What comes after the Trans-Pacific Partnership Agreement
OVER the years, trade has become an essential component for sustainable economic growth in regional economies, in particular Malaysia. In fact, Malaysia has enjoyed an average trade to gross domestic product (GDP) ratio of 148% between 2010 and 2015.
According to the World Trade Organisation’s (WTO) trade profiles, Malaysia is well above the average global trade to GDP ratio of 56%.
Throughout the decades, Malaysia has evolved from being a commodity exporter with dominance in exports of tin and rubber to more diversified export basket now, especially manufactured products.
In recent years, Malaysia has been a leading exporter of electrical appliances, electronic parts and components and oil and gas commodities. Cumulatively, these items make up over 50% of our exports.
Concurrently trade policy is important as it sets the direction of international trade for the betterment of global macroeconomic growth. Traditionally, the WTO has been the platform for trade-rules setting.
However, due to its large membership base and respective national interests, it could be challenging to form bloc consensus and enact progressive trade practices in a timely manner.
Therefore, free trade agreements (FTAs) are vital for individual countries and economic blocs to reach targeted agreements in order to open up their economies and encourage free and fair flow of goods and services.
Importance of FTAs to Malaysian trade
Globally, international trade growth has been subdued since late 2015, coinciding with the fall of commodity prices and subdued industrial demand. Consequently, Malaysia’s trade performance has been sluggish throughout 2016, with little indication of a strong catalyst for a rebound in 2017 at the moment.
In the first 10 months of the year, exports contracted 0.6%, substantially lower than the 2010-2015 average annual growth of around 4.0% per annum.
Given that external demand will likely remain weak due to possible protectionist policies from the United States and a more cautious Chinese economy, engaging in FTAs is one way for Malaysia to boost its trade sector in a structural manner.
Malaysia is no stranger when it comes to negotiating and signing FTAs. In fact, Malaysia has 12 signed FTAs, along with various other FTA negotiations in the pipeline. One such example is the EU-Malaysia FTA negotiations, which have been in place since September 2010. The FTA aims to establish the extensive, legal framework for bilateral trade between the two partners.
TPPA and Malaysia
The other major trade agreement in the making was the Trans-Pacific Partnership Agreement (TPPA), dubbed as the “mega” FTA as it would have been the largest regional trade deal in history.
The TPPA would have consisted of 12 member countries – Australia, Brunei, Canada, Chile, Japan, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam which accounts for 40% of the global economy, with a total population of close to 820 million people.
According to a study done by PwC, Malaysia’s involvement in the TPPA will boost its GDP by an estimated US$107bil to US$211bil, raising GDP growth by 0.6% to 1.15%.
Providing open doors to foreign investors will build their confidence towards Malaysia and in turn, draw in additional investments of US$136bil to US$239bil.
Besides that, tariff and non-tariff barriers among TPPA members will be non-existent and it will lead to an increase in trade activity among the member countries. This will narrow the trade surplus to 4.3%-5.2% of total GDP while the export and import growth rate will rise by 0.54%-0.9% and 0.65%-1.17%.
The TPPA would have been a good boost to the external trade sector as it would have opened up market access to countries which Malaysia does not have a bilateral FTA with, such as Canada, Mexico and Peru. Furthermore, it could have been a gateway to deepen US market penetration.
Malaysia’s participation in the TPPA would have provided local companies more access to international open markets and more trade facilitative measures. There would have been more transparency and predictability in the market and this would have ensured that they could compete with foreign companies more efficiently and effectively.
Additionally, export-oriented firms, such as those dealing with automotive components and E&E would benefit most from broader market access.
Upon the new change in US government in January 2017, there lies a chance that the TPPA might not be ratified by Congress. However, member states should not forget the years of hard work that was put into the negotiations for the pact. Instead, they should find ways to fill the void should the TPPA fail to take effect.
RCEP – better than nothing?
Fortunately enough, another FTA may fill in the gap. The Regional Comprehensive Economic Partnership (RCEP) chaired by China, includes Asean and five other countries – Australia, India, Japan, New Zealand and South Korea. It aims to provide a mutually-beneficial economic partnership among Asean and Asean’s FTA partners.
The RCEP will tap into a region with a combined GDP of US$17.2 trillion and a population of more than three billion people. The scope of the agreement includes trade in goods and services (eliminating tariff and non-tariff barriers), investments, economic and technical cooperation, intellectual property rights, competition, dispute settlement and additional issues which are mutually agreed by RCEP members.
Similar to TPPA’s benefits, the RCEP will strengthen Malaysia’s economy and its foundation as a trade-oriented country. The International Trade and Industry Ministry states that Malaysia’s global trade with RCEP parties makes up almost 63% (US$434bil). This percentage has the potential to rise further with the implementation of RCEP.
What else can Malaysia do?
Another option for Malaysia would be to pursue (again) a bilateral trade agreement with the United States. Negotiations were launched in 2006; however, due to several roadblocks along the way, these were abandoned in March 2016. Given that the strongest demand for Malaysia’s E&E products comes from the United States, deepening relations with the country would facilitate the Malaysian export market.
However, with a Trump presidency, negotiating an FTA may be far from easy. In light of the comprehensive topics covered under the TPPA, an FTA with the United States may require just as much detail and compromise as commitments would go beyond what is prescribed in WTO requirements. This is because both countries have differing views on issues pertaining to tariffs, labour laws, and intellectual property rights.
The final option for Malaysia and the rest of the TPPA members would be to go ahead with ratification without the United States. However, this will also essentially mean renegotiating the trade terms. If the economies see fit, the FTA remains a powerful tool to widen access to new markets and opens up the possibility for the United States to join later.