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How Malaysia E&E Industry Benefited from the China-US Trade War (Part 1)

How Malaysia E&E Industry Benefited from the China-US Trade War (Part 1)
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By Charles F. Moreira, Editor

Malaysia’s electrical and electronics (E&E) industry grew by leaps and bounds after semiconductor giant Intel opened its first integrated circuit production plant outside the United States in Penang’s Bayan Lepas Free Trade Zone in 1972

Others such as Broadcom,  Dell, Motorola, National Semiconductor, other U.S. and Asian E&E manufacturers and as Malaysians learned, absorbed and applied the technologies, Malaysian E&E manufacturers, supply and support industries were later spawned.

Dubbed the “Silicon Valley of the East”, Penang saw an inflow of billions of US dollars in foreign direct investment, which created tens of thousands of jobs for Malaysians, billions of US dollars worth of exports and the E&E industry became a major contributor to Malaysia’s GDP.

However, this “party” began to wind down in the mid-1990s as E&E companies began to move their plants out to China for its lower labour cost and by 2005, Penang’s E&E industry was in the doldrums and  Penang regarded as a “sleepy hollow”.

According to the September 2019 issue of the Institute of Strategic and International Studies’ ISIS Policy Brief, the U.S. – China trade war began with the U.S. imposing tariffs on all washing machine and solar panel imports in January 2018, followed by a 25% tariff on all steel and 10% tariff on all aluminium imports in March that year.

Then in July 2018, the U.S. applied List 1 tariffs (25%) on US$34 bil of Chinese imports and China retaliated with 25% tariffs on US$34 bil U.S. imports. Also the same month, the U.S. applied List 2 tariffs (25%) on US$16 bil of Chinese imports and China retaliated with 25% tariffs on US$16 bil U.S. imports. Then in September 2018, the U.S. applied List 3 tariffs (10%) on US$200 worth of Chinese imports and China retaliated with 10% tariffs on US$60 bil of U.S. imports.

In December 2018, the U.S. and China agreed to a temporary trade truce. However, progress in trade talks were slow and in May 2019, the U.S. broke the truce and raised the tariff rate on List 3 tariffs from 10% to 25%. The following month the two countries agreed to a temporary truce again.

The U.S. broke the truce in September 2019 with List 4A tariffs (15%) on US$112 bil of Chinese imports and China retaliated with 5% to 10% tariffs on 1,717 goods imported from the U.S.

ISIS reported that the U.S. planned to raise the tariff on List 1 and List 2 Chinese imports from 25% to 30% in October 2019 in 15% tariffs would take effect on US$160 billion worth of List 4B Chinese imports in December 2019, whilst China planned to apply 5% to 10% tariffs on all U.S. imports that month.

Whilst these two countries duked it out, Penang’s and Malaysia’s E&E industry saw a revival as U.S. E&E companies moved their production facilities from China to other countries including Malaysia to escape the high tariffs, whilst China’s E&E companies sourced their supplies from other countries besides the U.S.

In mid-2019, Nomura Research said that Malaysia was the fourth biggest beneficiary if the U.S. – China trade war, with the E&E sector, as well as natural gas being amongst the biggest beneficiaries due to trade diversions from these two countries, with E&E sector being the bigger beneficiary and the biggest gains seen in the production of integrated circuits (0.2% of GDP), semiconductor devices and light-emitting diodes (0.2% of GDP).

On the other hand, Malaysia’s waste and scrap alloy (0.4% of GDP), natural gas (0.3% of GDP) and benzole (0.3% of GDP) were beneficiaries of China’s tariff on the U.S.

Nomura predicted back then that if the U.S. went ahead with its threat to impose 25% tariffs on the remaining US$300 bil of imports from China, Malaysia’s E&E sector would benefit even more especially in the production of semiconductors because that US$300 bil of imports mostly comprised of electronic products and companies including Inari Amertron, Frontken Corp, Globetronics Technology, Malaysian Pacific Industries, Elsoft Research and Vitrox Corp would benefit.

Nomura estimated that Malaysia gained more from the trade war that its Asian neighbours such as Hong Kong, South Korea and Singapore.

Overall, Malaysia gained an additional 1.3% of its GDP due to trade diversions but these gains would be in the short term but in the long term, everyone loses.

Meanwhile, InvestPenang, Penang principal state government investment promotion agency reported that the state attracted up to RM12 bil (US$2.94 billion) in foreign investment in the first 10 months of 2019, up 456% from RM2.1 bil (US$514 million) a year earlier and the number of new jobs created over the same period nearly doubled to 15,013.

Major investments were from companies such as U.S. chip maker Micron Technology, which announced that it would spend 1.5 billion ringgit over five years on a new solid-state drive assembly and test facility. Other major investors were American firm Jabil Circuit and British medical device maker Smith+Nephew.

According to InvestPenang Chief Executive Officer Loo Lee Lian, Malaysia’s E&E exports from January-August rose 0.7 per cent on the year to RM247.6 billion, while total exports slipped 0.4 per cent to RM650.8 billion. Electronics exports from other countries such as South Korea and Singapore have plunged in recent months.

According to the Malaysian Investment Development Authority (MIDA), the U.S. replaced China as the largest source of approved foreign investment in Malaysia over the first nine months of 2019, spending US$5.9 bil, over six times up from US$889 mil a year earlier, whilst Chinese investments meanwhile halved to US$1.7 bil from US$3.5 bil in the previous year.

“The tariffs imposed on China raises the possibility of trade and investment diversion to Malaysia,” said MIDA spokesman Zalina Zainol, adding that Malaysia’s government  was focused on sectors with high growth potential and low labour-intensity, including the chemical industry and producers of machinery, medical devices and aerospace.

Another benefit of Penang is that many semiconductor and other electronics products from Malaysia are exempt from U.S. tariffs, unlike the 25% rate for China.

[Part 2 of this article can be found HERE]

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