Review or renegotiate free trade agreements?

Renegotiating FTAs could be time consuming and very disruptive to exporters. If the aim is to allow Malaysian protectionist policies, then it will harm overall trade.

The new investment, trade and industry minister Johari Abdul Ghani has started the year with a much-needed housekeeping exercise — announcing a review of 17 free trade agreements (FTAs) citing continuing protectionism, modest overall gains and limited gains for small and medium-size enterprises (SMEs).

According to the ministry of investment, trade and industry (Miti), Malaysia has signed and implemented seven bilateral FTAs, nine regional FTAs and two partial preferential trade agreements. In 2022, Malaysia implemented two mega-FTAs through the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

We do not know yet which of these will be reviewed but it is clear that there will be a comprehensive audit of most trading arrangements.

The latest data from Malaysia External Trade Development Corporation (Matrade) for January-November last year showed that trade is at record levels and 5.8% higher overall compared to the same period in 2024. Imports and exports were up 6.1%, and 5.6% respectively and net trade 10.7% higher.

Despite this, the contribution of regional and bilateral FTAs has fallen to 65.3% of Malaysia’s total trade compared to 67.3% in 2022. Many bilateral FTAs are small and there are none with the EU and US.

So specific FTAs might not be contributing and when reviewing these we need to know whether or not there was more trade after each was implemented, especially a higher trade surplus with the FTA partner.

If we do not see these positive benefits, it is usually because tariffs were not cut enough but more likely that the non-tariff barriers were not removed.

If tariff and non-tariff barriers were supposed to be removed but were not, then there is an implementation problem that needs to be resolved. If protectionist policies in Malaysia have remained in place and the benefits of the FTA have not been achieved, then those Malaysian protectionist policies must be removed.

The benefits of removing tariffs and committing to removing non-tariff barriers are easy to see. For example, the trade negotiations with the US under the Agreement on Reciprocal Trade (ART) last year was very successful and removed or zero-rated more than 2,000 product lines.

Exports to the US rose by 13.9% during January-November. Imports from the US rose by 7.9% and the overall trade surplus rose by 19.5%. So the devastation predicted by the anti-Trump pessimists did not happen.

The lesson is that a review of the FTAs must focus on removing tariff and non-tariff barriers. It might also usefully focus on whether the arrangement is helping in trade diversity, reducing dependence on the US and China in key product areas and whether any deficiency in outcome is due to the agreement itself or problems with implementation.

In other words, a review may simply signal changes in management and implementation and it should not be assumed that renegotiating the FTAs would be necessary. This could open a whole range of problems and continue the disruption and uncertainty of last year in years to come.

We also need to recognise that other factors might cause unsatisfactory outcomes in trade. For example some of the bilateral agreements, such as those with Japan, Australia, New Zealand and India overlap with regional agreements and this may lead to conflict and redundancy in the terms.

Macroeconomic factors also matter, for example the ringgit is currently very strong and this pushes up the price of exports in overseas markets.

This makes trade difficult, especially for SMEs, which cannot cut costs quickly to accommodate unanticipated exchange rate movements. Protectionist policies in Malaysia aimed at helping SMEs would not solve this problem.

So while review and rationalisation is always welcome, renegotiation may not be. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.