Malaysia Bilateral Trade Relations and Economics Growth

By Yusoff, Mohammed B. | International Journal of Business and Society, July 2005 | Go to article overview

Malaysia Bilateral Trade Relations and Economics Growth


Yusoff, Mohammed B., International Journal of Business and Society


ABSTRACT

This paper examines the structure and trends of Malaysian bilateral exports and imports and then investigates whether these bilateral exports and imports have caused Malaysian economic growth. Although the structure of Malaysia's trade has changed quite significantly over the last three decades, the direction of Malaysia's trade remains generally the same. Broadly, ASEAN, the EU, East Asia, the US and Japan continue to be the Malaysia's major trading partners. The Granger causality tests have shown that it is the bilateral imports that have caused economic growth in Malaysia rather than the bilateral exports.

I. INTRODUCTION

Malaysia, as an open economy, has been very much dependent on foreign trade to achieve its economic development goals. Foreign trade (exports plus imports) has accounted for a significant and rising portion of its gross domestic product (GDP) in the last three decades, indicating that international trade has been playing an important role in the development of Malaysian economy. The share of merchandise trade in GDP was 73% in 1970, increased to 172% in 1995, and increased further to 202% in 2000. If we take the share of the merchandise trade in GDP as an indicator of trade liberalization, Malaysia certainly has gone through a relatively rapid process of trade liberalization and globalization. Thus, it has become the major objective of this paper to analyze the trends in bilateral trade relations of Malaysia with her traditional major trading partners: Singapore, Japan, the United States, and the EU and her new major trading partners: ASEAN and the East Asian nations and see whether these trade relations have had contributed to the relatively rapid growth of the Malaysian economy. In particular, the decision made by Malaysia to implement the export-oriented development strategy beginning in 1980s has been the major vehicle that has transformed Malaysia from the primary commodity based economy to a more industrial based economy. As a result, Malaysia recorded an average of 8 percent economic growth for about nine years prior to the 1997 East Asian financial crisis. This financial shock had a profound impact on Malaysian economy when it registered a negative one per cent growth rate in 1998. The economy began to recover the following year.

The paper begins with an introductory remarks on bilateral trade relations, followed by a detail discussion on the directions of bilateral exports and imports between Malaysia and her major trading partners: the USA, Japan, and Singapore. The third section deals with the issue of whether exports and imports cause economic growth in the context of Malaysia, followed by sections on the methodology, empirical results and finally the conclusion.

II. DIRECTION OF EXPORTS AN IMPORTS

Malaysian total trade, imports plus exports, has been increasing steadily beginning at RM 9.451 billion in 1970 and increased to RM 684.729 billion by 2000. Japan, the United States, the Association of South-East Asian Nations, the European Union have been the major Malaysian trading partners which together accounted for more than 70% of Malaysia's total trade flows during the 1970-2000 period. In recent years East Asia, comprising South Korea, Hong Kong, Taiwan and China, have become increasingly important Malaysian trading partners while that of the EU has declined. Interestingly, the direction of Malaysia's trade follows closely with the sources of foreign direct investments in Malaysia, especially in the manufacturing sector, as foreign firms investing in Malaysia's manufacturing sector generally source their intermediate goods from their parent or associated companies in their home countries. Subsequently, the processed products are exported back either to their country of origin or other markets. Hence, Japan, the US, ASEAN, East Asian and the EU have been the major source of foreign direct investment in Malaysia. In 2000, the USA was the largest investor in Malaysia at 37. …

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