Leveraging trade opportunities with non-traditional partners: the Malaysia–GCC perspective

^*Revised version of the paper presented at the International Conference on International Trade and Investment: Globalisation at Crossroads: Implications for the Developing World, Le Meridien Hotel, Mauritius, 20–21 December 2011.

Abstract

This paper examines the impact of economic factors on bilateral trade flows between Malaysia and the GCC through estimations of panel data using a gravity model. In particular, the paper compares the determinants of bilateral trade and trade potentials between Malaysia and two regions, the non-traditional Gulf alliance and the traditional ASEAN counterpart, to provide insights for leveraging opportunities through trade with the former. The gravity estimates imply the importance of size effects, similarities in GDP and differences in factor endowments as drivers of trade flows between Malaysia and the GCC, underlying the fact that inter-industry trade dominates these flows. The opposite holds in the case for the Malaysia–ASEAN trade. Though export potentials for industrial products per se appear exhausted in trade with both regions, the Gulf region provides opportunities for Malaysia to export quantity-based final (end-use) products and to diversify its exporting strategy away from quality-based parts and components.

Keywords:

• trade structure
• inter-industry trade
• panel gravity
• GCC
• Malaysia

• JEL Classification
• F10
• F14.

Notes

^* Revised version of the paper presented at the International Conference on International Trade and Investment: Globalisation at Crossroads: Implications for the Developing World, Le Meridien Hotel, Mauritius, 20–21 December 2011.

1 The GCC is a group of six high-income economies of the Persian Gulf, established on 25 May 1981. These economies share a common production structure based on a state-owned hydrocarbon sector and a nonoil sector dependant on imports (World Bank, 2010). Beginning 2008, the GCC operated a common market, which aims to have a unified tariff structure to remove intra-bloc trade barriers.

2 At present, Malaysia does not have FTA with any of the GCC countries, but has signed the Investment Guarantee Agreements (IGAs) with Kuwait (1987), UAE (1991), Bahrain (1999) and Saudi Arabia (2000).

3 Exports of wood products from Malaysia to the Middle East are expected to gain momentum with the onset of new housing projects in the latter. More recently, demand from the Middle East for Malaysian-made garments has seen a substantial rise as a result of the rising affluence and household income of these emerging economies (MOF, 2011).

4 This specification is considered appropriate given that the GCC partners differ considerably from Malaysia in terms of factor endowments (capital–labour ratios).

5 Within the context of export diversification, this paper focuses on the export function (see also Ma´tya´s, 1997; and Anderson and van Wincoop, 2003) per se (apart from total trade) to identify export determinants and export potentials in Malaysia's trade with the GCC vis-à-vis ASEAN.

6 It should be borne in mind that differences in factor endowments are also crucial in determining vertical IIT, but, to a lesser degree (Chan-Hyun, 2005).

7 Using the data on GFCF, capital stock (K) is estimated as follows (Miller and Upadhyay, 2000):

K₀ = GFCF₀ / [λg_d + (1 – λ)g_w + δ] where the initial or base year is 1970; g_d is the average growth rate of the GDP series for the country in question for the period 1990–2010; g_w is the estimated world growth rate at 2.95% for the period 1990–2010; λ = 0.25, is a measure of mean reversion in growth rates and δ = 0.05, is the assumed rate of depreciation. The estimated capital stock is K_t = GFCF_t + (1 – δ)K_t-1

8 Malaysia is already facing strong competition from other major Asian economies that export similar products to the Gulf, namely Singapore, Indonesia, China and India, particularly so when the Malaysian products are considered as ‘middle-end’ products. This problem is however not specific to Malaysia as the ASEAN region has also to contend with the stiff competition from China and India to gain market access in GCC. The ASEAN 6 (pioneer ASEAN countries plus Vietnam), currently account for 35% of Asian trade with the GCC, falling from 77% in 1981. Instead, China and India's share has risen to almost 58% of Asian trade with the GCC from a mere 10% in 1981 (EIU, 2011).

9 Malaysia (apart from Singapore, South Korea and India) will remain important as providers of technology know-how for the GCC States (EIU, 2011). Unfortunately, the influence of R&D on Malaysia-GCC exports was not examined in the empirical estimation of this paper given the lack of data on R&D in the GCC economies.

Additional information

Notes on contributors

Evelyn Shyamala Devadason

Evelyn S. Devadason is an associate professor at the Faculty of Economics and Administration, University of Malaya. She received her PhD in economics from the University of Malaya in 2006. Her research focuses on international trade, with specific focus on production networks, trade–labour linkages and trade–environment issues.

Ahmad Zubaidi Baharumshah

Ahmad Zubaidi Baharumshah is a professor at the Graduate School of Management, University Putra Malaysia. He received his PhD in econometrics from the University of Illinois – Urbana Champaign in 1990. His research spans the area of econometrics and policy modeling.

Thirunaukarasu Subramaniam

Thirunaukarasu Subramaniam is a senior lecturer at the Department of Southeast Asian Studies, University of Malaya. He received his PhD in Economics from the University Putra Malaysia in 2008. His research interest is in labour economics, specifically on labour-related issues in Southeast Asia.