Another effect is the rise of protectionist measures. These are barriers to importation of goods.
Malaysia's official stance has at all times been against trade protectionism. We are, after all, an overt mercantilist nation that depends on export earnings for a wide range of finished manufactured goods, oil and gas products and agricultural commodities, namely, palm oil and rubber.
During the Great Depression tariffs were the protectionist weapon of choice. In the U.S., the infamous Smoot-Hawley Act 1930, increased nearly 900 types of import duties. This move received widespread retaliation from U.S. trading partners.
Many believe that there are sound reasons for assuming that there won't be a rise in excessive protectionism nowadays when compared to the past.
International agreements to limit tariffs, built over the post-war decades, are regarded as a bulwark against all-out tariff wars.
Moreover, the increase in global supply chains have bound national economies together tightly making it more difficult for governments to increase tariffs without harming producers in their own countries. This appears to be Malaysia's position.
But, it should be noted that many countries are able to raise tariffs, because their applied rates are below the maximum allowed by their WTO commitments. They may choose to do so despite the possible disruption to global supply chains. And, since global sourcing amplifies the effect of tariff rises, even action that is permissible under WTO rules could cause a lot of damage.
The point that should not be ignored is that a slight lowering of trade barriers can cause a huge increase in trade. By the same token, if tariff barriers rose above a certain point, which might still be below the maximum agreed on at the WTO, global supply chains would become unfeasible. Trade would drop even more steeply than it has in recent months.
This time round, despite the economic turmoil few tariffs have been raised. But tighter licensing requirements, import bans and anti-dumping, which imposes extra duties on goods supposedly dumped at below cost by exporters, are being used instead. India appears to be particularly adept at using this protectionist weapon.
Certain developed countries have begun using discriminatory procurement provisions in their fiscal-stimulus bills and offered subsidies to ailing national industries.
These count as protectionist measures.
Use of subsidies as a form of protectionism
International trade agreements provide little protection against domestic subsidies. Nor do they provide immunity from greater use of anti-dumping laws. The subtler variants of protection may be similarly disruptive.
WTO action against subsidies is not straightforward. To complain successfully, a country has to show that a subsidy offends the numerous criteria used to measure protectionist conduct.
We also cannot ignore the double-edged problem that an aggrieved country has when lodging a complaint. Having subsidies of your own does not stop you from challenging someone else’s, but if you pick a fight they may challenge yours.
It is this uncertainty and ambiguity that may encourage many countries to use subsidies as a form of protection. For example, the Malaysian governments can aid national carmakers and, at the same time criticise others for their protectionist ways.
Threats to supply chain strategies
Many will recall that just before the economic turmoil began festering, global supply chains were all the rage. Outsourcing was sexy.
Protectionism threatens to dismantle the grand conventional wisdom of the 1990s and the millennium. Countries like Malaysia stand to lose from its policy of relying on FDIs. Multinational companies move into countries like Malaysia to establish manufacturing bases due to supply chain efficiencies. The icing on the cake are the incentives such as tax exemptions offered by MITI. But, a key attraction was Malaysia's low-cost labour.
Forwards or backwards
A positive thinker will see the ruptures in global supply chain strategies as opportunity for domestic manufacturers to pick up some advantages in the vacuum left by missing FDIs.
The sad truth is that in countries like Malaysia the decades-old dependence on FDIs to formulate industrial and economic development plans have left domestic industries to play ancillary support roles. These domestic industries are mostly SMEs who are far from being world-beaters. Most SMEs are still in labour-intensive activities.
For Malaysia, as with other countries, there are many economic policy challenges that has arisen in this negative economic climate.
One of the key challenges is to decide to move away from labour-intensive industries to higher value-added manufacturing.
Education is a key component
One suspects that in order to give effect to this strategy, Malaysia needs to step up its education policies to produce the high-quality workforce that is needed to form the foundation for this strategy.
Otherwise, we can only look forward to competing with other low-cost labour jurisdisctions like Vietnam and Thailand.