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As tensions ratchet up between two of Malaysia’s biggest trading partners, the US and China, the south-east Asian nation is increasingly looking to hitch its wagon to its more successful neighbour, Singapore.
A special economic zone straddling the two countries — along with a raft of initiatives to build stronger ties — has been designed to help the pair withstand tougher global economic trading conditions.
“We are entering a new era where global tensions are here to stay,” warned Singapore’s Prime Minister Lawrence Wong this month at the signing of an agreement to create the Johor-Singapore Special Economic Zone. “The world is becoming a more dangerous and troubled place. This is not going to go away in the near term.”
Standing at his side, his Malaysian counterpart Anwar Ibrahim added: “We have to strengthen ourselves as a regional force to be able to withstand the unpredictable pressures from other areas or groups or regions.”
Malaysia’s closer ties to Singapore are part of a broader push by the former to use its chairmanship of the Association of Southeast Asian Nations this year to forge stronger links with its nearest neighbours, as global trade networks become increasingly balkanised.
“[Trade wars] could create opportunities for Asean,” Abdul Rasheed Ghaffour, Malaysia’s central bank governor, told the Financial Times, though he conceded that global growth would be harmed by increased protectionism.
The two countries have not always been close. It has been 60 years since Malaysia expelled Singapore from its federation, forcing the latter into independence as a city-state amid racial tensions and political clashes between both sides.
For most of the past six decades, the two countries have viewed each other with suspicion and been locked in a deep rivalry, one in which Singapore, Malaysia’s biggest trading partner, has been the clear victor. It has established itself as a global trading and finance hub, with GDP a head of $94,000 compared with Malaysia’s $14,400.
But Donald Trump’s return to the White House this week, his promise to implement a spate of tariffs and a slowing Chinese economy have made Malaysia and Singapore look to strengthen ties.
“Generations of Malaysian and Singaporean leaders had to manage [this rivalry] and that stopped us from doing what is common sense to everyone, which is to integrate Singapore and Johor better,” Malaysian economy minister Rafizi Ramli told the FT, referring to the Malaysian state bordering Singapore. “Operating as nearly an economic unit will offer investors the best of both worlds.”
Modelled on China’s Shenzhen special economic zone, which borders Hong Kong, but is twice its size, the JSSEZ is central to Malaysia’s ambitions to build on its 5 per cent economic growth last year.
Malaysia has already positioned its economy to play a key role in the global demand for artificial intelligence, from developing one of Asia’s biggest semiconductor hubs in the northern island of Penang over several decades, to more recently welcoming big tech companies to set up data centres in the south.
It has also benefited from “China plus one”, a strategy in which multinational companies complement their Chinese operations with investments in regional countries to diversify risk and lower costs.
The government hopes the JSSEZ will add $26bn a year to its economy by 2030, bringing in 20,000 skilled jobs and 50 new projects.
It has offered generous corporate tax rates of just 5 per cent for 15 years for companies investing in areas such as AI and quantum computing, as well as manufacturing high-end equipment. That compares with typical rates of 15-24 per cent in Malaysia and lows of 17 per cent in Singapore.
Johor has already been a critical engine for the Malaysian economy in recent years, thanks in part to its pro-business sultan becoming the country’s king a year ago.
The state has emerged as a global hub for data centres, drawing in more than $25bn of investment from the likes of Nvidia, Microsoft and TikTok owner ByteDance and creating 35,000 jobs.
While Johor provides plenty of cheap land, water, energy and labour to develop the projects, Singapore offers an entry point for investors.
“Conceptually [the special economic zone] has the ability to leverage Singapore’s global finance and logistics centre capabilities with Johor’s access to competitive land, labour and energy to deliver a differentiated proposition — especially for supply chains looking for alternatives to north Asia amid the US-China trade war,” said Maybank analyst Thilan Wickramasinghe.
But it is not just big tech companies the JSSEZ is aimed at attracting. Johor also hopes to draw everything from Singaporean banks setting up administrative offices to aerospace, electronics and pharmaceutical companies building manufacturing bases.
The two neighbours have talked about closer collaborations on a range of areas, including cross-border electricity trading, digitalisation, infrastructure projects and green energy. There are also plans to improve transport links across the strait separating the two countries, one of the busiest borders in the world.
“How does a small, non-aligned trading nation like Malaysia wade its way through trade wars and geopolitical tension?” said Rafizi. “There’s only one option for countries like ourselves and Singapore: we collaborate better with each other and harness our synergy.”
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