Emerging Trade Patterns of Malaysia with China, U.S. and Japan: A Comparative Analysis

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EXECUTIVE SUMMARY

The US, Japan and recently China are all important markets for Malaysia's manufacturers. Trade ties with China in particular have grown faster than that of the rest of the world. Being a middle-income country, there are arguments that Malaysia may be squeezed between low wage competitors such as China and rich country innovators such as the U.S. and Japan. The paper compares the shifts in trade patterns, namely quantity flows and trade structure, between Malaysia and the three global players. Specifically, implications of trade for product quality and skill upgrading effects in Malaysia are examined from aggregate trade and component trade flows.

Keywords: Quantity Flows, Trade Overlap, Component Trade, Product Quality, Skill Upgrading.

INTRODUCTION

The United States (U.S), Japan and recently China are not just global players in merchandise trade but are also important markets for Malaysia's manufactures1. The U.S. has maintained its position as Malaysia's main trading partner in manufactures over the past two decades, commanding a share of 16.6 per cent of total trade in 2005. Japan, Malaysia's third most important trading partner (11.7 per cent of total trade in 2005) seems to be losing ground in terms of both export and import market shares of Malaysia in the recent past due to the economic recession in Japan. In fact, Japan has declined from its position Malaysia's top-trading partner in 1996. In contrast, the most dynamic trading position is registered by China2. Malaysia's trade with China has grown tremendously to account for 8.8 per cent of total trade in 2005, thus emerging as Malaysia's fourth largest trading partner since 2001.

Apart from greater trade levels between Malaysia and the three countries, there has been a rapid internationalization of production (Ng and Yeats, 2001; Jones et al., 2005; Gaulier et al., 2004; Athukorala and Yamashita, 2006; Gill and Kharas, 2007; Gaulier et al., 2007), which translates into the expansion of component trade. In fact, all four countries (including Malaysia) are at the "core" of trade in intermediate inputs and capital goods (Srholec, 2006). The combined market shares of the three trading partners for Malaysian exports and imports of components in 2005 were 30 per cent and 46 per cent, respectively. The internationalization of the U.S. and Japanese semiconductor and electronics industries in the 80s had not only established production networks but also created a division of labor based on vertical specialization3 (Ernst, 2003). As such, it is not surprising that network trade of Malaysia is quite established in bilateral trade with the U.S.and Japan. Of interest is China's recent integration into the region's production networks (Chin, 2007), thus emerging as a conduit of exports (assembly and processing of imported inputs for re-exports) from the region to the industrialized world (Huang, 2007; see also Gaulier et al., 2007).

Being a middle-income country, there are arguments that Malaysia may be squeezed between the low wage competitors that dominate in mature industries such as China and rich country innovators that dominate in hi-tech industries such as the U.S. and Japan (Gill and Kharas, 2007). Are the current winds of change in trade working against Malaysia? It is thus important to compare the shifts in trade pattern (quantity flows and trade overlap) between Malaysia and the three global players both from the aggregate trade and component trade perspectives. Subsequently the effects of trade on local upgrading of Malaysian manufactures are explored in terms of product quality and skills.

TRADE, SKILLS AND PRODUCT QUALITY

The Hecksher-Ohlin (HO) model, based on differing factor endowments across countries, provides one of the most important theories of international trade for understanding the links between trade and labor. The typical model based on the HO theory assumes that the industrialized country is relatively rich in skilled labor and the developing country is relatively rich in unskilled labor. …