Malaysia's 2007 Trade Figures: U.S. Economic Woes Take

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 000099

SIPDIS

SIPDIS

DEPT FOR EB/TPP/BTA, EAP/EP AND EAP/MTS
DEPT PASS USTR FOR BARBARA WEISEL AND DOUGLAS BELL

E.O. 12958: N/A
TAGS: ECON ETRD MY
SUBJECT: Malaysia's 2007 Trade Figures: U.S. Economic Woes Take
Their Toll



1. Summary. After years of strong export growth that has formed the
backbone of Malaysia's economy, Malaysia's trade growth leveled off
in 2007, with exports growing just 2.7% from 2006. The
manufacturing sector, which accounts for 75% of Malaysian exports,
grew just 0.2%. A surge in palm oil exports helped offset the weak
figures for manufactured goods, though palm oil exports only account
for 6.2% of total exports. Malaysia still depends heavily on
exports of electrical and electronic (E&E) products; falling demand
for such products in most of Malaysia's major export markets,
including the United States, was the prime culprit for the weak
export results. U.S.-Malaysia two way trade declined from USD 49.1
billion in 2006 to 44.5 billion in 2007. In announcing the 2007
statistics Trade Minister Rafidah Aziz professed optimism for
accelerated export growth in 2008, to be driven by strengthening
global demand for E&E products. She scarcely mentioned the United
States (and made no mention of our ongoing FTA negotiations),
emphasizing instead Malaysia's intention to strengthen its trade
with China, India, and other fast-growing economies. End summary.

Trade is growing, but not very quickly
--------------


2. Malaysian Trade Minister Rafidah Aziz announced preliminary 2007
trade figures at a press conference in Kuala Lumpur on February 12.
Rafidah put a positive spin on the 2007 statistics, noting at the
outset that Malaysia's total trade hit a record high of RM 1.11
trillion (USD 341 billion). However, this figure marked just a 3.7%
increase from RM 1.07 trillion in 2006. Malaysia's trade surplus
shrank last year as imports grew at 4.9 % while exports grew just
2.7 %; this was only the second time in the last decade that imports
grew faster than exports. The tepid export growth figure was the
lowest since 2001 (when the number of exports actually fell),and
was less than a third of the growth registered in 2006.


3. The manufacturing sector, which accounts for 75% of Malaysian
exports, registered just 0.2% export growth in 2007. Electrical and
electronic (E&E) product exports, which accounted for 59% of
Malaysia's manufactured exports, decreased by 5.2%. This reflects
an 18% decrease in E&E exports to the U.S., as well as decreases in
such exports to Singapore (8.5%),Hong Kong (6.4%) and Japan (2%).
Of Malaysia's top five destinations for E&E exports, only China
registered an increase (29.9%),though it still accounts for less
than 10% of such exports.


4. One significant success story for Malaysian exports in 2007 was
palm oil. The value of palm oil exports increased by 45.5%, and now
account for 65% of agricultural exports and 6.2 % of total exports.
Palm oil exports registered strong growth in the three leading
export markets: China (70.1% growth),Netherlands (31.6%) and the
U.S. (54.4%). Though the U.S. is Malaysia's third largest export
market for palm oil, however, the total value of such exports was
just RM2.6 billion (USD 800 million).

Declining Trade with the United States
--------------


5. Seeking a positive overall message on Malaysia's trade in 2007,
Rafidah only briefly mentioned Malaysian trade with the U.S.
Nevertheless, Malaysia's largest single trading partner could not be
completely ignored. Rafidah announced that exports to the U.S.
declined 14.5% in 2007 to RM95 billion, compared to RM110 billion in

2006. Imports from the U.S. also fell sharply, by 9.2% to RM 54.7
billion, from RM 60.2 billion in 2006. Total trade with the U.S.
declined by 12.7% to RM 149 billion, from RM 170.8 billion in 2006.
U.S. Department of Commerce statistics released February 14 confirm
the weakening trade relationship. According to Commerce, two-way
trade amounted to just USD 44.5 billion in 2007, down from USD 49.1
billion in 2006. Malaysia now ranks as the U.S.'s 16th largest
trading partner, down from 10th place just two years ago.


6. Although the E&E sector had by far the most significant impact on
the decrease, other sectors experiencing sharp export declines
included wood products (down 18% to RM 2.8 billion) and textiles and
apparel, down 8.9% to RM 2.7 billion. E&E exports continued to
constitute 75% of all exports to the U.S., a figure that has
remained fairly consistent in the last decade. This consistency
reflects Malaysia's inability to significantly diversify its export
base, notwithstanding its oft-publicized efforts at trade
diversification.

Seeking More Markets
--------------


7. Given the projected slow growth in 2008 in many of Malaysia's
major export markets such as the U.S., Japan, and the Netherlands,
Malaysia is looking towards booming China and India to boost its
export performance. Rafidah expressed optimism that export growth

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will be much stronger in 2008 globally, as even weakened economies
like the U.S. begin to improve, and she suggested that export growth
approaching 7% was feasible. Rafidah noted that semiconductor
devices and integrated circuits will remain a mainstay of Malaysia's
E&E exports in 2008, and said that forecasts that this industry will
grow by 7.7% globally was good news for Malaysia.


8. Rafidah spoke at some length regarding Malaysia's intention to
open up additional export opportunities through additional free
trade agreements, in particular with India, with which Malaysia held
a first round of talks in early February. She also encouraged
Malaysian firms to take advantage of the FTAs with Japan and
Pakistan. Rafidah made no mention of the ongoing FTA talks with the
U.S., however.

Comment
--------------


9. Rafidah's characteristically upbeat performance could not
disguise Malaysia's weak 2007 trade statistics (though the
mainstream Malaysian press emphasized the positive parts of her
presentation). Malaysia's overwhelming reliance on E&E exports has
been of great benefit to its economic development over the years,
but a softening of global demand in the sector highlights the risk
that come from having an undiversified export base. Malaysia's
consistently strong trade ties with the U.S. also had negative
implications in 2007 given the U.S. economy's weakness. It may only
be a matter of time before we hear some Malaysians question the
wisdom of Malaysia seeking an FTA with the U.S. under the current
circumstances.

KEITH