free trade agreement and its success: an evaluation in the … · free trade agreement and its...

# Senior Lecturer, Economics and Quantitative Analysis Unit, Faculty of Business, MultimediaUniversity, Malaysia

BULLETIN OF POLITICAL ECONOMY9:2 (2015): 171-196

Free Trade Agreement and its Success:An Evaluation in the Light of Malaysia’sStrategic Policy Plans and Reforms

PRITISH KUMAR SAHU#

This paper evaluates Malaysia’s trade with its free trade agreements(FTA) partners in the light of its policy initiatives. It underlines that theparticipation of a country in the FTA would not be successful withoutthe government’s targeted policiesand properly enforced laws. In thiscontext, it first discusses in details the traditional trade barriers and thesubsequent steps taken under different policy framework to increasethe sectoral efficiency and boost trade. Later the study seeks to investigatethe Malaysia’s trade performance with the FTA partners and the successso far. The study finds that Malaysia has done significant progress inthe trade, particularly with the FTA partners with the implementationof appropriate policy and trade reforms.

Key Words: Trade; government Policies; trade barriers; FTA

INTRODUCTION

Trade plays an important role in an increasingly interconnected andinterdependent world. It is considered to be one of the key forces inbringing development of a country along with reducing poverty,creating employment and spurring economic growth. An increasingtrade between countries gives the opportunity to achieve quicker andhigher level of development is well realized by most of the countriesin the world. Malaysia’s realization to liberalization and marketopening measures is evident with the fact that its trade stands about160% of the GDP. In order to make much required structural shift inthe economy, Malaysia has transformed itself from a primary producerto gradual industrialization and to a highly-open economy throughgreater trade and financial integration.

The widespread liberalization of trade and investment hasincreased the participation of every nation, be it developed or thedeveloping, though the magnitude of gain from the participation differs

172 / PRITISH KUMAR SAHU

among countries. A more stable and reliable trade and investmentenvironment promoted through the active government participationcan upgrade every economy in the international trade by volume andvalue. However, the extent of participation in the international tradeis more driven by the forms of the governance as there is slow progressin the multilateral negotiations due to the several institutionalchallenges (IMF 2013). Stated differently, governments has a key roleto play in establishing a conducive policy environment that will enableproducer and the exporter to make use of the opportunities to getconnected with the world through trading activities (UNCTAD; 2013).Realising this, Malaysian government has undertaken several policyand initiatives which helped its economy to grow at a faster ratein thelast three decades. The commission on Growth and Development putMalaysia among the only 13 countries that registered sustainedeconomic growth of 7% or more for a period of 25 years or longer.Later Malaysian government well realized the creation of opportunitiesfor the Malaysian firms through trade agreements. It realized that thetrade agreements opens the new opportunities to sell more made inMalaysia goods, services, agricultural and petroleum products to theexternal customers. The FTAs have been proved to be one of the bestways to open up the foreign markets for the domestic suppliers. Thereduction in the barriers of export, creation of a stable and a transparenttrading environment have helped many countries to export theirproducts to the trading partner countries in the world. While somecountries experiences an increase in export to the partner countries,some other experiences a decline in the export to its trading partners.In this context, the present study explores briefly the strategic policychanges and the gradual liberalization of Malaysia’s policy towardsits domestic sector and the trade growth. The policy and the tradegrowth in aggregate and towards the FTA partner countries arediscussed separately and systematically to get a clear picture of tradegrowth in Malaysia.

Given the above background, the present paper attempts to studythe trade performance, particularly the trade growth with the FTApartners in the light of the policy changes and sectoral reforms. Tostudy the above it is broadly organized as follows. The second sectionsketches a broad outline on Malaysia’s trade and tariff policy in thechanging dynamics of trade. The third section briefly describes thesectorial policy reforms that led to the changes in the trade andinvestment pattern in the country. The fourth section briefs the overalltrade performance of Malaysia. The fifth section evaluates in details

FREE TRADE AGREEMENT AND ITS SUCCESS / 173

the trade performance with the FTA partners and its success in thelight of government’s strategic policies. And the last section concludesthe findings.

A BRIEF OF MALAYSIA’S TRADE AND TARIFF POLICY

The earlier trade system, which primarily focused on selling theproduced product of one nation in another, has gone through asystematic change in the GATT and subsequently in the WTO regime.The trade facilitation is more revolved around the changes in the tariff,quotas and the policies towards the dumping and anti-dumping relatedmatters. Malaysia in this regard has undertaken appropriate policymeasures and is evident from its strong economic performance in thelast couple of decades. With the adoption of outward oriented traderegime, replacing largely the import substitution policies of 1960s and1970s, Malaysia established the pillar of industrialization during theearly days of development. Industrialization and investment wasencouraged through moderate tariff imposition, direct importrestriction, and the establishment of state owned enterprises and heavyindustries (Lim 1992). However, the push for heavy industries and theadverse trend in the price of Malaysia’s major export products resultedin economic crisis during the mid-eighties there by bringing an end tothe state led heavy industrialization push (Corden 1996). Later thepolicy emphasized the role of private sector with an export orientedindustrial approach with greater participation of FDI. During lateeighties, the realization towards a market oriented reforms involved asignificant amount of tariff reduction and the removal of quantitativeimport restrictions. Except few sensitive industries, the averageeffective rate of manufacturing protection declined continuously inthe post eighties. And in the early nineties, the new policy approach totransform Malaysia into a developed nation has introduced the Vision2020 documents focusing towards all macroeconomic directions. Thenew policy vision pushed for industrial upgradation and emphasizedtowards the domestic and international linkage of the manufacturingsector for its growth and competitiveness. The main focus of thenational development strategy continued to remain supportive towardsthe private sector in the light of the open trade and investment regime.

In late nineties, the onset of the financial crisis which derailed theeconomy in its targeted growth path have seen some changes in policytowards the tariff and quotas. Subsequently, tariff for the automobilesector1 and the construction equipment have increased. Many productssuch as iron, non-alloy steel, some chemical and electrical products


were brought under the non-automatic import licensing. At the sametime high emphasis was given towards the FDI inflow by extendingseveral beneficiary measures towards the foreign investors. Thisincludes profit share, repatriation of capital, increase in the FDI cap inseveral sectors such as new investment, telecommunication, brokingcompanies, insurance sector and real estate investment etc.

Following the signing of Malaysia into WTO agreement in 1995,the tariff rate declined dramatically on many products. As part of itscommitments, Malaysia has bound only 65% of its tariff lines. Appliedtariffs have come down in successive annual budget exercises to anMFN average applied rate of 8.1% in 2005, compared to 9.2% in 2001.Along with the rule based multilateral agreements under WTO,Malaysia continues to focus on the regional and the bilateral tradingagreements for a greater integration with the World economy. Thetrade policies are formulated accordingly to boost export to both thetraditional market and the new emerging and the developedcountries. As part of the strategies it emphasizes more on high qualityinnovative products, creating brand awareness, consumer recognitionand reduction of the over-reliance on the electrical and electronicsproducts. WTO’s trade policy review (2014) articulates “Despite aslowdown in total factor productivity (TFP) growth during 2008-12,Malaysia remains externally competitive with its comparativeadvantage seemingly shifting from electrical and electronicsmanufacturing towards processed commodities and natural gas”. Theoverall trade policy in relation to the trade agreements focusedtowards the trade in goods, services and investment agreements. Butthe current focus has been shifted more towards export of servicesthrough the preferential trading agreements. In the recent past,Malaysia has increased its trading participation with the emergingeconomies such as China, India, Middle East countries and the EUnations.

With an objective to promote the trade and investment, Malaysiahas taken several aggressive initiatives in the recent past. Its policyfocus varies from the improvement in infrastructure to the increase infirm efficiency, competitiveness, business transparency and otherbusiness encouraging programs. This policy improvement has movedMalaysia up from 29th to 12th position in 2012 and further to 11th positionin 2013 on the trading across border parameter2. The latest World BankEase of Doing Business Report (2014) place Malaysia in the same leagueof Singapore, Hong Kong, New Zealand, the United States andDenmark. Among the major policy transformation programmes on the


trade facilitation initiatives incudes the National Policy forDevelopment and Implementation of Regulations (NPDIR), Customsmodernization and several export promotion activities. NPDIRintroduced by Malaysia Productivity Corporation aimed to meetinternational best practices in regulations or Good Regulatory Practices(GRP) by addressing the gap in the national regulatory infrastructure.The Government organisations such as Ministry of International Tradeand Industry (MITI), National Water Services Commission (SPAN) andFederal Agricultural Marketing Authority (FAMA) are currentlyparticipating in the pilot Project on NPDIR. Similarly, the custommodernization aimed at improving the effectiveness, efficiency,transparency and predictability of the customs administration andoperation. The main focus of customs modernization had been capacitybuilding, system development and output/outcome development.Similarly, to promote the local business, Malaysian External TradeDevelopment Corporation (MATRADE) is facilitating and promotingthe trade fairs, trade missions, specialized marketing missions andbusiness-matching programmes. MATRADE is also actively involvedin assisting foreign companies to source for suppliers of Malaysianproducts and services, and is represented worldwide at 40 locations inmajor commercial cities (TPR, 2014).

Higher tariff and other forms of trade restrictiveness negativelyaffect the export of a country (IMF; 2013). Realising the adverse impactof tariff and restrictiveness on trade, Malaysia has reduced the appliedMFN tariff gradually over time and continues to negotiate it with itspartner countries. It is seen that the average MFN applied tariff ofMalaysia is among the lowest in the ASEAN region. Though this variesacross sectors, but in raw materials, agricultural and industrial sectorMalaysia’s tariff is well below compared to many of its ASEANcounterparts and other FTA partner countries. Similarly, be itagricultural or non-agricultural products, the tariff lines/rates ofMalaysia have declined over the years. The low tariff of Malaysia couldwell be credited to the government’s policies and efforts to realize itsobjective of becoming a developed nation through higher trade,particularly the value added trade. According to Malaysian authorities,under the 2009 and 2011 Budgets, import duties were abolished forcertain items or reduced, while some products were exempted fromduties to curb inflationary pressures and support shopping activities.This effectively impacted about 300 tariff lines covering food products,electric goods, “tourism products” (cameras, watches, perfumes), andconsumer products (TPR; 2014).


Likewise, a comparative statistics shows that Malaysia’s averageapplied MFN tariff has reduced for the intermediate and the industrialproducts in the year 2009 over the year 2005. On the other hand, thereis a marginal increase in the average applied tariff for the agriculturaland the raw materials during the same period. However, in the year2013 the average applied MFN tariff for the agricultural and theindustrial products has dropped by 0.2 percentage points and 1.6percentage points respectively. Tariff protection varies substantiallyacross and within sectors, averaging 2.9% for agricultural productsand 6% for industrial goods in the same year. At HS2 digit level it isseen that many products enjoy zero average applied tariff3. However,articles of iron and steel, aluminum, explosives, rubber, ceramicproducts etc. face the highest average MFN applied tariff.

Table 2Maximum Average Applied MFN Tariff of Malaysia: Top 10 products

Product Name Simple Number of ImportsAvg. Tariff Total Lines Value in US$

Million

Articles of Iron or Steel (HS73) 21.56 200 2645.4Explosives; Pyrotechnic Products; Matches; 20.73 13 17.9Pyropho (HS36)Aluminum and Articles Thereof (HS76) 20.03 47 1474.0Rubber and Articles Thereof(HS40) 19.44 283 2201.0Headgear and Parts Thereof (HS65) 19.26 12 6.0Ceramic Products (HS69) 19.14 39 147.8Other Made-Up Textile Articles; Sets;Worn Clothin (HS63) 18.92 74 161.8Iron and Steel (HS72) 18.33 427 3649.0Manufactures of Straw, of Esparto or of 18.03 27 4.4Other Plai (HS46)Articles of Apparel and Clothing 17.71 107 119.5Accessories, Knit (HS61)Total Top 10 1229 10426.7Top 10 (In Percentage) 11.83 8.49

Source: Estimated from TRAINS, World Trade Integrated Solutions (WITS)

SECTOR WISE REFORMS IN MALAYSIA

Brief Policy Reforms in Agricultural Sector

In the agricultural sector, the main focus is on the production of foodcommodities and of plantation crops for international markets, led bypalm oil, rubber, and timber. The ninth five year plan (2006-2010) spellsthe agricultural sector as the third engine of growth after themanufacturing and services sectors. Agriculture is considered as oneof the National Key Economic Area under the economic transformation


programme of the country. During this period, the focus is diverted tothe development of large-scale commercial farming and venturing intohigh-quality and value-added primary and processing activities,particularly biotechnology. Focus on food productivity is given bybuilding of agricultural infrastructure, food production parks,aquaculture industrial zones and national feedlot centers to increaseproduction of fruits, vegetables, livestock and fish products duringthe ninth plan (TPR-Malaysia, 2009). This period has recorded anaverage annual value added growth by 2.1%, the palm oil being themajor contributor with 31.2% followed by forestry and logging (20.3%)and fishing (16.6%).

To increase the productivity and the efficiency, the governmenthad widened the farming method by strengthening the agriculturalR&D activities, use of modern technology, mechanization, promotinggreater private sector participation and higher value added activities.To strengthen the food sufficiency and value add of the agro basedindustry, National Agro-Food Policy 2011-2020 was introduced aimingat increasing the competitiveness and the sustainability of the agro-food industry along the value chain. It aimed at transforming theagricultural sector from fragmented and small scale farms to integrated,clustered and large scale agribusiness and towards a market drivenhigher value add products by 2020. Similarly, the government hasstrengthened the role of National Agriculture Training Council(NATC), Institute of Malaysian Plantation and Commodities (IMPAC),the agricultural training institutions and provides several competency-based business training at different times. In order to strengthen theagricultural sector the government has introduced several agriculturalcourses, including the diploma and the advanced diploma level studiesand training. In order to boost the investment and productivity, thegovernment is providing integrated infrastructure especially in theconcentrated agriculture zone such as Permanent Food Production Park(TKPM), Aquaculture Industrial Zone (ZIA) and Palm Oil IndustrialCluster (POIC). To avoid the crowding out of private sector thegovernment have reduced the involvement of subsidiaries ofgovernment agencies in production and agribusiness. The NationalAgri-food Policy also emphasized on food safety and nutrition byimplementing Good Agricultural Practices (GAP), GoodManufacturing Practices (GMP), Hazard Analysis and Critical ControlPoints (HACCP). The government also implemented the nationalcommodity policy 2011-2020 to modernize and transform thecommodity industry towards a more competitive and sustainable level


along the value chain. The policy aim at increasing the income ofoperators and smallholders in the commodity industry and promoteMalaysia as the centre of excellence in R&D, technology developmentand the downstream processing of industrial commodities.

Brief Policy Reforms in Manufacturing

The expansion of manufacturing sector has got a big boost since thefifth five year plan after the implementation of Industrial Master Plan(IMP) 1985-90. Since then it played a substantial role to the overallexpansion of the economy contributing the highest to the employmentand the leading sector for Malaysia’s growth. The IMP given majorway to the private sector with targeted policy orientations supportedby significant legislative changes. It focused on twelve importantsubsectors with emphasis on productivity, investment, linkages, export,training and R&D aspects. Similalry, the 10th Malaysian plan and theNew Economic Model also emphasizes on the improvement of theinnovation capacity aimed at achieving long-term globalcompetitiveness through the transformation and innovation of themanufacturing. These initiates have well improved Malaysia’s positionin the international market as compared to many developing anddeveloped countries in the world. The global competitiveness report(2009) ranked Malaysia 16th among the 134 countries for thesophistication of its financial markets of which investor protection andlegal rights ranked 4th and 8th respectively. The global competitivenessIndex (GCI) 2014-15 ranked Malaysia at 20th (among 144 economies),the best ranked of Emerging and Developing Asian nations, ahead ofAustralia, France, Korea, Italy, Spain, ASEAN (except Singapore) andBRICS countries. Continuing its upward trend, Malaysia makes its wayinto the top 20 for the first time since the current GCI methodologyintroduced in 2006. Among the large emerging economies Malaysiaranks the highest in the components of the public institutions, marketcompetition and labour market efficiency4. It has moved up in the rankin all these parameters compared to the last two GCI reports. Thiscontinuing movement in several parameters of competitiveness indexcan be attributed to the persistent effort of the government and itsinstitutions.

As far as the tariff and the duties are concerned, Malaysia hasreduced substantially the applied MFN tariff and is continuing to doso with every successive trade agreements. IT is estimated from thewits database that the MFN applied manufacturing tariff is reducedfrom 9.5% in 2005 to 8% in 2009 and this declined to 6.2% in the year


2013 (at HS 2 digit). The sectors such as textiles, clothing and footwear,and base metals and articles thereof has seen a significant drop in theaverage MFN tariff protection over the years. As part of manufacturinggrowth and export promotion, government also provides income taxreduction and exemption on certain items. More exemption is given tothe small and medium sized enterprises (SMEs) and is proposed toreduce their tax to 19% by the year 2016 as against 24% for othercorporate income tax.

Further, the income tax is exempted for 30% of the net increase innet export, provided the manufacturing exports increases by at least50% over the previous year. On the other hand, if a manufacturingcompany succeeds in penetrating new markets, 50% of its increasednet export income may be exempted (MITI, 2014). The SMEs werehelped and cooperated in the areas of innovation and technologyadoption, human capital development, access to financing at a lowinterest rate, market access support, legal and regulatory environment,and infrastructure for their further strengthening and growth. Thegovernment has also initiated various fund and programs to help themin their R&D and training activities. Similarly, the policy concerningthe investment and the import of materials has also been relaxed at agood pace. In addition to this the government has relaxed ceiling onthe equity participation, entry of investment on strategic sector ofimportance and establishment of five economic growth corridors for afree trade and business incentives and to promote the investment ineach region. Similalry, the government has allowed duty free importof raw materials which cannot be availed locally, otherwisemanufacturers were encouraged to obtain locally for greater domesticvalue addition.

Brief Policy Reforms in Oil and Gas Sector

With 409 oil and gas (O&G) fields and biggest Liquefied Natural Gas(LNG) production facility, Malaysia is the second largest O&G reservesin South East Asia and third largest exporter of LNG. The oil and gassector which contribute one fifth of the GDP and about 40% of thetotal revenue over the past decade has seen a few changes in the policyin recent past to attract investment for a sustainable long term growth.With a vision to secure the first position in the oil and the gas sector inthe Asia Pacific region by the end of 2017, Malaysia has introducedseveral transformation programs in the line of the vision 2020.

To safeguard the country’s oil and gas resources, the PetroleumDevelopment Act 1974 gives the exclusive ownership to the state owned


Petroliam NasionalBerhad (PETRONAS) and is the regulator and thelicensing authority for the Malaysian upstream oil and gas industry.Under the Petroleum Income Tax Act 2010, upstream petroleum andgas companies are subject to 38% tax on income from the sale of crudeoil and natural gas extracted from Malaysia. On the other hand, thetax rate for the income generated from the downstream (marginal oilfield development) petroleum activities5 are taxed at the rate ofstatutory 25%, down from the existing 38%. It provides investmenttax incentive between 60 to 100% of qualifying capital expenditure(factory, plant, machinery or other equipment used for the approvedproject) against the statutory income of first five years. The governmentaccelerated the Capital Allowance to five years from ten years formarginal oil field Development. Malaysia has mostly eliminated6

import tariffs on petroleum and gas and they are not subject to anyimport licensing requirements.

The government also provided several other tax incentives throughthe Global Incentives for Trading (GIFT) Programme to attract theglobal petroleum trading companies to use Malaysia as their base totrade petroleum and related products. GIFT extended the provision of0% tax rate for LNG trading companies for the first three years ofoperation. Similarly, under this programme, the government imposed3% flat corporate tax and 50% exemption on personal income tax forforeign professionals. Malaysia Petroleum Resources Corporation(MPRC) was formed in April 2011 to promote, reform, develop andtransform the oil and gas sector. It works with several foreignprofessionals, universities and the industry trade association and otherforeign agencies to promote the growth of Malaysia’s O&G industryin areas such as human capital development, technology transfer andbusiness opportunities.The government encourages foreign companiesto set up their presence in the region via strategic joint-ventures andpartnerships with Malaysian companies.

Brief Policy Reforms in Service Sector

The IMP3 (2006-2020) has focused on the services sector assuming thelead role in driving economic growth as against the targetedmanufacturing sector during the IMP2 (1996-2005). With theimplementation of IMP3, the government is aiming for a robust growthled by the service sector with the use of high technology and skilledworkers. The IMP3 target the service sector contribution in GDP toincrease to 66.5% by the year 2020, up from 59.5% in 2013. In otherwords, the IMP 3 targets an annual average growth of service sector


by 7.3% as against the achieved 6% during the IMP2. The governmentthrough IMP3 has identified 8 strategic services sub sectors7 which isimportant for contributing to greater growth as well as to exports.

Over the years, several initiatives have been taken to facilitate thegrowth of service sector. The establishment of the Malaysian ServicesDevelopment Council (MSDC) in 2007 targeted to transform theservices sector into a globally competitive industry to help more in thepath of economic development and growth. During April 2009, theGovernment has liberalized 27 subsectors belonging to the servicesector (TPR; 2009). This includes the health and social services, tourismservices, transport services, business services and computer and relatedservices. Following this announcement, the government have begunto remove the restriction (partially or fully) on the foreign equitystarting from 2012 in 17 services subsectors belonging to six sectorsnamely professional services; communications services; distributionservices; educational services; environmental services; and healthrelated and social services (TPR; 2014). In total, Malaysia has liberalized96 subsectors, only next to Thailand (104 subsectors) in the ASEANcountries. The current changes in the policy towards service sector isnotified in the 10th Malaysian Plan (2011-2015). The 10th plan emphasizeson the changing role of the government towards the policies andregulations inhibiting services liberalization. The government aims atreviewing the requirements for commercial presence, composition ofboards of directors, and residency for expatriates. The sector wisereforms since the inception of 10th plan are reported in table 2.

Table 2Malaysia’s Service sector Reforms: Sector wise

Telecommunications Service In this sector Malaysia allowed 100% foreign participationin application service providers in April 2012. However,only 70% foreign participation currently permitted intelecommunications services for network facil itiesproviders and network service providers

Distribution Services The government started allowing 100% foreign ownershipin department and specialty stores since 2012. However,the foreign owned hypermarket should have 30%bumiputeraequity holdings and hypermarkets must reserveat least 30% of space for goods and products manufacturedby bumiputera-owned SMEs.

Legal Profession Service The legal profession Act of July 2012 allowed foreign lawfirms to practice in Malaysia through an internationalpartnership or qualified foreign law firm license, andempower local firms to employ foreign lawyers subject tocertain conditions.

contd. table 2


Architectural Service Foreign architectural firm is allowed to operate in Malaysiaonly as a joint-venture participant in a specific project withthe approval of the Board of Architects. Foreign architectsmay not be licensed in Malaysia, but are allowed to bemanagers, shareholders, or employees of Malaysian firms.

Engineering Services A few amendments in this sector are still pending andexpected to be implemented quickly. However, as per thepresent law, foreign engineers may be licensed by theBoard of Engineers only for specific projects and must besponsored by the Malaysian company carrying out theproject. Similarly, the foreign firms are allowed for apermanent commercial presence only if all directors andshareholders are Malaysian.

Auditing and Taxation Service Foreign accountants and auditors are allowed to whollyown a practice in Malaysia only after registering with theMalaysian Institute of Accountants (MIA) and getting thelicense from the ministry of finance.

Audiovisual and Broadcasting This sector is mostly reserved for the domestic players.The TV programming permits only 20% for theforeigncompanies and 40% for the radio programming

Financial Services In 2009, the limits of foreign equity is increased to 70%from the existing 49% in Islamic banks, investment banks,insurance companies, and Islamic insurance operators.Foreign equity of 100% is allowed for fund managementcompanies providing wholesale services. Further inDecember 2011, the govt. released ten years financial sectorblue print. Under this, the new licenses is issued with anobjective to promote high value-added economic activities,filling the gap in demand for financial services, enhancingtrade and investment linkages, and providing high-skilledemployment opportunities. In 2012, the governmentannounced 70% tax exemption for five years to foreigncompanies establishing treasury management services inMalaysia

Education Service Permission to establish private universities in Malaysia isallowed with 100% foreign ownership (up from 51%) since2012. These universities must complies to the condition ofprivate higher educational institutions with universitystatus, must attract 30% international students within fiveyears of commencing operations and must be ranked amongTop 100 universities in the world by 2015. Similarly, since2012, 100% foreign ownership is permitted to establishinternational schools (20% previously), foreign trainingcenters, vocational and technical secondary schools.

Environmental and Since January 2012, the government allows 100% foreignHealth Service equity in the provision of incineration Services and to

establish dental and medical specialist clinics. Similalry,the Foreign dental and medical specialists may apply topractice in Malaysia, through their employer, to theMalaysian Dental Council or the Malaysian MedicalCouncil, respectively.

Source: Compiled from 2013 National Trade Estimate Report on Foreign Trade Barriers,US Trade Representative, Trade Policy Review 2014 and various Ministry ofInternational Trade and Industry reports, Malaysia.


MALAYSIA’S TRADE PERFORMANCE

Malaysia remained among the highly trade open country in the region.Manufacturing growth and its export remained a major driver ofeconomic growth for Malaysia, much of this driven by Malaysia’sexport-led industrialization model reliant on foreign direct investment(FDI). Though the recession in late 2000 hit the export industry,bringingdown to US$ 156.4 billion in 2009 from $198.7 billion in 2008 but,the improved policy measures, trade agreementsand the recovery in theinternational market has seen a boom in export to RM 720 billion(Approx. US$ 221.5 billion) in 20138, an increase by 2.7% over the lastyear. FTA partners mainly Australia, China, South Korea (ROK), Chileand New Zealand have increased their imports from Malaysia during2013. Malaysia’s trade to GDP ratio continued to remain high andestimated at 170% of GDP in 2013, despite a slowdown in the recentpast. A strategic geographical location of Malaysia coupled withpolitical stability, better infrastructure, low-cost supply of labor andother incentives have attracted the multinationals across the globe. Thisresults Malaysia among the top exporter from the region and labeledas the region’s third-most open economy to trade.

Similarly, import of Malaysia shows a growing trend mainly dueto the increased manufacturing activities accompanied by growinginvestment and domestic consumption. In the year 2013, import hasincreased to RM 649 billion (Appx. US$ 185 billion) up by 7% over thelast year. However, the total import in the year 2014 has registered agrowth by 5.3% (RM 683 Billion). The manufacturing import growthis the highest with E&E products tops the import basket in both 2013and 2014. Similarly, the import of capital goods remain robust as thelarge projects move forward in the economy. Other products such aspetroleum, machinery and chemical products and manufacturing metalcontinues to remain as the major products in Malaysia’s import basket.Even though Malaysia’s export has increased significantly over theyears, but the growing import of Malaysia has reduced the currentaccount surplus recently and posted a surplus of 4.0% of GDP in theyear 2013, the lowest level in 15 years.

MALAYSIA’S PTA AND TRADE PERFORMANCE

The number of RTAs and the coverage under it have increaseddramatically since the late nineties. The provision under the RTAs haswidened from the trade in goods to trade in services, investment,intellectual property, competition policy, trade facilitation andgovernment procurement (WTO, 2013). Countries undertake the RTAs


Figure 1: Malaysia’s export and Import of Goods: 1990-2014Source: Data from 1990-2013 is from UNCTAD and 2014 is from department of Statistics,

Malaysia. Note: Data for 2014 is until October (Provisional).

Figure 2: Malaysia’s export and Import of services: 1990-2013

Source: UNCTAD’S Total trade in services

to increase their participation in global trade and GVC, as is evidentfrom the existing studies (viz. Yi 2003, Hayakawa and Yamashita; 2011,Brooks and Ferrarini; 2012, Gereffi; 2014, Sahu; 2014). To evaluate towhat extent the increase in the trade agreements have increasedMalaysia’s participation in trade, the present study attempts to evaluatesystematically the increase in trade value and share with its FTApartners.

Participation of Malaysia in the Global Trade Agreements

The trade policy of Malaysia are increasingly aiming at more liberaland fair global trading environment to the rule-based multilateraltrading system under the World Trade Organisation (WTO). Alongside,Malaysia is also pursuing the regional and bilateral trading agreementsto complement the multilateral approach of trade liberalization. TheseFTAs primarily aims to seek a better market access by addressing both


the tariff and the non-tariff issues, promoting investment and extendingeconomic cooperation in several trust areas of economic importance.One such decision to realize these goals is the establishment of ASEANcommunity as a single market and production base characterised byfree flow of goods, services, investment, skilled labour and freer flowof capital. Many FTAs have successfully become effective withMalaysia, particularly after 2006. As of 2014, in addition to the ASEANeconomic community, the total number of bilateral FTAs into force forMalaysia is 6 (Japan, Pakistan, New Zealand, India and China) andsome more are under negotiations (Turkey, EU, TPP, TPS-OIC anddeveloping 8 countries TPA). As a member of ASEAN, Malaysia isalso caught up in the bloc’s regional FTAs dealing with China andKorea. Similarly, as of January 2014 Malaysia had signed investmentagreements with 68 countries of which 50 are already into force. Inthis context, table 4 shows the lists of FTAs in effect with the Malaysiaand the subsequent table (table 5) shows the progress of theseagreements and the goods traded under these negotiations.

Table 4Major FTAs in effect with Malaysia

FTAs Partner Countries Entry into force for Malaysia with thePartner Countries

Malaysia- AFTA January, 1992Malaysia- Japan (JEMPA) July, 2006Malaysia- Pakistan (MPCEPA) January, 2008Malaysia- New Zealand (MNZFTA) August, 2010Malaysia- India (MICECA) July, 2011Malaysia- Chile February, 2012Malaysia-Australia (MAFTA) January, 2013ASEAN- China July, 2003ASEAN-Japan February, 2009ASEAN-India January, 2010ASEAN- South Korea July, 2006ASEAN-Australia and New-Zealand (AANZFTA) July, 2009

Source: Compiled from Ministry of International Trade and Industry (MITI) Malaysia.

Table 5Progress of Malaysia’s FTAs with the Partner Countries

Malaysia- AFTA Reduction in tariff started since January 1993. The average tariffrates dropped to a mere 0.9% in 2009 from 12.8% in 1993 betweenthe original members of ASEAN-6 (Thailand, Malaysia, Indonesia,Singapore, Philippines and Brunei).

Tariff was eliminated for 99.11% of products starting January 2010between the six original members of ASEAN. Other ASEANCountries (Cambodia, Laos, Myanmar and Vietnam) willeliminate the tariff on almost all the items from 2015.

contd. table 5


ASEAN- China The tariff reduction covering the agricultural and the fisheriesstarted from January 2004 and for the non-agricultural/fisheriessince July 2005

Tariff rate reduced to zero for abt 90% of the products (7881product categories b/w China and the six original membersincluding Malaysia. The other four countries will follow it in 2015.

The average tariff rates for the Chinese products sold in ASEANregion is reduced from 12.8% to 0.6% in 2010. On the other hand,the average tariff rates for the ASEAN products sold in China isreduced to 0.1% from 9.8%.

ASEAN- South Korea Malaysia (including the other members of ASEAN-6) and Koreaeliminate the tariffs for 90% of all products by 2010. Vietnam willeliminate the tariff from 2016.

Malaysia-ASEAN- Japan Japan has a separate bilateral FTA with Malaysia along with themultilateral agreements. Agreed to reduce the tariff essentiallyon all goods within 10 years from the date of effective of JEMPA.Tariff eliminated for the Auto components and parts, Passengercars by 2010 and all other auto components by 2015.

Exemption of tariff on the iron and steel which are directly usedin the manufacturing activities. Eliminate tariffs on Malaysianimports of tropical fruits like mangoes, mangos-teens, durians,papayas and rambutans.

Japan will accept 1,000 trainees over the next 10 years fromMalaysia for human resources development in such areas asagriculture, education and information technology.

Malaysia-ASEAN-India Malaysia has given tariff concession for 140 items includingbasmati rice, mangoes, eggs, trucks, motorcycles and cottongarment to India. In contrary, India has given the tariff reductionfor 76 items and thereby given access to products such as fruits,cocoa, and synthetic textiles etc.

Tariff is eliminated for 82% of products imported from India toMalaysia under the normal track. In comparison to the 79.4% ofthe total products exported from Malaysia to India. The MICECAalso agrees to reduce the tariff in the services for 11 sectors and72 subsectors.

Malaysia-Australia With the effect of the agreement, 97.6% of the Australian goodsexported to Malaysia are enjoying the tariff free treatment. Thiswill increase to cover 99% of the total products imported fromAustralia by the end of 2017.

70% ownership of Australia in higher education services and willincrease to 100% by 2015. 70% ownership in all telecommunicationservices 100% ownership in accounting, auditing andbookkeeping services; 100% ownership in managementconsultant services (excluding financial management consulting

Australia’s tariff commitments provide tariff-free treatment forall goods from 2013

Malaysia- New Zealand The FTA eliminate tariffs on 99.5% of New Zealand’s exports toMalaysia within seven years from the date of entry into force,five years earlier than provided for under the existing ASEANFTA. The FTA.

contd. table 5


NZ eliminates the tariff lines under the normal tracks-1 (NT1) by2012 and the tariff lines under the Normal Track-2 will beeliminated completely by the end of 2016.NZ will eliminate the import duty for 99.35% of Malaysian exportby 2015 and the remaining will be eliminated by 2016.

Malaysia eliminates the import duty of 87% NZ products (9070tariff lines) by the end 2012 under the NT1. These products arePaper products, plasti products and automotive products. Importduty of the remaining 12% under the NT2 will be reducedcompletely by 2016 (mainly chemical products, Veneer, paperand steel products.

Malaysia- Pakistan For trade in goods Pakistan has eliminated tariff on 23% theimports from Malaysia on the day of implementation. Pakistanreduced 10% tariff on the import of Palm oil effective from January2008. Tariff elimination by Pakistan by 2009 under First track andunder normal track the tariff elimination is by 2012.

Under the MPCEPA Malaysia will get the mkt. access on rawmaterials, intermediate goods & machinery. Pakistan has obtainedmkt. access for its core exports like fruits and vegetables, seafood,beverages, confectionary, biscuits, gems and jewelry, cottonproducts, other home textile products and tents and tarpaulins,medicaments and surgical instruments etc.

Malaysia- Chile Chile has eliminated import duties on 6,960 tariff lines (90.2% oftotal tariff lines), including electrical and electronic products,vulcanised rubber thread and cord, and surgical gloves.

Source: Compiled from various sources viz. ASEAN News section, Country specificgovernment official sides and MITI International Trade and Industry Report,various issues.

Malaysia’s Trade with FTA Partners

Malaysia has signed several bilateral and multilateral agreements inthe recent past. One such multilateral regional grouping is the creationof ASEAN free trade zone (AFTA) that aimed at elimination of bothintra-regional tariffs and non-tariff barriers and making ASEANmanufacturing sector more competitive in the global market. This givesthe consumer a wider base to source the goods from the more efficientmanufacturer in ASEAN, thus creating a robust intra ASEAN trade.In this context, the following table (table 6) shows the trade matrix ofthe AFTA countries with trade share during the year 2010-2013. Inother words, the table shows the bilateral trade between the twocountries as percentage of the total trade of the country. The reasonfor choosing the 4 years (2010-13) trade matrix is based on the fact thateffective from 1st January 2010, Malaysia and other five ASEANPartners (Brunei Darussalam, Indonesia, the Philippines, Singaporeand Thailand) became a completely free trade area by eliminating theimport duties of 99% of products in the Inclusion List and AFTA isalmost completely realised among the ASEAN-6.


Table 6Trade Matrix of AFTA with Trade Share during 2010-2013 (percentage)

Countries Brunei Cambo- Indon- Malay- Myan- Singa- Thail- Viet-dia esia sia mar pore and nam

Brunei 0.000 3.913 6.435 0.003 7.155 4.246 3.845Cambodia 0.003 1.505 1.709 0.002 6.162 6.983 6.667Indonesia 0.217 0.079 6.102 0.129 11.502 4.435 1.251Malaysia 0.183 0.080 4.326 0.185 12.933 5.661 1.932Myanmar 0.003 2.048 2.521 11.865 30.966 0.836Singapore 0.220 0.211 7.819 11.584 0.210 3.315 1.607Thailand 0.100 0.771 3.735 5.518 1.449 4.160 2.057Vietnam 0.072 0.632 0.955 1.620 0.048 1.864 1.883 Trade with ASEAN 26.12 23.17 24.95 26.57 48.52 26.78 20.38 7.84partners/Total TradeExport from ASEAN 18.65 13.04 21.52 26.18 48.98 31.05 23.89 14.55Partners/TotalExportImport from ASEAN 51.57 34.31 28.60 27.04 47.68 22.06 16.87 18.38Partners/totalImport

Note: Trade matrix does not include the Laos PDR and the Philippines due to theunavailability of export-Import data.

Source: Estimated from WITS database

The finding reveals that, Malaysia’s trade with the ASEANcountries stands little more than 1/4th of its total world trade. Its tradevalue in percentage terms stands second to Singapore among theASEAN-6 countries. As per the data, it is estimated that the tradebetween the ASEAN signatories is about 24.2% of their total worldtrade by the end 2013. In terms of the total value of intra-ASEAN trade,Malaysia stands second (20.7%), next to Singapore (39.2%) among theASEAN countries. Malaysia’s export to the ASEAN countries duringthe period 2010-13 is about 20.7% of the total ASEAN inter-regionalexport, less by one percentage points compared to its imports.However, during the period 2007-2009, Malaysia contributed about24% of the total intra-regional export of the ASEAN as against 23%import from the ASEAN partners. In the year 2013, Malaysia’s exportgrowth to Lao PDR is the highest (77%) followed by the Brunei (19%)and Indonesia (17.5%) in the ASEAN region. But in terms of the absolutevalue, the highest export in the ASEAN region was into Singaporefollowed by Thailand and Indonesia. This shows that elimination oftariff in the region, particularly, the lowering of tariff to almost zeroamong the ASEAN-6 has increased the Malaysia’s firm’s access to themajor players ASEAN market. As per the latest data, in the year 20149,Malaysia’s export to the ASEAN region is about US$ 54.6 billion, an


increase by 5.9% over the same period last year. The export to theASEAN region during 2014 is estimated 28% of the total Malaysianexport as against 25.4% Malaysian imports from the ASEAN region.On the other hand, Malaysia’s import growth from the ASEAN blocduring the same period is increased by 2.6%, contributing about 25.7%of the total Malaysian import. In absolute terms, Malaysia enjoys apositive trade balance by US$ 93 billion with the ASEAN countries inthe year 2014.

Other than AFTA, Malaysia’s other big trading partners includesChina, USA and Japan. Though Malaysia’s trade agreement with USA(TPP) is not in force, but it continued to remain as one of the top mosttrading partners. Recently, Malaysia’s export to its FTA partners hasincreased significantly and is evident from the latest available data. Inthe year 2013 and 2014, Malaysia experienced a positive trade balancewith all the ASEAN countries except Vietnam. Similarly, with otherFTA partners, Malaysia possesses a positive trade balance except Chile,China and South Korea during the same period. In other words, withFTA partners, Malaysia enjoys a positive trade balance taken together.But in total, Malaysia’s trade surplus stood at RM 706 billion (aboutUS$21 billion) and 19 billion in the year 2013 and 2014 respectively.The diagram below (figure 3 and 4 and 5) shows the export, importand the trade balance of Malaysia with its FTA trading partners duringthe period 2013-14.

Figure 3: Malaysia’s export to FTA Partners (2013-14)

Source: Department of Statistics, Malaysia, data includes January 2013 to October 2014


With the signing of the FTA, Malaysia has opened several productsto its exporters by eliminating the tariff. At the same time the partnercountries has also got access to the Malaysian market through theestablished FTAs. The first FTA survey by the Economist Intelligenceunit of HSBC, based on 800 companies of in the first quarter of 2014across eight markets in Asia reveals that only less than a fifth of localcompanies were taking advantage of such trade agreement. InMalaysian context, the businesses leveraging on the FTAs haveexperienced moderate to significant export growth, lagging behindtheir Asian counterparts when it came to taking advantage of FTAs.

Figure 4: Malaysia’s Import from FTA Partners (2013-14)

Source: Department of Statistics, Malaysia, data includes January 2013 to October 2014

Figure 5: Malaysia’s trade balance with the FTA Partners

Source: Department of Statistics, Malaysia


In this context, the table below (table 9) shows the major items exportedby Malaysia by utilizing the FTA with its partner countries.

Table 9Major Products exported from Malaysia utilizing FTA

AFTA Petroleum Products (HS27), Palm oil (HS 15) Steel Products(HS72), TV (HS85), Air Conditioning Machine (HS84), EthlynPolymers (HS39)

ASEAN-China Palm oil (HS 15), Compound Rubber AND Rubber products(HS40), AlcholParaxiline, ethers (HS29),Steric Acid (HS38),Styrene (HS39)

ASEAN- South Korea LNG and Petroleum products (HS27), Palm Oil (HS 15), Tin(HS 80), Monitor Sterio (HS85), Tetra Hydrofuran (HS29),Fatty Acid (HS38)

Malaysia –Japan- ASEAN Palm oil (HS15), lauric and strearic acids (HS Polymer ofEthylene (HS39), Prawns and Shirimps (HS03), Alchols(HS03), Clothing (HS61), Ply wood (HS44), Beverages (HS22),Copper wire (HS74), Textile Products (HS51) etc.

Malaysia -India- ASEAN Acrylic Acid, Acetic acid (HS29), Cathode Ray TV Picturetubes (HS85), Fatty acid (HS38), AC Machine (HS84), LCDTV (HS85), Copper tube (HS74), Copper tyre (HS85),Vegetable Oil (HS15), wood and wood products (HS44),Organic Chemicals (HS29), Non-ferrous Metal (HS72-82)

Malaysia-Australia; Vegetable Oil (HS15), Ethylene Polyethilence (HS39),NZ- ASEAN Furnitures (HS94), Lumber (HS44) Tyres and AC Machines

(HS84)

Malaysia-Pakistan Butyl acrylate; ethylhexanol; crude acrylic acid; n-buthanol;iso-buthanol; PVC stabilizer; and oleic acid.

Malaysia-Chile Machinery & Mechanical Appl. (HS84), Elect. Mechinery(HS85), vulcanized rubber thread & cord (HS40) and medicalequipment surgical gloves (HS90) etc.

Source: Compiled from various sources viz. ASEAN News section, Country specificgovernment official sides and MITI International Trade and Industry Report,various issues.

Trade with FTA Partners: by Products

Malaysia shares a healthy trade relationship with many countries inthe world. The trade share and the products covered in the trade baskethas increased widely in the last couple of decades, particularly eversince it went ahead with several bilateral and multilateral agreements.Both the export and the import shows a strong growth across the globe,particularly with the FTA partner countries. At the product level, theexport of machinery and the electronics products is the highest followedby fuel and vegetable products to the FTA partner countries? The topfive product groups contributes almost 4/5th of the total export to theFTA partner countries. In other words, in the year 2013 more than 3/


5th of the total export of Malaysia was to the FTA partner countries. Amore disaggregated finding shows that Malaysia’s export in the year2012 to the AFTA region is 44% of its total export of its FTA partnersand this increased to 45.5% in the year 2013. Higher export to theASEAN partners are mainly due to the increased export of refinedpetroleum products; electronic integrated circuits and parts; machinery,appliances and parts including pumps, compressors, fans, centrifugesand parts; as well as, manufactures of metal of alloyed aluminum plates,sheets or strips. With high export of fuel, Malaysia remains as theworld’s second-largest exporter of liquefied natural gas and the second-largest oil and natural gas producer in the Southeast Asia.

Similarly, of the total import from the FTA partners, Malaysia’simport from the AFTA has declined to 46.3% in the year 2013 fromabout 47.8% in the year 2012. The trend of Malaysia import from itsFTA partners is no different from that of its export. However, it isevident from the findings that the shares of total export to its FTApartners are marginally higher than that of its import from FTApartners (table 10). The detail trade relationship of Malaysia with itsFTA partners at product level is given in table 11 and 12.

CONCLUDING REMARKS

The essential of role of government for an effective participation in theFTA and the subsequent trade growth is discussed in detail in this

Table 10Malaysia’s Export and Import by Products Groups with the FTA Partners*

(US$ Million)

*FTA partner countries includes only those FTAs are in force including AFTASource: Estimated on the basis of WITS Database


Table 11Malaysia’s Top 10 products export to the FTA Partners (US$ Million)



Table 12Malaysia’s Top 10 products Import from the FTA Partners Countries* (US$ Million)

paper. The discussion offered an insight to the changing role ofgovernment and the adoption of different policies and the sectoralreforms for trade facilitation and growth, particularly export. It isobserved that the emergence of deep PTAs in the last one decade haswitnessed an increase in Malaysia’s total trade, particularly the exportto these partner countries. Trading with these countries has given accessimmensely to these closely knit marketsfor goods, services and capitalflow. Similarly, it has also given way for the increased sales, newpartnerships, and new opportunities for the firms. The reduction in


barriers and transparent trading environment has increased the tradevolume of Malaysia from US$161 billion in 2000 to US$ 480 billion bythe end 2014, registering an increase by three fold in the last fourteenyears. Substantial proportion of trade growth is due to gradual tariffelimination with its FTA partners and creation of new opportunitiesfor the Malaysian firms with targeted policies.Detailed analysis on thesuccess of FTA provides the evidence that after each successiveFTA,Malaysia’s trade with its partner countries have increasedsignificantly.

To conclude, Malaysia’s strategic policy reform is the key to thelong term development of the country. The government shouldemphasis on the policies keeping the broader framework viz. income,employment, growth etc., in focus. In order to become a strong playerin global market, it should provide more targeted policies anddevelopment strategies, focusing more on fine sliced activities in thedomestic as wellas in the international market. Moreover, the policydimension should be friendly towards the local firms, particularly theSMEs with strong environmental, social and governance framework.This cautious and strategic approach would increase Malaysia’s tradeand the domestic component in trade, giving more meaningful growthto the economy.

Notes

1. Malaysian automobile producers are sheltered from foreign competition byboth tariff and non-tariff measures, and benefited from domestic supportmeasures allowing the market to be dominated by local car makers.

2. World bank doing business report, 2013.3. This includes 13 product groups (HS2 digit level) namely products of animal

origin (HS5), live trees and other plants (HS6), Lac, gums, resins etc. (HS13),vegetable Plating materials (HS14), residues and waste from the foodindustries (HS23), ores, slag and ash (HS26), pharmaceutical products (HS30),furskins and artificial fur (HS43), pulp of wood or of other fibrous cellulosic(HS47), wool, fine or coarse animal hair (HS51), other vegetable textile fibres(HS53), nickel and articles (HS75), other base metals; cermets (hs81).

4. Large emerging economies included Malaysia, Saudi Arabia Turkey, China,Thailand, Philippines, Russian Federation, South Africa, Brazil, Mexico,Colombia, Colombia, India, Iran.

5. Regulated by the Ministry of Domestic Trade, Co-operatives andConsumerism (MDTCC), and the Ministry of International Trade and Industry(MITI).

6. Malaysia has been gradually eliminating import tariffs on oil and gas since1994. In 2009, for oil imports, three tariff lines at the HS 9-digit level haveduties at 5%: 270900900, 271011100, and 271019200 (TPR 2010).


7. These includes Business and Professional services, Logistics, ICT services,Distributive trade, Construction, Education and training, Healthcare services,Tourism services.

8. During Jan– Oct 2014, Malaysia has recorded RM635 billion (approx. US$195 billion) export RM592 billion (approx. US$ 182 billion) during the sameperiod last year.

9. 2014 data includes the period January to October.

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