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There are strong reasons for New Zealand to conclude a Free Trade Agreement with Malaysia. This study has identified areas where a comprehensive FTA would be of direct benefit to New Zealand and where bilateral cooperation under an FTA framework could contribute to wider trade and economic objectives.
Malaysia is New Zealand’s largest trading partner in the ASEAN region. An FTA would build on the agreements already negotiated with Singapore and Thailand. It would add impetus to the negotiations underway with ASEAN as a whole that were agreed by Leaders at the Vientiane Summit in November 2004. Malaysia, as part of ASEAN, is now part of a growing web of FTA agreements within Asia (with China, India, Japan and the ROK). Malaysia and Australia are also considering negotiating an FTA. New Zealand should seek to ensure that its trade access and overall trade competitiveness in the region are maintained and enhanced.
Malaysia and New Zealand’s complementary trade structures provide potential for trade creation following an FTA. Comprehensive sector coverage offers the best assurance of a bilateral agreement that supports rather than undermines multilateral trade liberalisation. New Zealand’s goods trade with Malaysia is substantially free of significant tariff barriers, though current trade in some specific product areas faces moderate barriers. The removal of existing barriers would provide worthwhile but limited benefits for this trade. Encouraging Malaysia to bind its tariff rates more closely to applied rates would also provide more certainty for New Zealand exporters.
However, analysis suggests that high tariff barriers in certain areas – many of them manufactured products such as wood products, whiteware, mechanical and electrical machinery, aluminium products and food and beverages – may be acting to restrict or stifle potential trading opportunities (the “trade chilling” effect). Therefore comprehensive elimination of tariffs under an FTA offers the chance to widen as well as deepen goods trade with Malaysia.
In the area of agricultural trade, the complementary nature of Malaysian and New Zealand production suggests that an FTA would offer further opportunities for our exporters without displacing domestic industry.
Given New Zealand’s growing trading interest in, and the importance of, the services sector to the economy, facilitating the free flow of services with Malaysia would deliver tangible economic benefits. While trade in services is relatively modest in the overall Malaysia-New Zealand relationship, an increasing number of companies are establishing cross-border operations. Barriers exist that restrict commercial presence in markets and there are also various measures affecting the movement of people and participation in a wide range of services. There is little doubt that reducing such restrictions would facilitate trade flows, deliver benefits to services exporters and contribute to the further deepening of economic integration between Malaysia and New Zealand.
Levels of investment between New Zealand and Malaysia are disappointingly low. An FTA could provide a more visible platform for enhanced levels of investment, eg. through identification of significant impediments to such flows and raising the profile of each investment market both bilaterally and internationally.
To maximise the benefits from closer economic interaction, bilateral FTAs can go beyond the liberalisation of goods, services and investment. Cooperation in other areas of economic policy can help facilitate trade by improving conditions for doing business in each other’s economy.
An FTA with Malaysia could help reduce transaction costs to business associated with different standards and regulatory approval methods, eg. through improved cooperation between regulators, mutual recognition or harmonisation, or simplified administrative procedures. In the area of sanitary and phytosanitary measures, an FTA could encourage technical cooperation between regulatory agencies to enhance implementation of the WTO SPS Agreement and facilitate access. An FTA would also provide options to enhance mutual assistance between the New Zealand and Malaysian Customs authorities.
Cooperation in the area of intellectual property protection might include exchanging information to raise awareness of intellectual property rights, facilitating the development of contacts and cooperation between agencies, and providing mechanisms that expedite problem resolution. A competition chapter in the FTA between Malaysia and New Zealand could promote competition in markets and help curtail anti-competitive behaviour.
The New Zealand Government has developed frameworks to integrate labour and environment considerations more effectively in trade agreements and would seek to include appropriate provisions in an FTA with Malaysia. These would recognise that labour and environment matters should not be used as either artificial trade barriers or ways of securing unfair trade advantage. They would also serve as a means of exploring areas for future cooperation and dialogue. The final form and content of any labour and environment components would reflect the mutual interests and objectives that New Zealand and Malaysia wish to promote.
Overall, a comprehensive FTA between New Zealand and Malaysia would provide real benefits for the people, businesses and economies of both nations. It would underpin and enhance the important bilateral relationship with Malaysia at a time when new developments in regional political and economic architecture are providing challenges and opportunities for our existing pattern of interaction.
In order to gain insights into the changing patterns of Malaysian-New Zealand trade flows across all product lines, this study examined the imports from New Zealand into Malaysia over the last nine calendar years. Table 6.1 shows how the trade flows between Malaysia and New Zealand have changed over the last few years, and emphasises that imports from Malaysia have grown faster than New Zealand’s exports to Malaysia. While exports from New Zealand have increased, an important question relates to how well we are doing compared with major competitors. This annex examines this question.
The revealed comparative advantage (RCA) index usually compares a country’s exports with those of the world as a whole. We have slightly modified this to give an indication of the bilateral RCA index for New Zealand’s performance into Malaysia in a particular sector at a given point in time. We have looked at whether or not imports into Malaysia in a particular sector are increasing or not as a percentage of total Malaysian imports, and how well New Zealand is doing in that sector. This analysis creates four quadrants, determined by product growth relative to overall import growth and growth in market share. These quadrants are:
New Zealand’s exports in the crucial quadrants one and two69 are a combined total of only 21.5 percent of our total exports to Malaysia, indicating that New Zealand is not trading in the Malaysian import sectors that are growing strongly.
Quadrant 1The top 10 import lines in this quadrant accounted for $25.4 million 2003, scrap iron being the largest HS line by value. In only one of these top 10 lines does New Zealand have a market share above 5 percent (chilled beef, where the share increased from 15.5 percent to 21 percent between 1997 and 2003. Two of the 10 HS lines are agricultural products, while the remaining eight products are manufactured goods as defined by the WTO – although the most valuable line, imports of scrap iron, is hardly a value-added product. Of the 64 import lines, 41 products that were traded in 2003 did not feature in 1997.
Quadrant
These are HS lines where Malaysian imports are increasing above the average but
New Zealand’s market share is declining. Imports valued at $83.3 million
are found in this quadrant (136 HS lines and 16.0 percent of New Zealand’s
imports). Two HS lines (infant formula and fish fillets) made up over half
of trade in quadrant two.
Quadrant
3
Imports valued at $18.7 million
are found in quadrant three (112 HS lines and 34.3 percent of
New Zealand’s imports into Malaysia). Methanol was
the main item, accounting for $65.76 million worth of exports,
followed by sheepmeat exports totalling $22.6 million. Butter,
wood pulp, cheese, offals, processed vegetables, apples, onions and
timber (in which several of these products had a market share of at
least 25 percent) are also found in quadrant three. New Zealand
appears to be doing well in particular lines that are not growing above
the overall average into Malaysia.
Quadrant
4
Imports valued at $229.6 million are found in quadrant four (179 HS lines
accounting for 44.1 percent of New Zealand’s imports). By
value milk powder was the main product with exports valued at $170.47 million. Other
lines include frozen beef ($23.19 million and 12 percent market share)
and kraft paper ($9.2million and a 5.1 percent market share).
Southbound Trade71
In 1990 Malaysia held a 0.90 percent market share in New Zealand. By 2003 this had climbed to 2.28 percent, still below the 2.61 percent achieved in 2002. The results from the RCA analysis confirm that Malaysia is doing well in the New Zealand market. Nearly half (46.4 percent) of the imports that enter New Zealand from Malaysia are classified as quadrant one, product lines where the rate of growth was above the average growth rate for total global imports. A further 11.7 percent of the Malaysian imports were in quadrant two, with one-third (33.2 percent) in quadrant three and a low 8.7 percent in the lowest quadrant four.
This analysis points to possible under-performance by New Zealand in the Malaysian market. There are limited trade lines where New Zealand is expanding market share in growth lines, but this country features predominately in sectors that are in relative decline or, more worryingly, losing market share. Some 44 percent of New Zealand’s exports to Malaysia are in quadrant four, and 34 percent are in quadrant three.
This analysis needs to be treated with caution. It says little about (a) our exports to Malaysia in perspective of the overall global export strategy, or (b) the value-added aspects of our exports into Malaysia. A good performance in quadrant three, where New Zealand exports are bucking a trend, could be considered a positive result. Also, as cautioned above, this is a one-period snapshot. Detailed analysis or the use of another base period may show somewhat different results. The base period of 1997 was an unsettled period in Malaysia, as it related to the regional economic crisis of that time.
Conversely, Malaysia is performing well in the New Zealand market, with nearly half of its exports to New Zealand increasing market share in individual lines where the global share of these imports into New Zealand was also increasing.
Economic analysis of the results of tariff liberalisation tends to concentrate upon the analysis of the impacts of tariff reductions on existing flows of trade. This relatively simple calculation can be estimated using a CGE (computable general equilibrium) model. It is more difficult to obtain an estimate of the so-called “trade chilling” effect of high tariffs, namely the degree to which high rates limit or even prohibit trade in that particular product.72
The objective of this annex is to examine the potential trade chilling effects of current high MFN tariffs in Malaysia in order to assess the effects that liberalisation may have on exports from New Zealand in the medium to longer term. This analysis seeks to provide some insights into whether trade “widening” rather than “deepening” is likely to be a feature of the agreement.
The starting point was to take the tariff schedule for Malaysia 73 and isolate out the specific sectors where the tariff is at a level of 10 percent or higher. A complication is that international definitions are only comparable at the HS six-digit level, so these nine-digit Malaysian codes were condensed to HS 6 codes.74
The next step was to take New Zealand export data for the December 2003 year as it related to the world, Australia, Singapore and Malaysia.75 This data was for total exports from New Zealand and may differ from the detailed data shown above where Malaysian import data was used. The data was analysed to find where exports to Malaysia at the HS 6 level were below average exports to the world. Exports to Malaysia were then also compared to the benchmark duty-free destinations of Australia and Singapore. The final step is to analyse whether Malaysian tariffs may have been a factor in this trade chilling.
The working hypothesis is that high tariffs chill trade. Therefore, as a starting point, trade to selected countries will have a lower percentage of trade in the HS lines considered to have high tariffs than is the case for global exports – or, more importantly, than exports to the essentially duty-free regional “control” markets of Australia and Singapore in the second instance.76 These percentage shares can be compared with the tariff rate to see if a general pattern is visible.
The following limitations must be stressed:
Results at the detailed level show that only 7.7 percent of New Zealand’s exports going to Malaysia are in the HS lines where Malaysian duties are above 10 percent. Taking the same HS sub-headings, this contrasts with export shares from New Zealand to the world of 24.5 percent, 45.8 percent to Australia, 14.3 percent to ASEAN as a whole and 27.1 percent to Singapore.
At the next level up, trade in lines where the tariffs are above 20 percent show a similar pattern. Here, trade in a total of 543 HS lines account for only 3.9 percent of exports to Malaysia. The control figures are 15.2 percent to the world, 29.0 percent to Australia, 7.2 percent to ASEAN and 11.2 percent to Singapore in these same products.
Major products (using the top 25 HS 4 headings77 ranked by global exports) at the more aggregated level in the high tariff lines where trade appears to be chilled include:
a. agricultural – yoghurt, wine, waters, and ethyl alcohol. There is also some partial evidence in casein and buttermilk, although the export share to Malaysia in these products is higher than the comparable share of New Zealand exports to Australia;
b. forestry – plywood and paper towels. In both these cases the relative market share to the world, Australia and Singapore is higher than is the case with New Zealand’s exports to Malaysia;
c. Other manufacturing – 16 lines of plastics, carpets, tyres, iron and steel products, aluminium products, furniture, some electrical products (fridges, washing machines and heaters), car parts and boats. In all these lines the Malaysian share was below the global and Australian shares, but car parts, fridges, carpets, some plastics, tyres and heaters were above the Singaporean market share.
The remaining aggregate lines facing possible trade chilling in the Malaysian market are very minor exports lines for New Zealand globally. In these few lines the import shares into Malaysia are higher than into both the Australia and Singapore benchmarks.
Overall, the evidence suggests that there is trade chilling in (a) limited agricultural products such as yoghurt, and (b) in many manufacturing lines that are important exports from New Zealand. There is less evidence of trade chilling in the agricultural sector.
We again caution that this analysis is preliminary, but it does make an attempt to classify where trade chilling may be taking place. We also emphasise the limitations of the methodology as outlined above. In particular it should be noted that tastes and preferences vary across markets and, in the case of Australia, the domestic sector actively competes with New Zealand exports in the production of temperate agricultural products such as those of the dairy sector. Nonetheless, this methodology provides an analytical framework from which to assess the extent to which high tariffs may be inhibiting trade.
[69] We have opted for a 1997 base year and the final year as 2003, as this is the longest period over which we have Malaysian trade data. The analysis is invariant to the currency used.
[70] Includes trade with positive value in either 1997 or 2003.
[71] This analysis was undertaken by comparing 1990 and 2003 data on New Zealand’s imports, as trade data for that longer period is readily available.
[72] “Has The New Zealand/Australian Closer Economic Relationship (CER) Been Trade Widening or Deepening?” A paper prepared by the Economic Division of the Ministry of Foreign Affairs and Trade, June 2004. This study found that export trade widened rather than deepened as a result of the CER trade agreement with Australia. Trade has expanded in those products that were not heavily traded prior to the agreement as opposed to an expansion of “traditional” exports that were traded at the start of the agreement.
[73] Downloaded from the ASEAN Secretariat website.
[74] Where there was more than one HS 9 line from the HS 6 parent, the first HS 6 tariff rate was taken to represent the tariff level. This is somewhat arbitrary, but done for computational convenience.
[75] This data was total exports (ie. including re-exports) from New Zealand, and may differ from the detailed data discussed above where Malaysian import data was used.
[76] While neither Australia nor Singapore are perfect substitutes for the other nine ASEAN markets, they are possible substitutes.
[77] Note that in aggregating from detailed HS 6 to a more general HS 4 there are instances where only a part of the aggregated products are “chilled”.
