Market Access Opportunities under the Malaysia-Australia Free Trade Agreement

Paper submitted to the 8th Malaysia-Australia Joint Business Conference Plenary Session Three:  The Malaysia-Australia Free Trade Agreement (MAFTA)

by Michael Mugliston, Head Asia Trade Task Force, Department of Foreign Affairs and Trade, Australia

30 November 2006

“A WTO consistent comprehensive agreement that covers tariffs and non-tariff barriers re goods, services, investments, competition policy, movement of people, etc, etc will optimise the aspirations for our economies and the growth of the standard of living of our countries.”

Extract from the MABC-AMBC Joint Report to the 13th Australia-Malaysia Joint Trade Committee meeting held in Adelaide, Australia on 3 August 2006.

Australia’s Free Trade Agreement (FTA) agenda is focused on engaging key trading partners in negotiations on trade and trade-related instruments to deliver concrete outcomes in realistic timeframes.  Australia’s four existing FTAs (with New Zealand, Singapore, the United States and Thailand) cover 24 per cent of its current two-way trade in goods and services and 47% of its existing outward FDI stock[1].  Australia is currently negotiating FTAs with the Association of Southeast Asian Nations (ASEAN) and New Zealand (as a group), China and with Malaysia.

The World Trade Organization (WTO) Doha Round negotiations represent the best opportunity for countries to improve trade opportunities for their businesses.  Achieving a substantial outcome from these negotiations remains Australia’s top trade priority.  However, the simultaneous pursuit of Australia’s WTO and FTA agendas is mutually reinforcing.  By delivering access gains faster to key markets, comprehensive trade-creating bilateral and regional trade agreements can act as building blocks for WTO liberalisation.  FTAs, through their coverage of non-WTO provisions such as investment and competition policy, can further facilitate trade in goods and services by contributing to the stability, predictability and transparency of the business environment.

Why a Malaysia-Australia Free Trade Agreement (MAFTA) makes sense

Malaysia is a natural partner for Australia.  Malaysia is one of Australia’s closest geographical neighbours and our bilateral relationship goes beyond just trade and economic linkages.  Our historical links to the United Kingdom provide us a common language, legal institutions and parliamentary system.  Our relationship includes bilateral defence cooperation through the Malaysia-Australia Joint Defence Program and the Five Power Defence Arrangements.  We cooperate closely on a range of security and transnational crime issues, including counter-terrorism and people smuggling.  There are strong people-to-people links.  Over a quarter of a million Malaysians are graduates of Australian educational institutions.  We cooperate in a number of fora including the WTO and the Asia-Pacific Economic Cooperation (APEC) forum.

Malaysia is an important trade and economic partner for Australia ranking as our second-largest trading partner in ASEAN and our ninth-largest trading partner overall.  Two-way goods and services trade between our two countries was around $10.4 billion in 2005 – see Chart 1.  Trade is complementary with Australia providing inputs for Malaysia’s industries and Malaysia providing Australia with computers, consumer electronics, furniture and oil to name just a few products.  Malaysia is a significant investor in Australia, with total (direct and portfolio) investment of over $5.8 billion at the end of 2005 – see Chart 4.  The top five Malaysian investors in Australia employ almost 11,500 Australians.  Over 3,500 Australian firms do business with Malaysia.  However, Australia’s investment in Malaysia was only $808 million by December 2005 – see Chart 5.

Scoping studies into a possible FTA between Malaysia and Australia were undertaken, in parallel, by both countries.  The Australian Scoping Study[2] included extensive consultations with Australian industry, State and Territory governments and other organisations.  There was generally wide interest and support from Australian industry, state, territory and local governments and non-government organisations for the FTA.  The Study found that an FTA would deliver worthwhile economic benefits for both countries – the GDP and exports of both countries would increase as a result of the FTA.  It recommended that Australia seek to enter into negotiations with Malaysia to establish a comprehensive and WTO-consistent FTA.

The key conclusions of the Australian Scoping Study relate to

Subsequent industry submissions and numerous discussions with firms and industry associations have confirmed high interest by the Australian corporate sector in a comprehensive, high-quality FTA.  Industry is watching very closely the evolving negotiations and MAFTA will be judged on the real benefits it creates.

Market Access Opportunities from MAFTA

Much of the merchandise trade between Australia and Malaysia already takes place at low or zero tariffs.  The Australian Scoping Study noted, however, that there remains significant impediments to bilateral trade and investment which an FTA can address.  It noted that barriers to Australian exports to Malaysia are important for some agricultural products, processed foods, metal manufactures and services trade.  Tariffs as well as non-tariff measures, such as import licensing, were identified as impediments to increased goods trade with Malaysia.  Restrictions on commercial presence in many sectors and in some cases licensing and residency requirements limit Australian services exports to Malaysia.  The Australian Study also noted that there are some significant barriers facing Malaysian exports to Australia including passenger motor vehicles and parts and textiles, clothing and footwear.  Even where tariffs are already at zero, the FTA would provide the benefit of certainty for exporters – once bound they could not be increased to the FTA partner.

Case studies which form part of the Australian Scoping Study indicated a number of potential synergies between the Australian and Malaysian market sectors.  For example, in the automotive sector there is substantial two-way trade in components, most of it from Malaysia to Australia, but the trade in motor vehicles is low.

Automotive production is a significant part of both the Australian and Malaysian economies.  Together the Australian and Malaysian automotive markets represent over 1.5 million vehicles a year and are growing.  Malaysia already exports Protons to Australia, but the FTA negotiations provides an opportunity to improve the competitiveness of these exports, while providing opportunities for Australian vehicle exports, and affording both countries opportunities to work together in third markets.  The sectors are complementary with Australia producing larger, mostly six-cylinder cars, while Malaysia manufactures smaller four-cylinder cars.  Australian passenger motor vehicles would benefit from improved access into Malaysia.  Malaysia would enjoy improved access for exports of both vehicles and components.  The differing characteristics of the two automotive sectors offer significant opportunities for complementarities and there would be potential for greater specialisation and two-way investment.

Australia’s and Malaysia’s agricultural production and trade are broadly complementary.  In general, Australian agricultural products do not face sizeable barriers in the Malaysian market, but there are significant exceptions.  Australian agricultural exports – especially of dairy products, meat, other processed food and beverages – are expected to benefit from MAFTA by eliminating and binding tariffs at zero.  Similarly, Malaysian agricultural exporters – including of palm oil, seafood and other processed food – would enjoy the certainty of zero tariffs in Australia.  MAFTA could assist Malaysia in modernising its agricultural industry through encouraging increased Australian investment.

A significant part of Australia’s exports to Malaysia are base metals which are manufactured from Australian minerals.  With some exceptions these enter Malaysia at low or zero tariffs.  However, for more complex products there is significant escalation in Malaysia’s tariffs.  Australia’s approach is aimed at having tariffs on these products eliminated under the FTA, thereby providing the opportunity for Australian exports of metal products to increase.  This would be the case for some steel products, some types of aluminium, aluminium products and some copper and zinc products.

Malaysia is a significant exporter of manufactured products, especially electrical and electronic goods.  Information and communications technology equipment have zero or low levels of duty in Australia, as do some consumer electronic goods.  Nevertheless some Malaysian products (furniture, ceramics, aluminium, paper, woven fabrics of synthetic yarn, jewellery and rubber products) face tariffs, albeit mostly around 5 per cent.  The MAFTA negotiations provide the opportunity for duties on these products to be eliminated, which would benefit Malaysian industry.

The services sector represents a huge opportunity for growth in our bilateral trading relationship.  As economies modernise, services account for an increasing proportion of economic activity.  Services account for around 70 per cent of Australia’s GDP and around 60 per cent of Malaysia’s GDP.  Both Australia and Malaysia can also expect growth in our services export profile.  Services account for 23 per cent of Australia’s and 11 per cent of Malaysia’s total exports.

There are considerable opportunities to further promote bilateral services trade and investment to the benefit of both countries.  Australia’s approach is aimed at seeking to bind existing levels of openness which takes account of differences in the level of development of our respective services sectors.  At the same time, we are also seeking some liberalised access for Australian service suppliers in certain sectors to address restrictions on commercial presence, licensing requirements and issues relating to recognition of professional qualifications.  We are aware that this does raise some sensitivity regarding the prospect of increased competition with established domestic suppliers.  However it has been Australia’s experience that:

Continued liberalisation of Malaysia’s financial services sector would provide new opportunities for Australian industry and contribute to securing Malaysia’s ambition, as stated in the Ninth Malaysia Plan, to develop a more robust financial services sector to capitalise on new growth and wealth creating opportunities.

More liberal access to the Malaysian market for professional services such as legal, accounting, architectural and engineering services could also be expected to benefit both countries.  Australian firms in these areas are not so large as to provide a significant challenge to their Malaysia counterparts, but are likely to provide niche services important to Malaysia’s economic development.

Currently there is only limited trade and investment in telecommunications services between Australia and Malaysia suggesting this is an area with significant potential for growth.  MAFTA could usefully clarify and raise permitted foreign investment levels and address other relevant regulatory issues.

Improving market access in the education sector would benefit Australian exporters of education services.  It would also contribute to improved education outcomes for Malaysia, including in strengthening Malaysian institutions through partnership with Australian institutions and helping Malaysia to become a regional centre for education.

While our trade relationship is healthy and growing, by comparison our bilateral investment relationship is underdone.  Malaysia is already a significant investor in Australia.  MAFTA could provide a strengthened environment to support further Malaysian investment, as well as to encourage higher levels of Australian investment in Malaysia.  Input from Australian industry suggests that Australian investors are seeking a more predictable regulatory environment in Malaysia and for MAFTA to address a number of restrictions applying to commercial presence, including restrictions applying to corporate structure.  Furthermore a comprehensive, high-quality MAFTA would provide both countries with opportunities to attract more foreign investment from third countries.

Government Procurement is an important area of economic activity for both countries, with the OECD estimating that it generally accounts for at least 10 to 15 per cent of GDP.  The Australian Government is a significant buyer of goods and services, purchasing over $23.5 billion (about 65 billion ringgit at today’s exchange rate or 13 per cent of Malaysia’s GDP) worth of goods and services each year.  Australian State and Territory Governments purchase more than double this amount each year.  Including Government Procurement in MAFTA would provide Malaysian companies and Australian companies an opportunity to enjoy secure access to these very important sectors of our economies.

Australia recognises that this is a sensitive issue as government procurement is used by Malaysia to further socio-economic policy objectives.  It is also a sensitive issue for Australia.  Neither country is a member of the WTO plurilateral Agreement on Government Procurement. Australia has however included government procurement provisions in other FTAs it has negotiated.  In MAFTA, Australia is not seeking the complete removal of Malaysia’s preference system – Australia too has preferences for small and medium-sized enterprises and indigenous suppliers.  We think there is considerable scope to negotiate provisions on government procurement that provide greater access and certainty for our exporters while still catering for sensitive domestic policy concerns.

MAFTA can facilitate increased cooperation

MAFTA is not confined to market access issues.  It can also facilitate trade between Australia and Malaysia and lead to much deeper economic integration over time.  MAFTA could also provide the basis for much stronger cooperation in various areas, such as:

Conclusion

MAFTA has the potential to secure improved access for exporters of both countries by reducing and eliminating tariff and non-tariff barriers.  Where tariffs are already at zero, the FTA would provide certainty for exporters.  It can boost investment, output and employment, including through encouraging activities that should lead to the development of new technologies and enhanced cooperation.  MAFTA has the potential to raise the profile of Australia and Malaysia as trade and investment partners.

It is in both our interests therefore to complete a comprehensive, high-quality MAFTA.  There are sensitivities on both sides and some firms will face increased competition, but we should not lose sight of the significant opportunities which could be created to further enhance the competitiveness and economic growth of both economies.

FTAs are living documents that are designed to evolve and expand as the trade relationship grows.  Business needs to adjust its own operations to take advantage of opportunities which closer engagement with trading partners present.  While FTAs can facilitate trade and improve access, it is up to business to take advantage of these opportunities.

Charts

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Notes:    ^ Financial year data at 30 June; * calendar year data at 31 December.

In the above charts, “other” investment typically comprises holdings of equity securities (e.g. shares), debt securities (e.g. commercial bonds) and financial derivative assets.

Prior to 2005, Australian investment abroad was reported on the basis of the historical cost of a given investment.  Since 2005, the ABS has moved to the IMF recommended approach of reporting on the basis of the current market value of a foreign direct investment.  The ABS has only applied this methodological revision to investment data from 2001 onwards, which reduces the validity of undertaking comparisons of investment data before and after 2001.

(Sources for charts: Department of Foreign Affairs and Trade; Invest Australia; Australian Bureau of Statistics)

[1]This will rise to over 60% of outward FDI stock with existing FTAs under negotiation compared with only 4% coverage under our 19 bilateral investment treaties presently in force.

[2] Department of Foreign Affairs and Trade, An Australia-Malaysia Free Trade Agreement: Australian Scoping Study, Canberra, February 2005. dfat.gov.au/fta/mafta/ for further information.