Why Trade Matters by Nurul Fariza and Norsilah

by Nurul Fariza and Norsilah

BACKGROUND ON INTERNATIONAL TRADE AGREEMENTS IN TRADE POLICY

Countries enter into trade agreements with one or more other countries for the purpose of facilitating trade. In these international trade agreements, participants agree to reduce tariffs, quotas and other restrictions on trade between them. These arguments usually incorporate commitments that affect non-trade domestic policies.

• Bilateral FTA – between two countries, for example the Malaysia-Australia FTA (MAFTA)
• Regional FTA – between countries in the same region, for example the ASEAN FTA (AFTA)
• Plurilateral FTA – between many countries from different regions, for example the WTO Government Procurement Agreement (GPA)

MEASURING INTERNATIONAL TRADE

Trade is an integral component of the Malaysian economy. Malaysia has always been an open economy. Malaysia’s trade, as a percentage of GDP, has been consistently greater than 100% since 1988. In 2014, it was 131%. With the exception of the global financial years in early 1980s and 1990s as well as late 1990s, Malaysia has always been recording relatively high net exports as percentage of GDP. Malaysia’s net export in 2014 was RM83b of 8% of GDP.

Malaysia’s export and import compositions

Malaysia’s main exports are electrical and electronics (E&E), petroleum products and liquefied natural gas (LNG). Malaysia’s main imports are E&E, petroleum products and chemical products.

  Specialization in tasks : The global value chain (GVC)

Today, it is common for a products to be manufactured using inputs from many countries. A popular example is the iPhone:

• Credit for manufacturing iPhone is usually attributed to China because that is where the products is assembled.
• In reality, less than 4% of the value of an iPhone actually originated from China.

Food crises and government responses

Governments for example, may respond to the high food prices by introducing food-related trade measures. Unfortunately, these responses, in the form of export restrictions, had played a role in the food crises along with other trade measures such as tariffs and subsidies.

Liberalization of the services sector

Liberalization of services could happen via:

• Unilateral liberalization.
• Commitments in trade agreements.

The main value of binding services liberalization via FTAs is that it is hard to reverse the liberalization, once committed in such agreements. Since the signing of the WTO GATS, countries have been more willing to commit to the liberalization of healthcare services in their FTAs. On the other hand, their level of commitments in this sector remains low compared to those in other services sectors.

“The Story of Offshoring”

The 1980s saw the expansion of the E&E industry in Malaysia. Many multinational corporations opened their factories in Malaysia partly because of the relatively good infrastructure and low wages. Initially the industry had focused mainly on the relatively low-skilled downstream activities such as assembly. This was not unique to Malaysia. more recent examples include Apple Inc.’s and Lenovo’s manufacturing plants in China.

The Global Value Chain (GVC) model allowed firms to move their labor-intensive operations to areas with low labor cost. Lower trade cost had made labor cheaper to move goods and services across national borders. These factors enable firms to offshore their labor intensive, low skilled and high volume operations or part of the value chains to areas with lower labor costs. These firms have a propensity to come from developed economics while the areas into which the activities were offshored tend to be developing countries. For example, in 1985, developed economies imports from the developing countries were just below 25% of total imports. By 2014, the number had risen to just above 40%.

REFERENCE

Khazanah Research Institute. (2015). Why Trade Matters: Part 1. Kuala Lumpur, Malaysia: Khazanah Research Institute

Khazanah Research Institute. (2015). Why Trade Matters: Part 2. Kuala Lumpur, Malaysia: Khazanah Research Institute