Deal makers: Negotiations with the EU are in the spotlight

Malaysia used to benefit from the EU’s generalised system of preferences (GSP) scheme, which offers tariff reductions on exports to developing countries. However, the World Bank’s decision to award the country upper-middle-income-nation status ended its eligibility for these lower levies in January 2014. While EU representatives are confident a new free trade agreement (FTA) will deepen economic integration between its member states and Malaysia, local business representatives have questioned whether they can remain competitive once the lower tariffs are withdrawn.

EU Market 

The EU is a major importer of Malaysia’s goods. Figures show its members purchased 13%, or 2.22m tonnes, of the country’s palm oil exports in 2012, and spend more than $1.3bn each year on Malaysian timber. Bilateral trade between Malaysia and the EU reached RM135bn ($42.1bn) in 2013, an increase of 6%. Susila Devi, senior director of the Malaysia External Trade Development Corporation’s strategic planning division, told reporters that Europe offered Malaysia a broad range of business and investment opportunities across the industries. “It also includes information communication technology, chemicals, automotives, renewable energy, logistics, agro food processing, pharmaceuticals and financial services,” she commented.

FTA Negotiations

Business leaders, however, have highlighted the significant impact the end of GSP status is set to have on trade and investment. The GSP scheme provides duty reductions of up to 66% on sales to the EU. Malaysia’s exports to Europe under the initiative were valued at RM13.5bn ($4.2bn) in 2011, or 17% of its overseas shipments, according to a report published by The Edge Malaysia in April 2013.

Tan Sri Lee Oi Hian, CEO of Kuala Lumpur Kepong, a Malaysian conglomerate with interests in the palm oil industry, warned in 2013 that without the GSP, the tax rate on some Malaysian oleochemicals heading for the EU would be between 4% and 6%. “We will just not be competitive,” he said at a Global Malaysia Series workshop. Lee, together with other business leaders, said the impending withdrawal of the GSP scheme heightened the need for the government to secure an FTA with Europe. The loss of the GSP could be “another nail in the coffin” for the local palm oil industry, he said.

The EU and Malaysia first entered into discussions on a FTA in late 2010. The EU delegation’s former ambassador to Malaysia, Vincent Piket, said in 2012 that an FTA would boost the country’s GDP by 8% by 2020. “The conclusion of the FTA would be a landmark step in the fostering of bilateral trade between the two partners and deepen economic integration,” Piket said.

However, negotiations stalled in 2013 due to the general election. As of April 2014 the EU and Malaysia were reportedly looking to resume negotiations.

Looking Long Term

According to FTA supporters, a deal will, over time, increase market access for goods and services, facilitate trade and investment flows, enable mutual recognition of standards and qualifications, and increase joint capacity-building programmes.

However, not all Malaysians feel that an EU trade pact, at least in its current proposed form, is the best path for long-term economic growth.

In a report published in late 2012 by the IFRI Centre for Asian Studies, part of a French think tank, author Tham Siew Yean noted that the proposed FTA was in conflict with some of the country’s key economic interests. “A small trading economy such as Malaysia’s is keen to lock in its market access to other countries. … [But] Malaysia’s focus has always been in the ASEAN as well as the wider East Asian market. In this scenario, ASEAN agreements, including Malaysia’s commitments in extra-ASEAN-wide agreements, will hold more weight than an agreement with the EU,” he wrote.

Concerns have been raised that with regional competitors also vying for the EU market, Malaysia could be tempted to negotiate a deal with the union from a position of weakness or sign an agreement lacking transparency. Many Malaysians, it would seem, are keen to avoid signing onto an unbalanced deal that fails to dovetail with the country’s broader vision for growth.