• Malaysia places emphasis on trade agreements

• FTAs improve Malaysia’s competitiveness and develop economic sustainability

• Resilient exports to FTA markets

• New FTAs require opening up of restricted sectors, such as services

The proliferation of bilateral free trade agreements (FTAs) in Asia is a recent and new phenomenon. Before the late 1990s, the focus of economic liberalisation for Asian countries, including Malaysia, was the multilateral trade process. It was not until 1992 when ASEAN reached a milestone agreement to establish a free trade area that finally regionalism in the form of FTAs came into prominence in the region. However, since the onset of the Asian financial crisis in 1998, many countries in the region have embarked on bilateral FTAs.

FTAs are being formed between many types of partners – between individual countries in the same region, between individual countries in different regions, between individual country and a regional grouping, between regional groupings, between developing countries or between developed and developing countries. The underlying reason for countries to choose this form of economic integration is to generate higher economic growth. With FTA, the countries can regain their growth momentum, expand export market, attract foreign investment, drive domestic restructuring and open protected domestic sectors, reduce inputs costs for exports and make exports more competitive, look for new markets and overcome the slow progress of liberalisation in WTO. A particularly important reason why countries got onto the FTA bandwagon is the fear of exclusion – without preferential treatment given by FTAs, countries may lose competitiveness in export markets and become less attractive to foreign investments. Business lobby groups are also likely to pressure to improve market access for exports.

Apart from economic factors, strategic and political reasons are also considerations for forging preferential economic relations because they can be used as a reward for co-operation in non-economic matters or an endorsement of a strong relationship. Formation of FTAs can be seen as a way to improve trade relations, which in turn helps to strengthen confidence between neighbouring countries. FTAs can be used to encourage competitive liberalisation by setting precedent for areas of economic interest for example in intellectual property rights, investment rules and government procurement. In another aspect, an FTA could also be seen to have security issues as its objective. Each FTA is custom-made and a product of negotiation between the parties. Earlier FTAs mainly promoted trade while the new ones have larger goals such as generating growth, facilitating investment and creating the enabling environment for growth. However, the main elements of FTAs are similar and focus on liberalization and facilitation of trade in goods and services through reduction of tariff and non-tariff barriers including customs procedures and mutual recognition of standards. They also involve wider and deeper liberalisation such as in investment.

Source: BIMB Securities Research - 12 Feb 2019