A new era of international economic cooperation

WITH an increasingly interdependent world economy, international economic cooperation is typically used to facilitate the processes of trade and investment. However, we see dramatic changes in the traditional definitions and functions of international economic cooperation. This has heightened the desire to revise the traditional international economic cooperation policies. One such move is through the introduction of the “Belt and Road Initiative (BRI)” by China.

Among others, the BRI redefines international economic cooperation in two ways.

Firstly, BRI focuses on a larger trade area, involving businesses of various size classifications and market sectors through e-commerce. Traditionally, international trade is promoted through regional integration agreements, which are formed to remove tariffs on trade (free trade area), applying a common tariff structure (customs union) and permit free movement of factors of production, goods, and services (common market). Besides that, the traditional international trade system focuses on large enterprises. However, new international trade patterns have emerged with the rapid development of e-commerce. The use of the Internet and e-commerce applications has effectively improved the trade process, making it seamless and cost effective. E-commerce platforms enable small businesses and micro-entrepreneurs to access global market opportunities. Hence, countries with more advanced digital technology are more likely to benefit from this trade liberalisation. In the context of BRI, China has already made great strides in this direction with efforts to expand their cross-border e-commerce pilot zones. Specifically, China’s President Xi Jinping announced on Nov 4, 2021 that China would promote “Silk Road e-commerce”. This plan is imperative to countries participating in the BRI as it focuses on enhancing the infrastructure construction supporting cross-border e-commerce.

Secondly, global value chains (GVCs), which are a big part of today’s international trade, can be further strengthened through BRI. Under traditional international trade practises, each country produces and exports final products, i.e., finished goods and services which do not require further production. However, with GVCs, each country focuses on a specialised segment of production based on their comparative advantage in technology and factor endowments. Through this, while the production process is fragmented, there is an overall reduction in total production cost and an increase in production efficiency. The increase in cross-border production fragmentation has led to a more complex international production network. However, this is simplified through BRI as it offers infrastructure connectivity, and trade and investment enhancement which stands to strengthen international production networks.

International trade plays a major role in Malaysia’s economic development as we are a well-known trading nation. Malaysia was recognised as the world’s 25th trading nation in 2019 by the World Trade Organisation (WTO). Malaysia’s trade performance in 2020 remained resilient despite the Covid-19 pandemic. Malaysia’s total exports and imports stood at RM980.99bil and RM796.19bil, respectively. Total trade constituted 117% of the gross domestic product (GDP), reflecting the high intensity of Malaysia’s trade. During the 1990s, the high degree of trade openness catapulted Malaysia’s participation in GVCs. Nonetheless, based on the data from Trade in Value-Added (TiVA) OECD, Malaysia’s GVC participation position has declined in the past decades, particularly in the backward GVC participation.

This analysis illustrates the need for Malaysia to transform its production strategy and shift its focus on human capital development and technological innovation to remain competitive in the international arena. Despite the many downsides of the Covid-19 pandemic, it is an opportune time for Malaysian small businesses and micro-entrepreneurs to launch their businesses online and participate in e-commerce. According to the Department of Statistics Malaysia, there was an increase of 32.7% in e-commerce income from RM675.4bil to RM896.4bil in 2020, signalling an increased adoption of e-commerce by Malaysian sellers and buyers. This is supported by a report from Digital Malaysia 2020 which states that approximately 50% of the Malaysian population are now active online buyers. However, many businesses are yet to take advantage of the benefits of cross-border e-commerce. For instance, in 2019, Malaysia’s e-commerce income from the local market segment stood at RM591.8bil but only recorded an income of RM84.5bil from the international market.

Malaysia has been involved in China’s BRI initiative since 2013 and has potential to reap various benefits from this collaboration. Through BRI, we can narrow the digital divide and encourage specialisation in GVCs from the infrastructure and resources that are generated from BRI. Furthermore, BRI has brought about many mutual projects such as China-Malaysia Port Alliance (CMPA) which brings mutual benefit in terms of bigger trade volume to both countries, and bilateral tie-ups to facilitate the cross-border movements of goods and services. Most importantly, this new international cooperation has potential to ensure that Malaysia is not left behind.

Dr Ong Sheue Li is a Senior Lecturer at University of Malaya. The views expressed here are entirely the writer’s own.

The SEARCH Scholar Series is a social responsibility programme jointly organised by the Southeast Asia Research Centre for Humanities (SEARCH) and the Centre of Business and Policy Research, Tunku Abdul Rahman University College (TAR UC), and co-organised by the Association of Belt and Road Malaysia.