With the end of an agreement granting Malaysia preferential access to the EU market looming, all eyes are on ongoing negotiations between Kuala Lumpur and Brussels aimed at securing a replacement free trade pact.
Malaysia currently benefits from the EU’s generalised system of preferences (GSP) scheme, which provides developing countries with generous tariff reductions on exports. However, the WorldBank’s decision to award the South-east Asian state upper-middle-income-nation status will end its eligibility for the lower levies from January 2014.
While EU representatives are confident that a new free trade agreement (FTA) will deepen economic integration between its member states and Malaysia, local business representatives have questioned whether they can remain competitive once the lower tariffs are withdrawn.
Strong bilateral trade
The EU is a major importer of Malaysia’s goods. Figures show its members purchased 13%, or 2.22m tonnes, of the country’s palm oil exports in 2012, and spend more than $1.3bn each year on Malaysian timber. On October 22, the Malaysia External Trade Development Corporation (MATRADE) said it expected total bilateral trade to reach RM120bn ($38.2bn) in 2013. Results so far this year suggest this is an attainable goal, with exports to the EU for the first eight months amounting to RM41bn ($13bn), while imports stood at RM45bn ($14bn).
Susila Devi, the senior director of MATRADE’s Strategic Planning Division, told reporters that Europe offered Malaysia a broad range of business and investment opportunities across the industries. “It also includes information communication technology, chemicals, automotives, renewable energy, logistics, agro food processing, pharmaceuticals and financial services,” she commented.
Business leaders, however, have highlighted the significant impact that the end of GSP status is set to have on trade and investment.
The GSP scheme provides duty reductions of up to 66% on sales to the EU. Malaysia’s exports to Europe under the initiative were valued at RM13.5bn ($4.3bn) in 2011, or 17% of its overseas shipments, according to a report published by the EdgeMalaysia in April.
Tan Sri Lee Oi Hian, CEO of Kuala Lumpur Kepong, a Malaysia conglomerate with interests in the palm oil industry, warned in March that without the GSP, the tax rate on some Malaysian oleochemicals heading for the EU would be between 4% and 6%. “We will just not be competitive,” he said at a Global Malaysia Series workshop.
Lee, together with other business leaders, said the impending withdrawal of the GSP scheme heightened the need for the government to secure an FTA with Europe. The loss of the GSP could be “another nail in the coffin” for the local palm oil industry, he said.
The EU and Malaysia first entered into discussions on a FTA in late 2010, with the next round of negotiations scheduled for the fourth quarter of this year. The ambassador and head of the EU delegation to Malaysia, Luc Vandebon, told Bernama in June that if the next round of talks is held before the end of 2013, then “it should be possible to conclude negotiations in late 2014/early 2015”.
The EU delegation’s former ambassador to Malaysia, Vincent Piket, said last year that an FTA would boost the country’s GDP by 8% by 2020.
“The conclusion of the FTA would be a landmark step in the fostering of bilateral trade between the two partners and deepen economic integration,” he said.
Looking long term
FTA supporters say a deal will, over time, increase market access for goods and services, facilitate trade and investment flows, enable mutual recognition of standards and qualifications, and increase joint capacity-building programmes.
However, not all Malaysians feel that an EU trade pact, at least in its current proposed form, is the best path for securing long-term economic growth.
In a report published in late 2012 by the IFRI Centre for Asian Studies, part of a French think tank, author Tham Siew Yean noted that the proposed FTA was in conflict with key interests of Malaysia. Tham raised particular concerns about the impact of intellectual property rules on the pharmaceutical sector.
“A small trading economy such as Malaysia’s is keen to lock in its market access to other countries. … [But] Malaysia’s focus has always been in the ASEAN as well as the wider East Asian market. In this scenario, ASEAN agreements, including Malaysia’s commitments in extra-ASEAN-wide agreements, will hold more weight than an agreement with the EU,” he wrote.
Concerns have been raised that with regional competitors also vying for the EU market, Malaysia could be tempted to negotiate a deal with the union from a position of weakness or sign an agreement lacking transparency. Many Malaysians, it would seem, are keen to avoid landing an unbalanced deal that fails to dovetail with the country’s broader vision for growth.