Tuesday, March 31, 2009

M'sia's strategy in a climate of falling trade and rising protectionism

One of the unfortunate fallout from the economic turmoil is the decline in the volume and value of international trade. As the trade data from the last quarter of 2008 has shown, Malaysia is not immune from this.

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.

Tariff-based protectionism
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.

Non-tariff protectionism
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.


hishamh said...

Excellent post my friend. The only thing I can add on here is the use of exchange rates as a weapon. Competitive devaluations/depreciations are as much to be feared as a return of overt protectionism.

walla said...

All roads seem to lead back to education. And that could be because there is a global war of another sort that has been going around for a long time. For talent. The lifeline of a growing nation remains its human capital.

There is another specter. Many have taken to private sector courses. Those who can afford have gone overseas. In fact the high point of many youths from middle-class families these days happens after their last SPM paper. They just want to ciao from the system and go away to do some courses overseas. If those who have received government scholarships for overseas studies provide parallel telling statistics, these privately funded students won't want to come back too.

That said, the question asks itself - "how to grow future human capital?"

The human capital we are looking for is that which can fuel innovation which will raise commercial value in enterprises. We need that. As we can see day by day, our economy is looking less and less undifferentiated from those of Thailand, Indonesia and a few others. The industrial hollowing out is reclaiming past successes and dishing out future challenges.

These challenges we cannot meet straight on today. How else can one explain why the FMM requires a more prolonged and staggered roll-out of the new double-levy regulation for foreign workers? That seems to say continuous improvement is not our forte. Unfortunately, it's also understandable. When a factory recruits a foreign worker, it's for say two years, during which time any profit will only go to pay off the bank loan, if at all. So how are the investors going to find courage to add more business risk by investing in innovation with view to unshackling their business from foreign low-cost labour?

Secondly, there is a paucity of innovators in the country. You need people who know the stuff and can catch the market drift while chasing some new idea catalyzed by competent tapping of rich literature resources on the subject.

A thunderclap approach may be needed. More than a wake-up call, it should be something really revolutionary that challenges all our past assumptions on how to develop this country. All.

Looking around, who would be around to phrase those challenges, and question those assumptions?

Protectionism should be a last resort. But in our case, more because we don't really have the scale and means to do import substitution.

Share your observations of what you see using your economist's eye on a day in your life driving around the city, listening to the people, talking to your friends and colleagues.

Anything uplifting will be swell.

walla said...

for deminimis and satd:


Raison D'etre said...

Hi Walla,

Your "Protectionism should be a last resort."

True enough, but the country is still very much in protectionist mode.

Automotive, steel (to a degree), labor.

The last especially: why else do we allow cheap labor to come in and drive the wage level downwards?

Are we still in infancy stage?

DM's ideas of pushing the threshold/level of competency is sound but it does look like we have missed the boat somewhat.

Maybe its all from these protectionist mollycoddyling?

deck said...

Eh, but you even argued in favor of protectionism in your last argument with me...

walla said...

Thank you for your probing questions, Raison D'etre. They brought back some thoughts.

It's hard to think of something that we have done on our own which we can say signifies indigenous value driven by innovation. Petronas might be well-ranked but it's just management and only one company; motor oil can't count for much embedded value. And Proton should have started not as an assembler but as a cluster of parts designers seated in a ftz of other branded car makers from all over the world. Then a lot of the techno-fascination that's the linchpin of innovation could have percolated into our car industry which would in turn become the detroit of asia that's currently elsewhere.

My thorniest problem everyday is that i can't figure out where else we have done good on our own which will retire our protectionism in all but name that is the outcome of that phase of our nation building which spelled deregulation but was actually transiting decision-making from state to party.

Our present dilemma seems to stem from two assumptions.

Firstly, we took shortcuts coaxed by dreams of paper wealth as opposed to real-world skills wealth. We thought we could buy our way to make quantum leaps. Lest one thinks we have learned the lesson on this the hard way, i will have you believe there are still many who today, at this moment, hanker for those days when this was the prime mover of their existence, little caring for the price the next five generations at the least will be paying both directly and as opportunity costs.

Secondly, there is also something i coin as 'establishment syndrome'. It is the bulldozer squatting like a fly-swatting sleepy bull smack against the path of change. The people who are empowered to make real changes are least likely to do so because to change means to unseat. The older one becomes and the higher one rises, the more intractable the challenge to change or challenge past assumptions which had worked but only in the recesses of fading memories which still cling to the rice bowls of yesteryear.

While this happens everywhere and indeed sometimes too many changes can bring one back to the same spot but at a lower level, there are however other times such as now arrived when changes have to be made in order to raise one's enterprise and future targets to higher levels because the market in which one operates has itself changed since the last tea break.

So the blogger's theme on human capital to deroot protectionism is more than just manpower output with the requisite skills for today's employment markets; it is also manpower skills to tackle the challenges of change along the entire human enterprise chain from decision-making to innovation and execution, what more organizational, and institutional, make-over.

Having said that, one must recognize there is another dilemma. Many are employed based on social grounds. Their imperative is understandable - first survival, then dignity, then self-independence. In the short run, this should be supported but in the long run it is untenable simply because we are not a high-tax, high-tech social state like Sweden; we are just a small longkang-clogged state with vanishing oil resources. Every year we procrastinate from tackling this matter head-on is a year we will have to take full account when the balance sheet is drawn up viz-a-viz other producer economies.

Granted we started with some anomalous economic stratification, but that seems to have persisted after so many years of s/e engineering that one cannot be faulted for wondering if how we execute matters could have been better fine-tuned, like making sure real-skills are learned, and learned well because opportunities to compete on equal footing will happen naturally in a market that is more sensitized to helping one another up, not exercising tit-for-tat's that spiral into debilitating and mutually destructive acrimony.

Furthermore, the contention that all this s/e engineering is fine because when the market is up, you can build pyramids and when the market is down, maybe attap sheds. But the thinkers and doers forget one thing - the experiment cannot be done in vacuo. It is done in relation to the whole world. And many other players in this world are homogeneous, not heterogeneous, not stratified, not under-par, not sub-skilled.

Now we seem to be back where we started - protectionism, poli-ticking, and puffification.

You know there's a grain of truth in what is said here. Look at the socially-engineered dailies that fall on your car porch every morning. Ninety percent of the content is directly and indirectly about the public sector and on matters befitting salacious circles only. Only ten percent is on the private sector, and that in the business section, which you will quickly skip in order to proceed to the other more germane section. The obituaries. So that you can sigh out in relief, 'those lucky blighters'.

There's not a single interesting and enervating thing you can read in the papers that says the private sector is alive, kicking and innovating enough to conquer even the small market of the next pacific ocean island.

And sometimes you worry if policy makers in the public sector and decision makers in the private sector do really have a handle on the situation befalling all. The worry is disquieting because we all know how non-transparent things are. This country sits in a black box. Like a black hole, all light gets suck in and nothing comes out that makes sense. The little glimmers that are occasionally released are actually little lights that were emitted years ago; they took time to arrive for your preview. So when you have this, and two root problems plus two overriding dilemmas, how to flesh out ideas whose time has equally arrived?

All these were said years ago in many blogs. There has been no improvement since then because all continued to think the situation is under control, the market will continue to want what we produce, and the people will be able to stay tolerant of their passing inconveniences.

But what about the future of the young? How assured can they be that there will be enough new funds generated which can pay the escalated aggregate costs from the recent swarths of emolument increases in just one sector?

We need a summit. Leave the old baggage outside. No political affiliations, no staid assumptions, no buddy networks. Just hard cold facts and everyone to jump in and try to find more viable solutions than what have been oversold to all.

The situation before us may turn out to be more than worrying about low-cost advantage from foreign worker deployment in a pseudo-free market.

We shouldn't be lulled again into thinking that this nation can again afford the luxury of letting unstoppable forces fracture against immovable objects.

Otherwise the joke may be on all of us.