Written by Lau Zheng Zhou
Published in The Edge Weekly on 16th of September 2019
It may come as a surprise to many that Taiwan is the only top ten trading partner with Malaysia who has yet to have a free trade agreement (FTA) signed, either bilaterally or multilaterally at the ASEAN level.
Historically, Taiwanese manufacturers were among the pioneering sources of foreign direct investment (FDI) into Malaysia, particularly in the electrical and electronics (E&E) sector, as they joined other global companies from Japan, the US and South Korea in shifting production to cost-competitive destinations.
A necessary step in enhancing bilateral ties
But what more can be done to further enhance Malaysia-Taiwan relati United States and South Korea in shifting production to cost-competitive destinations.
Last year, according to MIDA, Taiwan had implemented manufacturing projects worth USD5.8 billion, ahead of China and doubled that of the United Kingdom. The quality of bilateral trade and investment has also evolved with various cross-border initiatives and partnerships established to help Malaysian industries transform from labour-intensive into innovation driven.
But what more can be done to enhance relations between Malaysia and Taiwan?
Uncertainties triggered in the short-run by the ongoing US-China trade tensions, and rapid reconfiguration of economic spheres of influence in the mid-to-long run, necessitate a more strategic and formal policy response, especially from Taipei, with Malaysia and other members of ASEAN, in order to add-value and promote greater regional resilience.
I recently represented the Institute for Democracy and Economic Affairs (IDEAS) in Taipei to conduct several focus group discussions with members of the industry, government as well as think tank on the topic of bilateral trade and investment.
Our delegation presented the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a multilateral trade agreement where Taiwan has expressed interest in joining, and using the multidimensional provisions stipulated in the agreement to highlight the many potential benefits that both trading partners will enjoy, as well as key concessions for Malaysia which may be challenging to both members and non-members of CPTPP alike.
Tariffs are low-hanging fruit
While some observers are quick to suggest that tariffs no longer matter as much as non-tariff measures (NTM) do given the inextricable nature of globalisation, this view could not be further from the truth for an export-oriented economy like Taiwan who has yet to have FTAs signed with many of its major trading partners.
For instance, a Taiwanese exporter of cold-pressed steel to Malaysia faces 15% of import duty while its closest competitors from Japan and South Korea would enjoy zero-rated tariff because of the effect of having FTAs signed with Malaysia.
In fact, many Taiwanese industrial exporters have been rendered uncompetitive not necessarily because of inefficiencies at the plant, but due to an artificial, man-made barrier being priced into its cost structure. Therefore, the priority is crystal clear for Taiwan as it seeks first to lower tariffs, a low-hanging fruit, before it can effectively address other NTMs such as local content requirements, movement of talents as well as favourable treatment of state-owned enterprises (SOEs).
Balancing domestic concerns
Despite its huge potential benefits, FTA will almost always run into opposition because certain groups will inevitably suffer more than others, at least in the short run. In Malaysia’s case with CPTPP, or Trans-Pacific Partnership (TPPA) before this, there is a widespread concern over the possibility of buying expensive imported medicines in the future because of the twin effect of enhanced intellectual property rights (IPRs) and investor-state dispute settlement (ISDS) provisions, purportedly in favour of the pharmaceutical firms over the general public.
Likewise, although our delegation has reasons to believe that the agriculture sector in Taiwan will have stronger resistance towards the market liberalising outcome of a trade agreement, it was imprinted on us that the perceived existential threat to the island economy simply takes priority over other domestic concerns.
It is nevertheless crucial to address effectively these concerns from the very start, as seen in Malaysia’s less-than-successful experience in handling the medicine issue, where we have collectively failed to pin down on the monopolies, created as a result of poor public procurement system, to be the fundamental reason for medicines getting less affordable while the IPRs provisions under CPTPP are intended to protect and encourage innovation, not necessarily designed to benefit the producers only.
Of course, objections to CPTPP within Malaysia are related to other, deeper issues. It was interesting having to explain to the Taiwanese the sanctity of advancing the Bumiputera agenda by the government of the day, and the labyrinth of policy measures and entities such as the government-linked corporations (GLCs) to facilitate a more equitable inter-ethnic wealth distribution.
But Malaysia as an original signatory of CPTPP has managed to extract important concessions on the Bumiputera issue, including restrictions on foreign equity in key sectors such as automotive, special preference for Bumiputera contractors in public procurement, as well as the continued presence of GLCs in the private sector. While these exemptions are far from ideal in promoting freer trade, but it is the price that the CPTPP bloc needs to pay for Malaysia to speed up its ratification process.
Not giving up previously secured concessions
Observers in Taiwan are monitoring Prime Minister Mahathir’s succession planning closely too, to see what perspective his successor might have on CPTPP. Meanwhile, we cautiously hope the administration will discover its appetite for ratification as a route to stimulating the economy and considering the broad concessions Malaysia’s negotiating team was able to secure.
But – more than these domestic factors – is the thought that perhaps now more than ever it is vital to defend the rules-based multilateral trading system. Growing interests from the developing world in joining CPTPP offer silver lining for stability and certainty in global trade and investment which is dogged by growing political preference for protectionist and mercantilist thinking.
For Taiwan, there would be clear benefits to being part of CPTPP – and Malaysia would benefit from their membership too. But first Malaysia must take that important step in completing the process of ratification.