rules and procedures among its members. With a more uniform set of rules for this trade deal, trade flows can be further enhanced beyond any tariff tweaks that may be introduced,” explains RAM’s head of research, Kristina Fong.
The fact that Malaysia has existing trade agreements with RCEP member nations should also alleviate concerns about threats to domestic firms’ competitiveness due to potentially lower import tariffs under this new trade agreement. Under the present agreements, Malaysia’s import tariffs are already at or near zero, thus limiting significant import-substitution effects.
Among all the RCEP members, Malaysia’s trade patterns with India hold the greatest potential for change. This is because Malaysia’s average tariffs on India (under the Malaysia-India Comprehensive Economic Cooperation Agreement or MICECA) are the highest relative to those imposed on other RCEP members (under their respective trade agreements). In particular, the stone and glass, and metal industries are more likely to face heightened competition given the comparatively high tariff currently imposed, together with India’s significant revealed comparative advantage measures for these sectors. That said, the extent of any import substitution will still boil down to the cost effectiveness of this switch and the finalised tariff structure under the RCEP.
Woon Khai Jhek, CFA
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