Malaysia between China & US - walking the fine line between taking sides and being neutral

China is a main foreign direct investment (FDI) player in Malaysia, having overtaken traditional investors that the US has been since 2016. Perhaps the most popularly known example of China’s FDI in Malaysia is in automotive where Geely is the 49.9% owner of Proton (with 50.1% owned by DRB-Hicom).

However, the trade war and reshoring by American multinational companies (MNCs) – and not least the debacle arising from the East Coast Rail Link (ECRL) renegotiation in the aftermath of the 2018 general election – may yet see a reversal taking place.

In 2019, US FDI jumped to RM11.5 billion as compared to the year before at RM3.2 billion for last year (representing a 259% spike).

By comparison, inflows from China were valued at only RM4.4 billion, which was actually below the quarterly average in 2019.

Hence, despite our increasing reliance on China for FDI as one of the means for economic growth and development, we have not weaned or decoupled ourselves from American MNCs. And just like the US through its MNCs, China (both state-owned/parastatal and private entities) is a very important partner for tech transfer. Of course, de-coupling is neither necessary nor desirable, especially given the complex of inter-dependent supply chain linkages in globalisation.

To state another truism, even China & US continue to be dependent on one another despite the latter’s containment policy applied to the tech sector that parallels China’s “dual circulation” strategy (see e.g., “The coming tech Cold War with China: Beijing is already countering Washington’s policy” by Adam Segal, Foreign Affairs, Sep’ 9, 2020).

The “dual circulation” strategy is intended to only reduce China’s own dependence on MNCs for its exports and hence global supply chain linkages with the US over time in an effort to spur the localisation of technological applications and innovations; and not least to boost domestic consumption.

How far this is a viable longer-term strategy and outlook remains to be seen.

Meanwhile, we should also be coming up with a strategy of our own, i.e., in terms of localising tech know-how and accelerating and increasing localisation of tech transfer mainly to our small-and-medium sized enterprises (SMEs) to reduce reliance on MNCs as driver of exports.

This will also help to reduce our balance of payments (BOP) deficit when it comes to imports of capital goods (heavy machinery, industrial/manufacturing equipment) for the purpose of producing consumer goods for exports which contributes to outflow of the ringgit only to be exchanged for the USD or renminbi, for example.

In this, it’s right that we haven’t taken sides in the tech “cold war” between the China and US.

We need both (and in fact have benefitted from the reshoring and supply chain reconfiguration) and so far, there’s no indication whatsoever that Huawei’s presence in Malaysia – which is critical for our advancement into the 5G era – is not conducive to or inimical to our national security.

On the South China Sea (SCS), while we need to stand firm against China’s “expansionism” and promote a multilateral approach to countering the threat to our territorial sovereignty (and that of our Asean neighbours), including continuing military cooperation with the US in the form of e.g., joint-exercises – the annual “Bersama Warrior”, there’s no need to enter into any Nato (North Atlantic Treaty Organisation) type arrangement(s) that’s overly and formally belligerent in nature.

And we shouldn’t be so over-dependent on China, economically, in the hope that perhaps the country would be more compromising on the SCS issue.

In other words, there’s no need for us to engage in what international relations (IR) scholars label as “bandwagoning” (allying with the country that’s considered threatening) or “counter-balancing” (allying with other against the threatening country).

Perhaps, the term “frenemy”, although sounds unpalatable, would be a better policy.

Malaysia should treat both China and US with a certain “cageyness” albeit in different contexts and ways.

Whilst we can’t accept China’s nine-dash line as intrusion into our Exclusive Economic Zone (EEZ) as well as contravening basic norms of international law and the United Nations Convention on the Law of the Sea (Unclos), Malaysia mustn’t become an unwitting pawn in the geopolitical and geostrategic agenda of another, rightfully or wrongfully. This might eventually drag us into outright conflict – turning the South China Sea flashpoint into the grim reality of war.

China would respect our stance on what is in our national interests (territorial integrity and national sovereignty) and, by extension, of Asean as whole.

What China can’t accept is what it deems to be foreign interference in its own backyard, namely from the US.

This means that any outright military confrontation with China with direct US participation would only be the last resort (like an “after-thought”) – where all other options have been exhausted in the face of the unlikelihood of all-out aggression.

At the end of the day, China still wants the SCS issue to be resolved bilaterally set against the benchmark and framework of the regional Code of Conduct for the South China Sea (COC) that’s still being negotiated.

On our part, a multilateral strategy that complements the bilateral approach should be adequate to ensuring that the SCS issue is resolved amicably and definitively.

In short, Malaysia are friends with both China and the US – except when our own national interests are at stake.

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Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.