What is it about Free Trade Agreements (FTAs) that raises the hackles of some people? Are FTAs detrimental to economic development or do they bring about greater economic prosperity?

In a perfect world, multilateral, rules-based trade is the way to go. In such an environment, countries will engage to ensure fair trade and optimise resources.

Unfortunately, it isn’t a perfect world.

The WTO negotiations, the Doha Development Round, are taking too long. So countries have taken towards bilateral, regional, even plurilateral trade arrangements, because of the practical advantage of FTAs. These are quicker and easier than multilateral agreements because fewer parties are at the table. Parties can secure advantages that are harder to win in bigger fora. For Malaysia, these bilateral and regional engagements complement our efforts at the multilateral arena.

To the critics, these agreements smack of exclusive clubs, with limited membership and separate rules. Some feel that FTA negotiations are shaped by the stronger party to the detriment of the other. The negotiations are looked upon as zero sum games with the developing- country party getting the short end of the stick. But they miss the point that an FTA is a negotiated outcome that takes on board the needs of everyone involved.

An FTA is a contract between two or more parties to provide each other with preferential market access for goods and services and to facilitate the cross-border flow of investments. The essence of an FTA is its transparency and predictability that it accords to traders, exporters and investors. Parties engaged in such an agreement work towards eliminating tariffs and trade barriers in goods and services, and, in so doing, create a “freer flow of goods and services”. Apart from market access, the FTAs that Malaysia negotiates also provide a platform to address technical regulations and standards such as those applied on agricultural products for health and safety reasons.

The end result, low tariffs for both exporters and importers, is a win-win outcome for everyone. Local producers will find that their lower cost structure can make them more competitive in the international markets while exporters will have improved access to the markets of our partners.

For example, in the case of the Malaysia-Japan FTA, Malaysia’s exports of RM79.9 billion in 2011 enjoyed preferential market access in Japanese markets, whereas exports from countries which have no FTA with Japan are subjected to duties that can reach 30%. Through the ASEAN-China FTA, RM91.3 billion of Malaysia’s exports enjoyed preferential market access in 2011. China imposes tariffs as high as 30% for exports from non-FTA countries. In the Malaysia-New-Zealand FTA, Malaysia’s exports of automotive components and plastics get duty free access while exports from competitor countries without such an agreement are subjected to a 20% duty.

MITI’s data show that Malaysian exporters are increasingly making use of them. Under the ASEAN FTA, for the year 2011, a total of 5,661 exporters used the preferential market access, a 31% increase in terms of certificates issued. A total of 1,569 Malaysian exporters accessed the ASEAN-China FTA preferences in 2011, compared with 1,165 exporters in 2010.

FTAs are reciprocal arrangements. This means that Malaysia cannot expect to have market access for our goods and services but continue to keep our markets closed. There is no such thing as a free lunch.

Malaysia is a very open economy. Our domestic market is limited and our companies need scale if they are to expand and remain competitive. Our competitors have either created linkages through their own trade arrangements or have a huge and growing domestic market that are natural draws for trade and investment.

What happens in trade negotiations?

The FTA process involves much engagement at various levels of government and industry. The preparation for each round sees extensive consultations with a cross- section of ministries, agencies and businesses. The preferences sought and given are done in concert with trade and industry associations and service providers.

Critics may argue that domestic industries and service providers face increased competition from the concessions accorded to FTA parties. In the short term some companies may find that they have to become more efficient to stay competitive.

This is acceptable, given that concessions are granted in stages, over a period of time, sometimes over ten years! This gives domestic producers time to adapt to meet the increased competition in the domestic market. The agreements also contain “safeguard” clauses and provide avenues for dealing with disputes.

In addition, Malaysia negotiates for longer time frames for market access for products deemed sensitive for Malaysian industry and service providers.

MITI functions as the coordinator of the process on behalf of the government. Each relevant ministry, as custodian of a specific area in the FTA, is directly involved in the negotiations. For example, market access for agriculture products are dealt with by the Ministry of Agriculture; Bank Negara for financial services. The final package of concessions is approved by the Cabinet. Throughout the negotiations Cabinet is consulted and kept updated. Malaysia’s policy space is never compromised.

Malaysia’s foray into FTAs began in 1990 with ASEAN. We have now concluded bilaterals with Japan, Pakistan, New Zealand, Chile, India and Australia; and are negotiating with Turkey and the EU. We are also a party to the Trans Pacific Partnership (TPP) negotiations, and will soon negotiate with the Gulf countries. With ASEAN, Malaysia has concluded agreements with China, Korea, and Australia and New Zealand as well as the FTA in Goods with Japan and India.

Malaysia has the advantage of geography, being at the heart of ASEAN. Malaysia also has the advantage of history with its links to China and India. It is thus necessary to make the most of these advantages. If we do nothing about enhancing our position, it will be akin to either jogging along or, worse, running on the spot, as our competitors race past us.

We would do well to recall that in the late 1920s, certain quarters in the US – and they sound familiar in this context – rebelled against opening up America’s markets. Congress agreed and passed the Smoot-Hawley Tariff Act of 1930. And we all know what happened next.

Let not history repeat itself. Let us focus on the balance of benefits. Let’s not throw the baby out with the bathwater.

Ministry Of International Trade And Industry
Block 10, Government Offices Complex, Jalan Duta, 50622 Kuala Lumpur, Malaysia.
Tel: +603-6200 0000 • Fax: +603-6201 2337 • Email: webmiti@miti.gov.my
Website: http://www.miti.gov.my