A Guide to Free Trade Agreements (FTAs) in Malaysia

A Free Trade Agreement or FTA is an agreement between two or more nations to reduce import and export-related barriers amongst them. A free trade agreement determines the tariffs and duties that countries impose on imports and exports to reduce or eliminate trade barriers, thus encouraging international trade. FTAs usually include trade facilitation measures and setting up of ground rules in areas such as investment, intellectual property, government procurement, and technical standards.

There are two types of trade agreements: bilateral and multilateral. Bilateral agreements are signed between two nations, whereas multilateral agreements have more than 2 nations as signatories.

Malaysia, a country that is strategically located along the Straits of Malacca, has been a trading nation for centuries and plays a crucial role in the global trade map. Thus, recognizing the importance of international trade to the nation’s growth and development, Malaysia has put a high emphasis on regional and bilateral trade agreements.

Malaysia’s Free Trade Agreements

Malaysia currently has 7 bilateral FTAs with the following countries –

• Japan: Malaysia-Japan Economic Partnership Agreement or MJEPA dated 13 July 2006
• Pakistan: Malaysia-Pakistan Closer Economic Partnership Agreement or MPCEPA dated 1 January 2008
• New Zealand: Malaysia-New Zealand Free Trade Agreement or MNZFTA dated 1 August 2010
• India: Malaysia-India Comprehensive Economic Cooperation Agreement or MICECA dated 1 July 2011
• Chile: Malaysia-Chile Free Trade Agreement or MCFTA dated 25 February 2012
• Australia: Malaysia-Australia Free Trade Agreement or MAFTA dated 1 January 2013
• Turkey: Malaysia-Turkey Free Trade Agreement or MTFTA dated 1 August 2015.

Similarly, Malaysia also has regional free trade agreements with countries like China, Japan, India, Korea, Australia, and New Zealand. 

In 2022, to further strengthen its global economic presence, Malaysia became a part of two mega free trade agreements - the Regional Comprehensive Economic Partnership or RCEP, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or CPTPP. The CPTPP is expected to open up the North and South American markets to the Malaysian economy through countries like Canada, Mexico, and Peru.

Benefits of free trade agreements

• Accelerated economic growth: Free trade agreements are designed to improve the trade between two or more countries, resulting in an increased economic growth of parties to the agreement. For instance, the FTAs have helped the Malaysian economy to export its products across the globe providing the necessary economic stability to the nation as it has low domestic demand.
   
• Dynamic business climate: Without free trade agreements, countries often protect their domestic industries and businesses. This protection makes them stagnant and non-competitive in the global market. FTAs result in the removal of these protections, allowing local businesses and industries to compete globally.
   
• Reduced government expenditure: Many governments subsidize local industries. Generally, as a part of FTAs, these subsidies are removed. This provides additional funds to the government for spending on improving the economic and social infrastructure of the country.
• Global industry expertise: Due to FTAs, global companies bring their expertise to domestic companies to develop local resources. This is particularly found to be beneficial for mining, oil drilling, and manufacturing industries.
   
• Improved investor confidence: The FTAs provide a stable trading and economic environment, which in turn increases the confidence of global investors.

Challenges of free trade agreements

• Decline of domestic industries: Free trade agreements allow technologically advanced and capital-rich Companies to enter the domestic market. This increase in competition results in domestic industries being overtaken by foreign players resulting in loss of domestic businesses.
   
• Job outsourcing: Free trade agreements can lead to increased outflow of human resources. Reducing tariffs on imports allows Companies to expand to other countries resulting in local job loss.
   
• Intellectual property theft: Many developing countries don't have laws to protect patents, inventions, and new processes. Thus, FTAs open up avenues for other global players to exploit unprotected intellectual property.
   
• Loss of natural resources: Free trade agreements can open up a country to illegal exploitation of natural resources. Increased production and consumption can lead to the overuse of natural resources in the economy. This also results in environmental degradation.
   
• Foreign equity capping: The foreign equity capping in certain countries negatively impacts foreign direct investment into the country. For instance, Malaysia has a foreign equity cap in various service sectors. Such capping has adversely affected the growth of the service sector in Malaysia despite the availability of human resources at cheaper rates.

Conclusion

In summary, FTAs allow each country to focus on producing and selling what best uses its resources while importing goods and services that are scarce or unavailable domestically. Thus, while free trade agreements offer benefits such as increased economic growth and industry expertise, they also pose several challenges to the local economy of a country. Therefore, Countries must create a balance between the domestic benefits of FTA and their consequences.

However, given Malaysia highly relies on international trade to fuel its economic growth, Malaysia has signed and implemented 16 FTAs and several other economic agreements with countries across the world. These agreements have played a crucial role in shaping Malaysia's economy by contributing approximately 67% of Malaysia’s total trade.