Racing to the Top – Shaping the Next Trade Agenda

Malaysia, Southeast Asia, and the world need a new trade agenda. It cannot be the regurgitation of old clichés but rather a fresh approach. The new agenda has to steer nations away from racing to the bottom but to push forward for the race to the top together. 

We must now accept that we are in a new era with a new set of realities, and there is not much point harping on the governing assumptions of the last era.

Much as the last free trade era brought massive development to Asia and specifically China, the race to the bottom due to a non-stop search for cheaper labour and production sites by multinational corporations had back-fired on domestic politics and the economy in the United States, United Kingdom and Europe.

UK’s Brexit, the election of Donald Trump as US President in 2016 and his continued popularity with a large section of the US electorate, and the rise of populist governments in Europe can trace their roots to a global free trade agenda that left too many people behind.

In the past several years, the world has also experienced the combined and simultaneous effect of a “polycrisis” of pandemic and global health challenges, financial instability and inequality, geopolitics and wars, and an increasingly serious climate crisis. For the next trade agenda to be sustainable and bring tangible benefits to the widest possible populations in developed and developing economics, the experience from the polycrisis must be taken into account.

Today, supply chain resilience, economic security and de-risking are the core concerns of governments and corporations across the world.

There are three points about China that are worth noting.

First, costs and tariffs. The first wave of production that moved out from China actually predated the Trump administration. By around 2015, wages and other costs in China had increased significantly and a substantial number of low-end manufacturing firms moved operations to Vietnam, Bangladesh and Cambodia. The tariff imposed by Trump moved a further set of firms out of China in search of lower tariffs.

Second, geopolitics. As great power rivalries between China and the United States intensified, MNCs are increasingly keeping China’s capacity to produce for China’s market while building a second supply chain outside China to produce for global markets.

Firms homeshore to the US through President Joe Biden’s industrial policy, or back to Germany or other advanced Western economies. Firms also near-shore to Mexico or Poland or other Eastern European countries. Then there is friend-shoring to India or Vietnam or, for higher end production, South Korea. Looks like the next option is to relocate to Southeast Asia!

Third, probably unwittingly, Southeast Asia has become the bridge between Western and Chinese businesses. When Western firms relocate to Southeast Asia, their Chinese suppliers are told to follow suit. There are increasingly many other forms of trade between Western and Chinese firms that previously took place in China, and now in Southeast Asia. No wonder trade between China and ASEAN is up by almost 70% since 2018.

In many ways, the West has not decoupled much from China, but the conduits, forms and characteristics of trade between Western and Chinese firms have changed, giving Southeast Asian economies a rare chance to benefit from the global shift.

The shift to Southeast Asia is massive and none of the single nations could digest the load. It is important that ASEAN states get it right by not competing against each other; instead, they should collaborate more to ensure that the region would prosper together. The reality is that Southeast Asian economies grew at a different pace and at different levels of sophistication as well.

For instance, when it comes to semiconductor, there is a discernible, yet not-talked-about vertical integration – with Singapore at the most complex level, Malaysia occupying an indispensable middle while Vietnam’s demographic dividend provides workers for the more labour-intensive activities. As long as Malaysia keeps moving up the value chain, it would not be in competition with Vietnam or Indonesia. But Malaysia must have the stamina and the political will to move wages, skills, technologies and productivity up to a level that is closer to that of Singapore.

The new trade agenda should bring tangible benefits to the widest possible number of people. Nations should avoid a race to the bottom. It is no longer about competitive lowering of wages, cutting down taxes, offering competitive financial incentives to lure investors at the expense of public funds, reducing environmental standards to attract polluting industries or downgrading labour standards. 

Efforts to build the global commons should be embraced by developing countries such as Malaysia, with purposeful investment from developed nations to help the transition. Malaysia and Southeast Asian economies should welcome global effort to build a common vision.

Modern anti-slavery laws and legal actions by the advanced economies have exposed the unscrupulous and rampant exploitation of unskilled foreign labour in Malaysia, especially in the glove and plantation industries not too long ago. 

The influx of cheap labour into Malaysia has caused wages to stagnate and productivity not to rise, as there is no incentive to invest in automation and other labour-saving technologies. For Malaysia to move forward and upward, clamping down on modern slavery is not only the right thing to do but also good economics.

The Global Minimum Tax is another effort to build the global common that Malaysia and Southeast Asian states should welcome and celebrate. The tax cuts, tax incentives and tax havens over the past four decades have crippled the capacity of governments and eroded the tax bases of nations.

Erecting a floor for tax is to ensure that multinationals do not evade tax and contribute their earnings to ensure that nations do not collapse and governments are solvent to provide services for the people, including the owners of capital. 

The European Union’s carbon border adjustment mechanism (CBAM) is seen as problematic by many in Southeast Asia. Given that the EU is going to implement this anyway, instead of complaining, it is the best time for governments in Southeast Asia to put in place their own carbon tax. In fact, some forms of carbon tax may help steer the Malaysian steel industry to investing more in carbon capture and other emission reduction measures – with banks more ready to help the steel industry – than it is now.

Over the past decade, China has set very high standards for its environment. Massive amounts of garbage from advanced economies landed in Malaysia and other Southeast Asian nations as an unintended consequence of China refusing to allow for garbage to be imported.

Southeast Asian economies are facing a huge oversupply of construction steel as China forcefully removed 150 million tonnes of excess capacity between 2016 and 2020. These Chinese steel firms moved the high-emission ageing technology to Southeast Asia. China’s high standards for the environment and climate over the past decade deserves a favourable mention.

The next step is for China to lead and ensure that such high domestic standards are extended to Chinese overseas investment and included in the country’s trade agenda. For instance, among other measures, if the steel produced by a Chinese firm in a Southeast Asian economy pollutes more than it does in China, the products should not be allowed to be exported into China or be expected to pay higher carbon tax. 

The new trade agenda would have to take into account the fact that trade has to ensure workers are well paid, and both advanced economies and developing countries could sustain a robust middle class. It would also have to place climate at its centre while ensuring that states receive adequate taxes from multinationals to provide services and ensure social cohesion.

Racing to the top should be the new trade agenda. Let the bygone era of trade be bygone.

This piece was originally published on Breaking Views 2024, a The Edge and Reuters joint publication.

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