WHY TRADE MATTERS by Tan Hui Hui and Foo Yong Wei

WHY TRADE MATTERS

 by Tan Hui Hui and Foo Yong Wei

INTRODUCTION

Khazanah Research Institute is a non-profit organization sponsored by Khazanah National Berhad which commenced operations in 2014. Their objective is to undertake analyses and research on the pressing issues of the nation and provide actionable policy recommendations that improve the well-being of the general population based on that research. The presenters of this talk are Mr. Junaidi Mansor, the Deputy Director of the Khazanah Research Institute and Ms. Aidonna Jan Ayub, the Research Associate at the Khazanah Research Institute.

The reason of starting the ‘Why Trade Matters’ is that, in the last five years, they have noticed that there is lack of understanding on trade in terms of the working and its impact to the daily activities despite that Malaysia has made a big negotiation in signing the Trans-Pacific Partnership Agreement (TPPA). Therefore, they wanted to make an introductory book to provide basic understandings on trade to the society.

BACKGROUND ON INTERNATIONAL TRADE AGREEMENTS IN TRADE POLICY

Since the day of independence, Malaysia has been the member of World Trade Organization (WTO). However, WTO is not comprehensive as it is because the gap between developed and developed countries is still existing in terms of trade development. Due to the challenges in negotiating at the WTO, many countries are shifting or have shifted their focus on negotiating free trade agreements (FTAs) at other levels, which are bilateral FTA (between two countries, for example the (MAFTA) Malaysia-Australia FTA, Regional FTA (between countries in the same region, for example the (AFTA) ASEAN FTA) and Plurilateral FTA (between many countries from different regions, for example the (GPA) WTO Government Procurement Agreement.

There is an increasing trend of FTAs around the world and Malaysia has participated in 18 other FTAs since Malaysia’s first FTA with Japan in 2005. Moreover, Australia and India are the two main FTA partners of Malaysia. As Mr. Junaidi mentioned in the talk, Malaysia’s first FTA was less complex which contains 14 chapters (Refer Appendix 1A). As he explained the contents briefly chapters by chapters, trade in goods in chapter 2 is about liberalization of trade in terms of reducing tariffs, quota and other restrictions on trade between them.

Next, Rules of Origin is the chapter focuses on the regulations of detailing the product-specific requirements relevant to each tariff classification for goods, explaining the method used to determine the regional value content of goods for the purposes of some of the product-specific requirements, etc. The big concern about this chapter is, for example in TPPA, the major portion of a product such as a Nike shirt comes from China and it lands in Malaysia and a Nike logo is printed on the shirt. After that, the shirt will be labelled as ‘Made In Malaysia’ and it will be exported to United States. However, the value-added in the production in Malaysia is actually 2 or 3 percentage only in the production. In this context, the Nike shirt should not be labelled as ‘Made in Malaysia’ but it was what happened to product in China. Therefore, a certain percentage must be fixed in terms of production for the products to be labelled in one country in order to benefit the tariff liberalization.

What follows next is Custom Procedures, which is also known as behind the border measures. The processing in terms of custom procedures for import and export can be complex, therefore, the process is hoped to be simplified in terms of goods which are importing to the country. In the Technical regulations, standards and conformity assessment procedures chapter, countries have established uniform multilateral rules aimed essentially at preventing the introduction of unnecessary barriers to international trade. Sanitary and phytosanitary measures focuses on standards for food in terms of exporting food to certain countries. Then, the next chapter which is Investment, a standard chapter among all of the free trade agreement, where governments are permitted to provide access to investment and also equal treatment to all local companies as well as foreign companies.

Following by Trade in services chapter, which focuses the investment on services and this chapter tends to be more attractive to developed countries because their high participation in services sectors. Nevertheless, the Intellectual Property chapter debates about copyrights and extensions of trademarks whereby certain governments especially the developed countries try to extend their rights on intellectual property. Moreover, encourage discipline on competition. The basic principle of this chapter is to ensure a country law have competition law and regulations to control anti-competitive activities. Thus, any such expansion of the co-operation shall be subject to the applicable laws and regulations of each country and available resources of each government.

In chapter 12 Cooperation, the basic principles recognize the importance of economic cooperation between the parties, promote and facilitate the implementation of economic cooperation, reaffirming the value of ongoing economic cooperation initiatives between the parties and acknowledge the provisions to encourage and facilitate economic cooperation by the parties. As Mr. Junaidi pointed out, the cooperation is the ‘sweetener’ for developing countries given by the developed countries as many developing countries tend to fall into this trap in WTO agreement. This is because the developing countries tend to agree to a higher standard of commitment due to the training programs that are provided by the developed countries. On the other hand, the Dispute settlement chapter  is aimed to avoid and settle any difference between the parties concerning the interpretation and application of this Agreement with a view to arrive at, where possible, a mutually acceptable solution.

In Appendix 1B, the contents of TPPA is more extensive by comparison which contains 30 chapters. Many US-based FTAs are usually complex and comprehensive, with commitments going beyond the WTO requirements in terms of scope and coverage as well as depth, and we can expect similar level of commitments for the recently concluded TPPA. For example, the TPPA includes chapters on areas that are not traditionally considered trade issues, such as labour, environment, and state-owned enterprises. The TPPA also has specific trade in services chapters for the telecommunications and financial services sectors. The TPPA highlights how the different chapters in an FTA obliges the Members to link their trade commitments to their various domestic policies.

The challenges for Malaysia in the TPPA is to be noted that It is to be noted that negotiations on these issues are still pending and Malaysia has put up its positions as well as concerns which is based on its prevailing laws, regulation and policies. The challenges are the following:

1. Government Procurement (GP)

∙ GP issues relate to the Build-Operate-Transfer (BOT) and threshold for construction services.

∙ On BOT, Malaysia has carved it out from the scope of commitments. As for threshold for construction services, Malaysia’s current offer has been set at a very high threshold.

∙ Areas of interests to the Bumiputra business community and SMEs have been excluded from our initial offers and Malaysia will maintain this position.

∙ Malaysia will continue to maintain preferences for selected groups, but at the same time allowing the business sector in Malaysia to participate in the sizable government procurement market of other parties.

2. Intellectual Property Rights (IPR)

∙ IPR issues revolve around access to medicine and healthcare, increase in pharmaceutical prices and longer copyright protection term.

∙ Malaysia has strongly raised objections towards proposals that could delay the entry of generic drugs into the market and result in high cost in the prices of medicines.

∙ Malaysia is working with TPP members for an outcome that would strike a balance between the continued need to allow access to affordable drugs and healthcare and sufficient incentives for drug companies to innovate.

III. State-Owned Enterprises (SOE)

∙ On SOE, the issue is the impact arising from the proposed disciplines on the role of SOEs in the Malaysian economy with regard to provision of public goods and services, development of strategic industries and implementation of sociodevelopment programmes.

∙ In the SOE Chapter, while acknowledging that a level-playing field is necessary to allow both local and foreign companies to grow, Malaysia is advancing the argument that countries have different economic systems in place with SOEs and GLCs playing important roles in economies such as Malaysia.

∙ Malaysia is seeking to have flexibilities in the agreement that will allow the continued existence of such entities to participate in the economy and provide public and social goods and services.

3. Labour and Environment

∙ For Labour, Malaysia is seeking to strike a balance between workers’ rights and maintaining harmonious employer-employee relations within the context of the Malaysian scenario.

∙ In the area of Environment, while supporting a chapter that provides for environmental preservation, we do not want to allow environment clauses to be used as a disguised barrier to trade.

∙ Some of the key issues for Malaysia are enforcement where forestry, biodiversity, water and land are under the State Jurisdictions; elimination of fisheries and fossil fuel subsidies, adopting stronger provisions in conservation, binding all the commitments in Multilateral Environmental Agreements (MEAs) under this chapter, and subjecting the environment chapter to Dispute Settlement Mechanism.

∙ In both Labour and Environment Malaysia together with other parties are seeking to have a dispute resolution mechanism that is more consultative in nature and also not sanctioned based.

MEASURING INTERNATIONAL TRADE

In cases of Malaysia, generally export is higher than import. In 2015, Malaysia’s net export was RM94b or 8% of GDP. Therefore, trade is important to Malaysia but it is still just part of Malaysia’s economic. According to their research, Malaysia bigger trading partner are Singapore, China, Thailand, Japan and the US as from 2015. Malaysia’s main export are electrical and electronics (E&E), petroleum products and liquefied natural gas. As for Malaysia’s main imports are E&E, petroleum products and chemical products.

Trade data tells us a lot about Malaysia’s external sector. However, the emergence of the global value chain (GVC) necessitates to rethinking of how trade data is reported. Nowadays, it is common for a product to be manufactured using inputs from many countries. Apple’s iPhone as example, credit for manufacturing iPhone is usually attributed to China because that is where the product is assembled. In reality, less than 4% of the value of an iPhone actually originated from China. If using the traditional measure to calculate the US trade balance in iPhones, China will get the full credit but if we calculate using value added measure, China will only get the credit for 4%. The global value chain is start globally all the way from the research and development (R&D) to assembly.

Apart from the E&E industry, the GVC model is also used in other industries. The Nutella GVC is another example. The production of Nutella uses ingredients sourced from all over the world, palm oil from Malaysia, cocoa from Nigeria, hazelnut from Turkey, sugar from Brazil and vanillin from China. International trade facilitates the production of Nutella on a global scale, allowing the manufacturer to source ingredients from around the world and locate factories close to the final consumer markets. Here come the important of Free Trade Agreements (FTAs), in order to have this to happen chain, FTA play an important roles. If the transportation logistic, the taxation and other cost are high when import and export, company will only willing to produce it in their own country. Now, many company divided the production by tasks to the countries rather than produce it from end to end. They want to specialize in certain tasks but not in the whole value chain.

The GVC brings up the question:” How much of a country’s exports actually originated domestically?” Here come the best idea in GVC is that countries can specialize in tasks that they are good at. Therefore the production activities of product do not have to take place entirely within one country. Besides that, GVC is also known as global supply chain, international production network and offshoring. Economists have proposed a new way of measuring trade called Trade in Value Added (TiVA). As example, Japan export USD100 product to Malaysia and Malaysia export USD120 product to China. Traditional method of measuring trade will record Malaysia’s gross export as USD120. TiVA will record Malaysia’s export in value added as USD20 because only USD20 is originated from Malaysia.

Next is the comparison between traditional measure of trade and TiVA. Traditional measure use to measure value of goods each time they cross the national borders, TiVA use to measure the economic contribution to the production. Traditional measure using data from the customs departments, while TiVA use the input-output (IO) tables. IO table describes the relationship concerning the production and consumption of commodities and services between producers and consumers across different sectors in economy. Traditional measure have the advantage of timely and TiVA can clearly specifies a country’s economic contribution to production. Traditional measure have the disadvantages of does not measure trade in services and country’s actual contribution to the production. TiVA have the disadvantages of it is complicated to calculate and interpret, publication of IO tables may not be timely and calculations involve a lot of technical assumptions. Both traditional measure and TiVA does not capture “unofficial” trade activities.

TRADE AND REGIONAL INTERGRATION

Trans- Pacific Partnership Agreement (TPPA) is one of the mega FTAs that Malaysia had signed and Regional Comprehensive Economic Partnership (RCEP) is one of the mega FTAs that Malaysia still negotiating. This two are known as mega FTA because this link to a lot of countries. World trade organization involve more than 160 countries that is why the negotiation is proceed in a very slow pace, and might cannot get the deal that wanted. Therefore we have this mega FTAs to get the deal for Malaysia.

Malaysia is part of the Association of Southeast Asian Nations (ASEAN) Economic Community (AEC). AEC aims for ASEAN to become:

1. A single market and production base by promoting and enabling free flow of goods, services, investment and capital as well as labour within the region.
2. A highly competitive economic region through the adoption of laws related to competition policy, consumer protection, IPR, and e-commerce.
3. A region of equitable economic development through developing SMEs and other cooperation intiatives within the region.
4. A region fully integrated into the global economy by remaining the “ASEAN centrality” in ASEAN’s external economy relations. The AEC also works towards the enhanced participation of ASEAN businesses in global supply networks.

Besides the AEC, ASEAN Political-Security Community (APSC), which aims to promote shared responsibility for a comprehensive regional security and ASEAN Socio-Cultural Community (ASCC), which aims to undertake cooperation on regional human development, thus, improving the quality of life for the ASEAN population.

TRADE AND FOOD POLICY

‘Food security’ is when “people, at all times, have physical and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life.” As with many countries, Malaysia considers its food sector to be a strategic and sensitive sector. One of the key end goals for its agrofood policy is to ensure availability, affordability, and accessibility of food for the country, as well as to promote national food security and safety29. This chapter discusses how countries develop food-related trade measures aimed at protecting their food sector. While these measures are intended to be positive interventions, they may have unintended negative results by becoming non-tariff barriers to trade of food which may subsequently lead to higher food prices.

In order to protect the country from global food price volatility, governments globally have implemented various policies to control both the demand and supply of food. Trade policies is one option for governments to address issue of high food prices. For example, government may respond to the high food prices by introducing the food-related trade measures. Unfortunately, this form of export restrictions had caused the food crises along with other trade measures such as tariffs and subsidies.

Furthermore, the United Nations Food and Agricultural Organization (FAO) has identified four dimensions to food security as well as examples of trade measures that could impact the dimensions of food security. Additionally, the relationship between food security policies and trade as a tool for development should also be considered.  

The key messages in this section is that governments have the political and legal rights to provide for the basic needs of their population through the implementation of their trade and food policies. These measures may indeed provide added advantages to their domestic agriculture and food industries. In each country, these measures are intended to be positive interventions. However, in some cases, it may have negative implications by becoming non-tariff barriers to trade. Lastly, the governments need to balance between enforcing measures that are necessary for the country and at the same time, managing their cross-border effects, thereby avoiding protectionist policies.

TRADE AND THE HEALTHCARE SERVICES SECTOR

In general, the liberalization of healthcare services is a sensitive issue worldwide, and Malaysia is no exception. Governments tend to be especially cautious when it comes to policies regarding healthcare services sector, as it is their responsibility to ensure that all healthcare service providers are of good quality when practicing in the country.

The liberalization of healthcare services is a sensitive issue worldwide but countries have been more willing to commit to the liberalization of healthcare services in their FTAs since the signing of the WTO GATS. However their level of commitments in this sector remains low compared to those in other services sectors.  

The key messages in this section is that the provision of healthcare services is affected by trade policy via the commitments undertaken by the government in the various international trade agreements including the FTAs. Besides that, Malaysia’s experience is not unusual and indeed, many other WTO Members have similar commitments, regardless of their level of development.

TRADE AND THE MOVEMENT OF PEOPLE

The movement of people falls under Mode 4 of the WTO GATS. Commitments made in international trade agreements may affect the movement of foreign workers across borders. The WTO GATS includes commitments on the movement of people across borders. However, progress for MNP negotiations at the WTO have been limited. Some developing countries are interested in getting increased access for the movement of their workers across borders. This may be because the money that its citizens working abroad send back to their home country could be a source of earnings for their relatives back home. Despite it, the negotiations among the WTO Members to further liberalize Mode 4 at the ongoing Doha Round have been slow.

Despite some WTO Members have refocused their efforts to liberalize MNP through FTAs with like-minded partners, the FTAs may not be the optimal solutions to improving commitments to liberalize MNP. As illustrated previously, the movement of people interacts closely with international trade activities. Additionally, it is also inter-linked with other government policies, and the immigration and labour policies are notably.

The key messages in this section is that some countries are interested in getting further liberalization for the movement of their workers across borders. The existing commitments as per the WTO GATS are generally limited, as are efforts to negotiate greater MNP commitments in the ongoing Doha Round. In the meantime, some countries are seeking further MNP liberalization in FTAs. However, MNP chapters in FTAs may not be the optimal solution in improving MNP commitments, as seen in the case of the USSFTA. MNP policies are also inter-linked with other government policies. Thus, the decision to liberalize the movement of people using the FTA route should be assessed in a holistic manner.

TRADE AND LABOUR

Trade policy does not just affect the liberalisation of the labour market. It also influences other parts of the labour policy, notably the rights of the domestic workers (labour rights). This section highlights another dimension to international trade and trade policy – trade policy goes beyond regulating the movement of goods into and out of the country. It also increasingly addresses the production of the said goods, which is closely tied to the rights and the well-being of the workers who made those goods.

For Labour, Malaysia is seeking to strike a balance between workers’ rights and maintaining harmonious employer-employee relations within the context of the Malaysian scenario. The International Labour Organization (ILO) sets out the basic principles of labour rights. Some of these basic principles or labour standards are ILO recommendations which are non-binding guidelines. Malaysia has made labour-related commitments in the ILO which is the decision to denounce one of the ILO’s eight core Conventions- Convention Number 105 on the abolition of forced labour. It was taken in response to the continued criticism on the existence of compulsory prison labour in Malaysia.

The key message in this section is that trade policy goes beyond regulating the exportations and importations of goods and services. It also increasingly addresses the rights and the well-being of the workers who are involved in the production of the said goods and services. At the moment, Malaysia is not part of any FTAs which both contain labour provisions and have entered into force. However, Malaysia is affected by other external laws and standards such as the US’GP policy, the US’TVPRA List, and the ILO’s standards. The debate of whether or not ‘traditionally non-trade issues’ such as labour standards should be included in trade policy, remains to be concluded.

CONCLUSION

This talk discussed how international trade is measured, as well as the interlinkages between trade and food policy, and trade and regional integration. It also focused on the people-centred subject areas, with chapters on trade and the healthcare services sector, trade and the movement of people, trade and labour. Nonetheless, this talk also illustrates how commitments made in international trade agreements may affect non-trade related matters.

QUESTION AND ANSWER SECTION (QnA)

After Mr. Junaidi has concluded the talk, Q&A section is conducted to allow the students to ask questions regarding the relevant topics discussed during the talk.

1. Comparison of fully China produced phone and iPhone that assembled in China.

Answer:

If it is a fully China produced phone, the value is coming from China. The important of TiVA here is that, iPhone is an example of the trade of the US and China, TiVA is used to see the relationship that happened because we need to dislocate the other factors that infecting the US and China trade balance for example, Japan and Germany. Therefore a fully China produced phone will have greater value added compare to an iPhone that have lesser value added.

2. Under the TPPA, have government did anything to protect the domestic company? What is the advantages and disadvantages of TPPA?

Answer:

In general, any FTA is like a template and a way of opening the market. If did not take action and take advantages out of it we won’t get anything. As the domestic company it will be a great chances to go oversea with lower tariff. The benefit is come from doing it, therefore we can see that government is actively implementing strategic, example is enhancing the small and medium enterprises. The most important is that how to we reach this benefit. The negative sides is that, if we did not take advantages out of it, we did not get anything and we will be left behind. All FTA involve cost, in term of policy implementation, changing laws and regulation, changing policy, monitoring and market access. The government fully aware of the cost, therefore government is monitoring TPPA so that it is being implementing effectively.

3. Foreign product can enter to Malaysia without any barriers, how it will increase and help Malaysia’s trade.

Answer:

If we talk about profit, as consumer we will be able to buy product with cheaper price and this is profitable to consumer. As manufacturer, before this they are protected and they can sell product with higher price, they have to reduce it, this will make them more competitive. Being competitive is a profit too as it make us more efficient economically.

4. Importing automotive product is expensive and what is the different between TPPA and other FTA?

Answer:

TPPA is deeper in term of the commitment. Automotive sector is indeed a protected industry in Malaysia, it is nothing new about it. There are many other countries protecting their own sector. There are two things we need to remember, there are two types of barriers: physical berries and behind the border berries. If we talk about Proton, we will have to look at GVC. If look at the breakdown we can see the employment from all level of production, including accountancy services and other related services. Besides that, importing automotive product now are way cheaper compare with it used to be.

5. As students, what are the benefits we will be able to gain from this TPPA?

Answer:

In the short run, student will be able to gain knowledge from reading the TPPA and also economic analysis. In term of long run, the whole idea of TPPA is to create employment of Malaysia, if the specific policy or strategic of government is being implementing accordingly, it will increase employment not only in Malaysia and also TPPA countries.

APPENDIX 1A

APPENDIX 1B