This article first appeared in Forum, The Edge Malaysia Weekly on September 23, 2024 - September 29, 2024

During her working visit to China in April this year, US Treasury Secretary Janet Yellen voiced concerns about her host’s overcapacity in industrial goods, especially electric vehicles, solar panels and batteries. According to her, Chinese capacity significantly outstrips its own demand, in addition to that of the international market. By flooding the world with cheap goods, China is said to decimate the industrial ecosystems of other nations.

Chinese officials naturally challenged Yellen’s claims, producing a series of statistical data to buttress their position. There is also a perception — not just among the Chinese bureaucracy — that US pressure in recent years is designed to kneecap China’s industrial development, thereby preserving the US’ global dominance.

About four decades ago, it was Japan Inc that found itself in the crosshairs of US officialdom. Those with long memories will no doubt notice that the current friction between the US (and by extension, the European Union) and China is rather similar to what we saw then with Japan. As before, key complaints remain centred around overcapacity, excess savings, currency manipulation, state-supported industrial policy and intellectual property theft. Although Japanese planners gave in to US pressure on certain features of the economy and eventually rode through the turmoil, it came with a hefty price tag, witnessed in the bursting of the asset price bubble in the 1990s, which subsequently precipitated the nation’s “lost decades”.

Notwithstanding the differences between contemporary China and 1980s Japan, the rest of the world has taken up positions to buffer themselves from the increasingly hostile US-China rivalry. For one, substantial volumes of foreign direct investment (FDI) and export revenue have shifted to well-prepared economies that welcome business groups looking to de-risk their commercial activities in China.

A recent analysis by Japanese financial conglomerate Nomura Holdings reveals that Asia is the main beneficiary of this capital and technology exodus, with India, Vietnam and Malaysia leading the pack. Outside of Asia, Mexico is a clear winner, leveraging its proximity to the large, wealthy US market as well as its membership of the agreement between the US, Mexico and Canada (USMCA).

This industrial migration mirrors the movement of Japanese (and to a smaller extent, South Korean and Taiwanese) firms that flowed into Southeast Asia in the aftermath of the 1985 Plaza Accord, which saw the yen’s steep appreciation relative to the US dollar. Many Southeast Asians will recall that this event kick-started the region’s boom for the next few years until the onset of the 1997 Asian financial crisis.

While China might not (yet) house the modern-day equivalent of Japan’s technological powerhouses, its firms are making increasing headway in relatively mature, mid-tech products such as steel products and solar panels. In emerging industries, firms such as BYD (electric vehicles) and ByteDance (internet technology) have gained market share in various international markets.

As a non-aligned nation running a relatively liberal trade and investment regime, it is perhaps unsurprising to find Malaysia on the radar of investors now, just as it did during the 1980s. However, the international environment in the contemporary era is no longer as benign.

For starters, US policymakers are seemingly taking a harder stance on today’s Chinese firms compared with their Japanese counterparts of old. In March 2024, the US Congress passed a bill requiring ByteDance to either sell its popular TikTok video platform within 12 months or face a US ban.

Such a standpoint will of course impact intermediary economies like Malaysia. The growing worry is that certain exporters targeting the US market are merely establishing a token presence in Malaysia, where only minor levels of local processing take place. Indeed, the US Department of Commerce has opened investigations into a series of Vietnamese exports, including steel and solar panels, for allegedly circumventing duties on what are essentially Chinese-origin goods. Former US president Donald Trump (2017-2021), in a bid to return to the White House, also promised to slap a 200% tariff on Chinese cars made in Mexico.

Perhaps, more importantly, there needs to be a more serious debate about the manner in which Malaysia is inserted into global production networks. To reiterate, a generally liberal stance towards international trade and FDI is not a negative thing per se. However, this approach has arguably had the side effect of locking Malaysian firms into disadvantageous positions within the international economic system. This can, to a certain degree, be inferred from the lack of technology-intensive Malaysian firms in dynamic, export-focused industries.

Going forward, it is important to better integrate Malaysian firms into more favourable nodes within global supply chains. Well-meaning policy prescriptions on this subject have been outlined in several recent master plans, including the New Industrial Master Plan 2030. The key lies in implementing them expeditiously.

Guanie Lim is associate professor at the National Graduate Institute for Policy Studies (GRIPS), Japan. He is interested in broader development issues within Asia, especially those of China, Malaysia and Vietnam.

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