Malaysia: Selected Issues

This Selected Issues paper examines variation in different types of Trade Policy Uncertainty (TPU) on ASEAN economies especially Malaysia. The paper studies TPU effects by improving on the measurement of TPU and exploring spillovers from other economies’ TPU shocks. The results indicate that third-party protectionist TPU shocks are the most detrimental to output per capita, followed by third-party agreement TPU shocks and own protectionist TPU shocks. For third-party TPU shocks, declines in investment and private consumption disproportionately offset stronger trade balances that likely stem from reallocated trade flows to ASEAN, in line with prior literature. Own protectionist TPU shocks weigh directly on economies’ trade balances while putting upward pressure on inflation over the medium term. Finally, in contrast to the other findings, own agreement TPU shocks are associated with a small boost to output per capita. This may reflect anticipatory investment effects for potential expanded economic activity once the tension is resolved; however, that potential does not appear to materialize in stronger trade balances, and the initial boost to investment and its effect on output per capita wane over time.