TOPIC 7

MALAYSIA & INTERNATIONAL TRADE

(BY NAZMI@NAZNI B NOORDIN, FSPPP UITM KEDAH)
LEARNING OBJECTIVES
1. To differentiate open economy and close
economy.

2. To identify the benefits of International Trade.

3. To look into the history of Malaysian

International Trade.

4. To examine the implications & the needs to

have protection (trade barriers).
FOREIGN SECTOR
INTERDEPENDENCE
 INTERNATIONAL TRADE:

1. Open economy: Dealings or transact with

other countries.

2. Closed economy: Does not transact with other

countries.
 ADVANTAGES OF OPEN ECONOMY
1. Assisting the country towards international market and developing
economy.

2. Necessary for globalization and internalization of Malaysia.

3. FDI will benefit local investors, producers, organization and public as a

whole.

4. Income generation from open economy activities.

5. Multiple choices to suppliers and consumers- people can have many

choices from both local and international companies- can sell to others
and also buy from others.

6. Transfer of technology.

7. Transfer of knowledge – share knowledge & expertise.

BENEFITS FROM
INTERNATIONAL TRADE
1. To get goods not produce within country.

2. To get benefit/profit from specialization.

3. Means of production can be used efficiently.

4. Every country able to used more goods compare if it is

produce outside the country.

5. Expand the local industries’ market.

6. New technology imposed and increase the local

productivity level.
INTERNATIONAL TRADE –
MALAYSIAN EXPERIENCED

A. Before and early independence (1947-1965)

 Agricultural commodities (rubber, tin, iron, metal, are

the main contributor to the export activity).

 Foods, manufactured goods, raw material – the main

products being imported – economic development.
B. 1993-2000

 Important to the national economic development.

 Manufacturing goods (foods, cloth, mining

industries, metal, electric and electronic
appliances) contribute highest in the export
activity (USA, Japan)

 Agricultural goods to be exported declined

(rubber, palm oil, tin, cocoa) but liquid petrol and
other petroleum output still remain at the higher
level of demand from the foreign countries.
 The import activity has declined.

 Imported electronic and electric appliances

declined, only focus on the machines and the
transportation equipment.

 Consumer products exported increase especially

rice, flour, sugar, milk industries/product – due to
the abolishment of import duties.
IMPLICATIONS ON
INTERNATIONAL TRADE

1. Depend on foreign trade, financial and

technology.

2. Export earning: when the developed countries

demand for Malaysia product declined, it
affected the volume of our exports. Example, the
decline in the volume and price of rubber and
other commodities affected the export earnings.
IMPLICATIONS ON INTERNATIONAL
TRADE- CONT’D
3. Deficit in the current account and balance
of payment: When our export earnings from
primary commodities declined and on the other
hand the price of imports increased, it caused
deficit in the current account. When the value of
import is greater than the export, it will cause
deficit in the current account and balance of
payment.

4. These deficits have forced the country to

raise even higher amounts of loans.
IMPLICATIONS ON
INTERNATIONAL TRADE- CONT’D
5. Implication on output: due to the decrease in
demand for our exports, the growth rate of the
primary products slowed down.

6. Implication on the economic growth:

Affected the GDP.

7. Implication on income:
 Price of commodities is unstable.
 The demand and supply of primary commodities are
inelastic.
TRADE BARRIERS
Trade barriers = government policy that has been
formulated to control or to tax the goods and
services.

 Tariff - tax against import products. Ad-valorem tariff, import

tax based on the price of the imported goods (e.g. 50% on the price
of goods). Specific tariff, fixed tax on imported goods although the
price of the goods changed (RM20 for every unit of imported
goods).

 Quota: Maximum quantity of output that can be imported within

certain duration of time, e.g. A year. Not increase the national
income.
Non-tariff barriers: steps taken by government
to protect and giving priority to the local
products.

Foreign exchange control: monetary policy to

control import activities. No loan facilities
provided for the import activity or by controlling
the foreign money (e.g. selling the foreign money
with higher price from the formal exchange rate).
ARGUMENTS AGAINST TARIFF
 Comparative advantage - welfare is
greatest when each country exports
products whose comparative cost are
lower at home than abroad and import
goods whose comparative costs are lower
abroad than at home.

 Absolute advantage - profit earn by a

country from specializing in producing
certain goods efficiently compare to other
countries.
 PROTECTION AND THE NEEDS OF TRADE
BARRIERS

1. To protect infant/new industries from foreign competition.

2. Revenue sources- tariffs are often major source of revenue

especially in young nations with limited ability to raise direct
taxes.

3. Improved employment and the Balance of Payment

(BOP)- a rise in tariff rates will diverts demand from imports
to domestic goods, so that the balance on goods and services
(export – import), aggregate demand and employment
increase.

4. Antidumping – dumping is selling a product cheaper abroad

than at home.
BALANCE OF PAYMENTS
(BOP) ACCOUNT
BALANCE OF PAYMENTS (BOP)
ACCOUNT
What is the BOP account?
 BOP = the records of all the inflow and outflow of money
arising from international trade are kept in the BOP
account.

 Account statement that contains the transaction and the flow of

money between one country to another country.

 An accounting record of all monetary transactions between a

country and the rest of the world.

 These transactions include payments for the country's exports

and imports of goods, services, and financial capital, as
well as financial transfers.
BALANCE OF PAYMENTS (BOP)
ACCOUNT- CONT’D
 The BOP summarises international transactions for a
specific period, usually a year.

 Sources of funds for a nation, such as exports or the

receipts of loans and investments, are recorded as
positive or surplus items.

 Uses of funds, such as for imports or to invest in foreign

countries, are recorded as a negative or deficit item.

 When all components of the BOP sheet are included, it

must balance.
COMPOSITION OF THE BALANCE OF
PAYMENTS (BOP) SHEET

 Since 1973, the two principal divisions on the BOP = current account and the
capital account.

 Basically there are three (3) main components of BOP, i.e. current account,
capital account & overall balance account.

BOP = CURRENT ACCOUNT – CAPITAL ACCOUNT +/-

BALANCING ITEM

 If BOP value more than zero = BOP surplus

If BOP value less than zero = BOP deficit
If BOP value equals to zero = BOP break even
CURRENT ACCOUNT (CA)
 CA = it records the payment of import and export of goods and
services flowing into and out of the country. The balance between
import and export of goods (trade balance)and service (service
balance) is called the current account balance.

 The current account shows the net amount a country is earning @ net
income if it is in surplus, or spending if it is in deficit.

 It is the sum of the balance of trade (net earnings on exports – payments

for imports) , factor income (earnings on foreign investments – payments
made to foreign investors) and cash transfers.

 Its called the current account as it covers transactions in the "here and
now" - those that don't give rise to future claims.
THE STATEMENT STRUCTURE
CURRENT ACCOUNT
1. Export and import of tangible goods -
output from the agricultural, manufacturing,
mining and others sectors.

2. Export and import of intangible goods -

E.g. insurance from the export or import of
tangible goods, incomes from investment.

3. Transfer of payment.
CAPITAL ACCOUNT
 Capital Account = it records the inflow and outflow of
funds into and out of the country. It consists of the net
capital transfer (acquisitions of fixed assets) and net
investment flows (for investment purpose). The balance
between the net capital transfers and net investment flows
is called the capital account balance.

 The capital account records the net change in ownership of

foreign assets @ net change in national ownership of assets.

 It includes the reserve account (the international operations of a

nation's central bank), along with loans and investments between
the country and the rest of world (but not the future regular
repayments / dividends that the loans and investments yield,
those are earnings and will be recorded in the current account).
BALANCING ITEM @ OVERALL BALANCE
 The balancing item is simply an amount that accounts for
any statistical errors and make sure the current and
capital accounts sum to zero.

 At high level, by the principles of double entry accounting,

an entry in the current account gives rise to an entry in the
capital account, and in aggregate the two accounts should
balance.

 A balance isn't always reflected in reported figures, which

might, for example, report a surplus for both accounts, but
when this happens it always means something has been
missed—most commonly, the operations of the country's
central bank.
IMBALANCES OF BOP
 While the BOP has to balance overall, surpluses
or deficits on its individual elements can lead to
imbalances between countries.

 In general there is concern over deficits in the

current account.

 Countries with deficits in their current accounts

will build up increasing debt and/or see increased
foreign ownership of their assets.
CAUSES OF BOP IMBALANCES
 The conventional view is that current account
factors are the primary cause.

 These include the:

1. exchange rate.

2. the government's fiscal deficit.

3. business competitiveness.

4. and private behaviour such as the willingness of consumers to

go into debt to finance extra consumption.
BALANCE OF PAYMENTS CRISIS

A BOP crisis, also called a currency

crisis, occurs when a nation is unable to
pay for essential imports and / or service
its debt repayments.

 Typically this is accompanied by a rapid

decline in the value of the affected
nation's currency.
BALANCING MECHANISMS

1. Adjustments of exchange rates.

2. Adjustment of a nations internal prices along

with its levels of demand; and rules based
adjustment.

3. Improving productivity and hence

competitiveness - can increasing the desirability
of exports.
FACTORS THAT INFLUENCE BOP:

1. Current Account – the value of both tangible and

intangible exports and imports.

2. Capital Account– both capital inflow and outflow.

3. Overall economic growth and GDP.

4. Balance of Trade (BOT).

5. Others (political stability, socio-economic factors).

STEPS TO OVERCOME DEFICIT IN
SERVICES ACCOUNT.
 Why deficit?
 When intangible imports more than intangible
exports.
 How to overcome?

1. Reduce intangible imports/increase intangible exports.

2. Training – more knowledge and skilled workers.
3. ICT based education produce more k-graduates.
4. Promote those scarce areas .
5. Government to reduce expenses – less foreign loans.
6. Transfer of technology within the country.
BALANCE OF TRADE (BOT)
ACCOUNT
DEFINITION
 A country's exports minus its imports.
 the largest component of a country's balance of payments.

BOT = EXPORTS - IMPORTS

 The difference in value between the total exports and total imports of a
nation during a specific period of time.

 If BOT value more than zero = BOT surplus

If BOT value less than zero = BOT deficit
If BOT value equals to zero = BOT break even
BALANCE OF TRADE

 BALANCE OF TRADE means:

The balance of trade is the difference between the

monetary value of exports and imports in an
economy over a certain period of time. A positive
balance of trade is known as a trade surplus and
occurs when value of exports is higher than that
of imports; a negative balance of trade is known
as a trade deficit or a trade gap.
BALANCE OF TRADE (BOT) ACCOUNT
What Does Balance Of Trade - BOT Mean?

 The difference between a country's imports and its exports. Balance of

trade is the largest component of a country's balance of payments.

 Debit items include imports, foreign aid, domestic spending abroad and
domestic investments abroad.

 Credit items include exports, foreign spending in the domestic economy

and foreign investments in the domestic economy.

 A country has a trade deficit if it imports more than it exports; the

opposite scenario is a trade surplus.

 A trade deficit is not a good thing during a recession but may help during
an expansion.

 Also referred to as "trade balance" or "international trade balance“.

WHY HUGE SURPLUS IN TRADE
BALANCE?
1. Produce more goods internally and having less imported
products.

2. High demand for export market – slow import growth.

3. Economies of scale – produce huge quantity and reduction

in average cost. Price will be cheaper and will increase
the demand.

4. Highly competence workers – can produce goods with

high quality.
STRATEGIES TO OVERCOME DECLINE
IN TRADE BALANCE
1. Increase exports and reduce imports – can be done by focusing
more on local produced goods especially food items.
Diversification of local production such as oil palm, rubber etc.
By doing this we can reduce imports and at the same time
increase our exports.

2. Look for new markets to exports our products especially OIC

countries and other third world countries.

3. Reducing the price and increasing the quality of our local

products to gain competitive advantages – this will reduce
imports and increase exports.

4. ?
5. ?
MALAYSIA BALANCE OF TRADE
 Malaysia recorded a trade surplus of 4316.60 Million MYR in June of 2013.

 Balance of Trade in Malaysia is reported by the Department of Statistics Malaysia.

 Malaysia Balance of Trade averaged 2822.01 Million MYR from 1970 until 2013, reaching an all
time high of 15767.47 Million MYR in May of 2008 and a record low of -2880.61 Million MYR in
June of 1997.

 International trade plays a large role in Malaysian economy. Since 1998, Malaysia reports
consistent trade surpluses.

 Main exports are: electrical and electronics products (35% of total exports), palm oil (15 percent),
petroleum products (9 percent), liquefied natural gas (7 percent), timber and natural rubber.
Malaysia also sends abroad chemicals, machinery, appliances and manufactures metals.

 The country’s main imports are: machinery and transport equipment (60 percent of total imports),
manufactured goods (12 percent), fuel (10 percent) and chemicals (9 percent).

 Main trading partners are: Singapore (15 percent of total exports and 13 percent of imports) and
China (13 percent of exports and 15 percent of imports). Others include: Japan, United States and
European Union.
CAPITAL ACCOUNT
CAPITAL ACCOUNT

 Definitions:

1. An account that tracks the movement of funds

for investments and loans into and out of a
country. The capital account makes up part of
the balance of payments.

2. An account in which a firm records expenditure

on capital items.
WHAT DOES CAPITAL ACCOUNT MEAN?

 The net result of public and private international

investments flowing in and out of a country.

 The net results includes foreign direct

investment, plus changes in holdings of stocks,
bonds, loans, bank accounts, and currencies.
 In Macroeconomics and international finance, the capital
account (also known as financial account) is one of two
primary components of the balance of payments, the other
being the current account.

 Whereas the current account reflects a nation's net income ,

the capital account reflects net change in national
ownership of assets.

 The term "capital account" is used with a narrower

meaning by the IMF and affiliated sources. The IMF splits
what the rest of the world call the capital account into two
top level divisions: financial account and capital account,
with by far the bulk of the transactions being recorded in
its financial account.
CAPITAL ACCOUNT

1. Long Term Capital - Official loans:

borrowing and payment between countries -
Private investment

2. Short term capital:

- Commercial bank
- Other financial institution: EPF, Tabung Haji, PNB

Change in central bank reserves

TUTORIAL

1. Distinguish between BOP and BOT.

2. Students need to identify the

elements of international trade in
the ‘New Economic Model’ announced
by our Prime Minister in 2009.
 TAZKIRAH
“Success is not the key to happiness. Happiness is
the key to success. If you love what you are doing,
you will be happy and successful…”