This study explores the trade-related impacts of rapid growth of China and India on the Malaysian economy and evaluates policy options to better position Malaysia to take advantage of these changes. Higher growth in China and India is likely to raise Malaysia’s national income and to expand Malaysia's natural resource and agricultural exports while putting downward pressure on exports from some manufacturing and service sectors. Increases in the quality and variety of exports from China and India are likely to substantially increase the overall gains to Malaysia. The expansion of the natural resource sectors and the contraction of manufacturing and services reflect a Dutch-disease effect which will raise the importance of policies to facilitate adaptation to the changing world economy and improve competitiveness. Preferential liberalization with India and completely free trade with China would provide greater market access gains than MFN liberalization, but neither would be as effective in increasing income as MFN liberalization, and FTAs would lead to greater competitive pressure on many of Malaysia’s industries than MFN reform. Increased investments in education and infrastructure could boost manufacturing and services sectors in Malaysia, while improving trade logistics would benefit sectors with high transport costs, including the agricultural and resource-based industries.
