Cover Story: Becoming an irreplaceable part of the global supply chain amid ‘slowbalisation’

This article first appeared in The Edge Malaysia Weekly on January 23, 2023 – January 29, 2023 WHEN China acceded to the World Trade Organization in 2001, not many would have expected the country to file a complaint on chip export restrictions imposed by the US — where more liberal economic and trade policies had originated from. Today, however, the world is well acquainted with America’s protectionist turn on national security concerns — more so following severe global supply chain disruptions when the Covid-19 pandemic hit. When questions arose over whether globalisation was dead, The Economist had in 2019 called the fragile state of international trade “slowbalisation”. Since then, discussions on global supply chain disruptions and geopolitical tensions have brought to the forefront terms like “reshoring”, “onshoring”, “nearshoring” and “friendshoring”, which essentially mean having strategic industries build their supply chains at home, close to home or only with friendly and allied countries — with priority on ensuring supply security rather than lowering production cost. America’s US$52.7 billion CHIPS and Science Act, passed in July 2022 — which not only bolsters investments in domestic semiconductor manufacturing, but also blocks China’s access to US technology — epitomises geopolitical tensions that persist between the two global superpowers. Indeed, the world is in a “low-growth, low-investment and low-cooperation” era, as noted in the World Economic Forum’s Global Risk Report 2023. Speaking at a World Economic Forum panel discussion titled “Living with Risk” on Jan 20, Malaysia’s Minister of International Trade and Industry (Miti) Tengku Datuk Seri Zafrul Abdul Aziz noted how “friendshoring, reshoring and onshoring” dominated discussions at Davos, Switzerland, and reiterated his call for major economies to strike a balance between security and growth: “Impediment to trade is [an] impediment to growth … Trade matters because it brings prosperity.” In an earlier interview with Bloomberg TV, Zafrul had called for the need to “go back to fundamentals” of trade, even though Malaysia is among beneficiaries as multinationals recalibrate their supply chains. “In the short-to-medium term, I must admit that we do see some of the spillover [effects] from those concerns about supply chain resiliency and security because of geopolitics between US and China [but] in the long run, it would not be good,” Zafrul said, reminding that “the reason Malaysia and the world are trading is because it is something that is beneficial for all”. At Davos, US-based chipmaker Intel Corp reiterated its 2021 commitment to invest more than RM30 billion in the expansion of its operations in Penang and Kulim, Kedah — a move that Zafrul said would create more than 4,000 jobs at Intel and over 5,000 jobs in the construction sector. Malaysia, Zafrul said, is targeting 20% year-on-year growth in foreign direct investments (FDI) with emphasis on quality rather than just headline numbers on approved investments. “Traditionally, measuring FDI is about the absolute dollar value … how much of that is realised, how much translated to jobs and what the spillover effects are. I think those are key and the number achieved has got to be one that focuses on the right kind of investments.” Whatever one’s thoughts are on that, there is ample literature on the need for Malaysia to up its game in digitalisation and capacity building towards the desired high-tech, high-income status. The right kind of FDI, with potential for deeper linkages to the global supply chain, can be a key avenue to bolster growth, but is perhaps not the most important. More on this later. Backward linkages In a 2020 paper titled “Promoting Technology Transfer and Productivity Spillovers from Foreign Direct Investment (FDI)”, the World Bank Group noted that “the presence of foreign firms in the host economy can become a major driver of local firm productivity growth and offers opportunities for [ambitious] local firms to integrate in international production networks” and global value chains. “Evidence suggests that backward linkages between multinational enterprises (MNEs) and local suppliers are the most important channels for technology and productivity spillovers to local firms,” its researchers wrote, adding that backward linkages — which tie local supplies tighter with their multinational customer — “can promote the diffusion of knowledge, spread good management practices and help domestic suppliers upgrade their technical and quality standards”. Further, “rewarding MNEs [with matching grants] for training or upgrading the quality of local suppliers can change the cost and risk calculation for MNEs in terms of technology transfer and sourcing locally versus relying on their trusted foreign suppliers”, it adds, noting, though, that in practice, no […]

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