Leveraging the RCEP as an impetus for trade

The apparent euphoria over the significant hike in trade surplus by about 27% to RM185 billion in 2020 compared with 2019 has caught the attention of many.

Upon closer scrutiny, exports have declined by 1.4% while imports have dropped by 6.3%.

The increase in trade surplus that is contributed by a significant drop in imports is not something to gloat about.

The decline in imports for intermediate goods and capital equipment are indeed causes for concern. Based on Matrade’s report, the import of intermediate goods nosedived by 9.5% and this could be attributed to weaker manufacturing activity.

Even in the month of December 2020, the import of intermediate goods continued to fall by 5%.

While the decrease in consumer goods import is a reflection of weaker consumer confidence and buying power, the sharp drop in intermediate goods import could be a harbinger of future lackadaisical business activity.

This is not a case of import substitution as the Malaysian manufacturing sector still relies heavily on imported intermediate inputs except the resource-based industries.

The IHS Markit PMI index continues to persistently fall below 50 in December 2020 and the figure in January 2021 should be even weaker with MCO 2.0 and the subdued economic sentiments.

As Malaysia has just signed the Regional Comprehensive Economic Partnership (RCEP) Agreement in November 2020, let us see how we stacked up vis-a-vis the RCEP countries (Asean plus China, Japan, South Korea, Australia and New Zealand).

Exports to major Asean markets registered a fall except Singapore and Myanmar. The export value to Singapore had increased by about RM5 billion in 2020 but, the pickup in Myanmar is not significant.

The cause for concern is the double-digit drop for our two major markets in Asean, namely Thailand (19%) and Vietnam (12%).

China was the bright spot and maintained its position as the largest export market with a 12.5% expansion to RM158 billion.

In the case of Japan, it maintained its position as the fourth largest trading partner.

Meanwhile, exports to the South Korea grew by 1% in 2020 despite the adverse market conditions attributed to the Covid-19 pandemic. Australia/NZ are not on the top 10 trading partners radar for Malaysia.

With the advent of the RCEP, which is expected to roll out, what is in store for Malaysian businesses especially SMEs? Are there opportunities or are the threats real? The fears associated with the Covid-19 vaccine draws a close parallel.

Let us comprehend the trade statistics on RCEP. These countries account for about 40% of world trade with a combined GDP of US$21.3 trillion. Upon rollout, it would be the largest trading bloc which pivots the centre of trade to Asia-Pacific.

Based on the simulation of Peterson Institute (US), total exports within the RCEP grouping is expected to grow by US$428 billion in 2030.

Asean already has a bilateral FTA with each of the other five non-Asean countries in the RCEP.

Based on the Asean plus One FTA or CEP in the case of Japan, duties were already on the downtrend based on the Tariff Schedule. With or without RCEP, the tariffs were on a downward slope.

Exports to China rose by RM18 billion from 2019 to 2020 while imports declined by RM4.5 billion during the corresponding period.

In terms of value, there was still a trade surplus in China’s favour of around RM13 billion. Should we be alarmed by the anti-FTA movement that there would be a flood of cheap imports flooding our domestic market?

With the RCEP, there is expected to be more protection based on safeguards and anti-dumping measures should there be a need for legal responses. Trade remedies is one of the Chapters in RCEP, which is not even found in the Asean-Australia/New Zealand FTA.

Other than just direct trade, investment is another area where the spinoffs can be harnessed.

Vietnam has been attracting investments from China and Japan. As an indication of the competitiveness of Vietnam, it was prepared to lower tariffs for swimwear from China to zero with the reciprocal removal of tariffs for exports from Asean.

Countries such as Vietnam and Indonesia with larger domestic markets than Malaysia have been bracing themselves to compete while courting FDI aggressively.
Based on their domestic news, the governments have announced their intentions to plug into the regional supply chain with the advent of RCEP.

There is less fear mongering as strategic partnerships are pursued for market access and technological collaborations.

Where do we go from here? Twelve months would just pass in a blink. Once there are six Asean countries on board with at least three out of five from non-Asean, RCEP is ready to roll.

If our businesses and SMEs especially, are still having their heads in the sand, they would be left behind.

For a start, there should be more information dissemination on RCEP, with MITI working closely with the trade associations.

For those who take the initiative, you can go to the MITI website and start reading up. SMEs should understand concepts like Rules of Origin, Product Specific Rules and Regional Value Content (RVC).

Businesses should identify how they can ride on the RCEP platform by planning and determining the source of your raw materials and intermediate goods.

Otherwise, your finished product may not fulfil the Originating Material (OM) content and qualify for the RCEP Certificate of Origin.

In addition, scan the regional environment and scour for opportunities in both trade and joint-ventures from other developed countries of the RCEP.

The SME Chapter in the RCEP Agreement promotes capacity building and technical co-operation.

There are movements from Japanese companies to identify SMEs in Malaysia and Asean for joint-ventures to re-export to Japan as well as to serve as an Asean hub.

The RCEP accords us a lifeline to plug into the Regional Supply Chain. At present, we still have competitive advantages in the E&E clusters especially the supporting and ancillary industries which are SMEs.

If we remain stuck in the protectionist and regulatory mentality, our businesses and the county would be economic laggards.

Malaysia has always been a trade dependent country which has to punch above its weight for GDP growth given our small domestic market.

The United Nations Conference on Trade and Development report is indeed a wake up call and it is up to us, both the private and public sector, to run with the ball or watch our neighboring countries score more touchdowns.

Source: The Sun Daily