Market Access Opportunities under the Malaysia-Australia Free Trade Agreement

"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 13^th 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

• complementarities between the Australian and Malaysian
  economies
• barriers to two-way trade and investment
• the potential for trade and investment liberalisation and
  cooperation
• potential gains to both economies from a comprehensive FTA.

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:

• The participation of efficient competitive services suppliers in a
  market provides opportunities for sharing skills and development of
  infrastructure as they introduce new products and business
  practices.
• Access to competitive, state-of-the-art services, particularly in
  areas such as telecommunications, financial services, professional
  services and transport services benefit all suppliers of goods and
  services, as well as individual consumers.
• More open services sectors are a strong inducement to foreign
  direct investment. Given the high services cost component in
  many goods and services, investors in competitive and
  export-focused industries will increasingly seek to locate new
  operations in countries or regions which provide access to advanced
  and competitive service suppliers.
• Establishing more efficient and competitive domestic services
  sectors creates opportunities for services exports. For
  example, the opening of Australia's legal market has
  encouraged the establishment of international law firms in
  Australia, exposing domestic lawyers to world best practice.
  As an intermediate input, this has not only led to increased trade
  and investment, but has also strengthened the quality of the
  Australian legal market and ultimately led to Australia exports of
  legal services. Malaysia might similarly be expected to gain
  from steps to address its own barriers.
• Access to the most competitive suppliers of services in a wide
  range of sectors reduces costs for goods producers and establishes
  the most favourable conditions for investors.

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:

• Customs cooperation which would assist to expedite trade
  between Australia and Malaysia. This could take the form of
  cooperation to increase transparency, efficiency and consistency in
  customs procedures, as well as greater information exchange to
  assist in the investigation and prevention of infringements of
  customs laws.
• Addressing differing standards on industrial goods,
  unnecessary technical regulations and overly complex procedures for
  assessing conformity. MAFTA could develop measures that
  facilitate cooperation and provide a mechanism for addressing
  issues on standards certification and technical regulations,
  thereby facilitating trade.
• Reinforcing mutual commitment to the development and application of
  science-based sanitary and phytosanitary (SPS) measures
  which are consistent with the WTO Sanitary and Phytosanitary
  Agreement. MAFTA could seek to strengthen cooperation between
  Australian and Malaysian SPS authorities.
• Strengthening the cooperation and people-to-people links that
  already exist between our respective intellectual property (IP) agencies. The negotiations have already proved a catalyst for
  this. For example, during the September 2006 negotiating round in
  Canberra, three Malaysian officials participated in an Australian
  Inter-Departmental Committee meeting on IP enforcement. This
  provided an opportunity to exchange views on approaches to IP
  enforcement and to strengthen links between these Malaysian
  officials and counterparts from relevant Australian agencies.
  The negotiations have also helped to consolidate the close
  relationship between the Malaysian IP Office and IP Australia:
  during rounds held in Canberra, IP Australia hosted visits from
  Malaysian IP officials in order to promote people-to-people links,
  enhance understanding of the Australian industrial property system
  and to facilitate technical exchanges on areas of mutual
  interest.

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

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)