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Degree of openness in trade giving a definition of level of one country and its economy having trade with another country. FDI (foreign direct investment), import, export, repatriation of funds abroad and lending are examples of trading elements.
Openness degree in trade can be measure by trade openness ratio. Trade openness ratio indicated the simple average of total trade (export and import of commodities and services) relative to GDP (Gross Domestic Product). Generally, the higher the trade openness ratio, the larger influence of trade on domestic trade.
Malaysia economy having high degree of trade openness and financial openness. Financial openness can refer to the total of external assets and liabilities relative to GDP. In 2004, the trade volume has increased twice the size of economy. Moreover, the amount of external assets and liabilities also twice of the size of economy in 2004.
Figure above shown that Malaysia rates high among 28 emerging economies from Asia, Eastern Europe and Latin America. Originally, Malaysia is rating with 58 economies that make up the OECD (Organization for Economic Co-operation and Development) but the graph above only show out 28 emerging economies. Trade openness of Malaysia only lower than Hong Kong and Singapore which is well known of financial centre nature. Besides that, Malaysia also having high ranking in financial openness with more than median score, 2.03. Surprisingly, Malaysia having higher financial openness than United States and Japan with well developed economies. However, comparison in East Asia, Malaysia ranks lower than Singapore, Brunei and Hong Kong.
Diagram above indicated that the Malaysia trade openness has increasing significantly from 1980 to 2004. One of the reasons of increasing trend in trade openness is structural changes occurring in Malaysia’s economy based on its trade direction. Besides, open current account and liberalization of capital account also reasons influenced increasing trade openness. As Malaysia became more and more integrated with global economy, Malaysia’s economy and financial system will significantly become more and more ingenious.
The ratio of exports and imports to GDP in Malaysia
A related concept that has received much less attention from theorists is that of the degree of openness of an economy. The relevant question is not what does a country export or import but how much does a country export and import in relation to its GDP. The theory of commercial policy establishes a relation between protection and volume of trade.
Commonly, judgements on commercial policies of Malaysia are made based on the comparison of volume of trade to GDP ratios. These comparisons and policy recommendations are usually done without resort to any theory stating which are the factors determining the degree of openness of an economy.
Table 1 shows basic data for the world’s extremes in terms of openness. (Carlos Alfredo Rodriguez, 2000) The extreme variability of openness ratios is quite evident. While Malaysia exports are 93% of its GDP, Myanmar’s exports are just 1.5%. The commercial policy is one determining factor in explaining some of these observed differences. Myanmar is more protectionist than Malaysia. They conclude that protectionism alone cannot explain openness. However, the more protectionism should be associated with less openness.
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The other variable they want to focus on is country size. Small economic units must specialize in producing few goods in order to attain optimal scale and be competitive. They must therefore export those goods in exchange for the imports of the goods they do not produce.
Malaysia is a developing country, thus it should be more open on the degree of openness. They expect the trade to GDP ratio to be both negatively related to size and to a measure of protectionism.
A high degree of protection of domestic industries in the form of high tariffs or of strict quotas on imports in Malaysia
High Tariff Goods
The Uruguay Round resulted in a trade-weighted average of 9.1 percent for imports of industrial goods into Malaysia. This is a low level for a developing country. However, there are some areas subject to high tariffs. For example, textile products (average 21.5%) and transportation equipment (average 22.6%). Other high-tariff items include electrical equipment and glass, which have maximum tariffs of 30%. They also note that Malaysia’s bound rate covers only 79% of tariff items.
Import-Reduction or Export-Promotion Methods In the year of 1997, Malaysia hiked tariffs on trucks, construction materials, and durable consumer goods in order to reduce imports. Although this tariff hike was apparently carried out within the level of the existing bound rates. Therefore, it does not necessarily violate World Trade Organization (WTO) rules, Malaysia has hiked tariffs to a maximum of 25%, which is large enough to have a clearly detrimental impact on trade. Besides, Malaysia applied comparatively low parts tariffs to the products that were processed in bonded regions and subsequently entered into the customs territory of Malaysia as finished products. However, the applicable rates for these instances were changed to those on finished products. This change amounted to a tariff hike on companies in bonded regions that could have vast impact on them.
The structure of the Malaysia’s imports and exports
In early 1980s, Malaysia began its export-oriented development strategy focusing on the exports of manufactures. Since it does not have abundant in raw materials and capital goods, Malaysia have to import more of the intermediate manufactured goods and the machinery and equipment from oversea. In 1970s, the structure of Malaysia imported almost an equal proportion of food, beverages, tobacco, and fats at 21 percent; inedible crude materials, mineral fuels, and lubricants at 20 percent; intermediate manufactured goods at 25 percent; and machinery and transport equipment at 28 percent. (Yusoff, M.B. 2005)
Since the Malaysian imports from EU have started to decrease to 16 percent in 1980 and reduced further to 11 percent in 2000 mainly due to the fall of the imports from the UK. The share of imports from ASEAN remained stable at about 23 percent during the same period. Malaysia had begun to source more imports from the US and Japan in 1970. The share of imports from the US increased from 9% in 1970 to 17% in 1990 and remained at the same level in 2000. Malaysian imports from Japan was 17% of its total imports in 1970 but increased to 24 percent in 1990 and remained stable at about 21 percent 1990s. For East Asia: Taiwan, South Korea, China, and Hong Kong have become about equally important sources of Malaysian imports. As of 2000, Japan was the most important sources of Malaysian imports, followed by the USA, and Singapore. (Yusoff, M.B. 2005)
On the other hand, there has been a tremendous increase in the Malaysia’s exports during the 1970- 2000 period. Malaysian total exports in 1970 were at RM 5,263 million which increased further to RM 28,172 million in 1980 growing at an annual rate of 43.5 percent. In 1990 the total exports was RM 79,646 million registering an increase of 18.3 percent per year during the 1980-1990 period. There was a revival of Malaysia exports in 2000 at RM 373,270 million giving a growth rate of 36.7 percent in 1990- 2000 period. Most of the exports went to ASEAN and the US, followed by EU and Japan. They accounted for 76% of Malaysian exports in 1970 which declined to 70% in 2000. (Yusoff, M.B. 2005)
The structure of Malaysian exports has changed substantially. In 1970s and 1980s, most of the exports were in the form of raw materials: inedible crude materials, mineral fuels, and lubricants which had decreased from 61 percent in 1970 to 57 percent in 1980. By 1990 these exports accounted for only 33 percent of the total exports while the exports of manufactured goods began to appear when its share increased from 26 percent in 1970 to 55 percent in 1990. The contribution of the inedible crude materials, mineral fuels, and lubricants fell to only 12 percent in 2000 while that of manufactured products increased to 82 percent. (Yusoff, M.B. 2005)
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Although the manufactured exports have increased significantly, Malaysia has some major weaknesses in terms of its composition. Notably, most of the manufactured exports have been in the form of intermediate manufactured goods where their shares increased from 23 percent 1970 to 49 percent in 2000. The exports of machinery and transport equipment increased from 2 percent in 1970 to 25 percent in 2000. Malaysian exports of final manufactured goods are still at relatively small contributing only 8 percent of the total exports in 2000. The changes in the structure of Malaysian exports have been due to the deliberate government policy to industrialize and develop the domestic economy through the export-oriented development strategy since 1980s by diversifying and intensifying the export base and at the same time focusing on manufactured exports. (Yusoff, M.B. 2005)
There have been major changes in the degree of “openness” of Malaysia in recent decades.
From a primary producer with a gradual industrialization strategy, the Malaysian economy has undergone transformation into a highly-open economy through greater trade and financial integration since the late 1970s. As a result, Malaysia’s trade openness is among the highest in the region, reaching a peak of 192% of GDP in 2000. (Annual report 2012)
Models by Grossman and Helpman(1991), Rivera-Batiz and Romer(1991), Romer(1990) suggest that the expansion of international trade increases the number of specialized inputs which then causes economic growth as the domestic economies become more open to international trade. Consistent with its outward-looking growth strategy, Malaysia have a balanced export structure. This structure has produced a good counterbalance when manufacturing (e.g. electrical and electronics products) exports fell, exports of primary commodities (e.g. rubber and tin) increased because they had different consumers and demand cycles. In addition, Malaysia’s manufacturing and primary commodity exports tend to be upgraded to incorporate higher value added and innovation. Thus, technology acquisition and availability of skilled labor are essential for this transformation in order to develop more exports that originate in Malaysia. (Mahani Zainal Abidin, 2011)
If China and other Asian countries are able to generate their own domestic demand, then the prospects for Malaysia’s exports will become bright. Consequently, East Asia has now become Malaysia’s largest trading partner through the diversification of the markets. The share of China in manufactured exports has increased from 1.7 percent in 1996 to 12 percent in 2009. The share of the Association of Southeast Asian Nations remains at about 27 percent. However, the share of traditional markets has declined whereby the United States to 13.2 percent in 2009 from 21.7 in 1996, the EU to 12.2 percent from 14.5 percent, and Japan to 7 percent from 11.1 percent for the same period. (Mahani Zainal Abidin, 2011)
Therefore, Malaysia operating now continues with the outward-oriented development strategy, it had kept its tariff levels at significantly low levels by the developing country standards. Unilateral, regional and multilateral initiatives in recent years have caused trade weighted average tariff to be as low as 8 per cent, down from 15 per cent at the beginning of the industrialization drive. (Ariff, 1998)
– Carlos Alfredo Rodriguez, Universidad del CEMA Buenos Aires, Argentina, (2000). Retrieved from http://www.ucema.edu.ar/u/car/Advantage.PDF
– Tariffs, (2001). Retrieved from http://www.meti.go.jp/english/report/data/gCT9904e.html
Bank Negara Malaysia. (2007). White Box: Openness of the Malaysian Economy. Retrieved from http://www.bnm.gov.my/files/publication/ar/en/2006/cp02_001_whitebox.pdf
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