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FTA with Malaysia finalised

Business Recorder (Pakistan)

FTA with Malaysia finalised


ISLAMABAD (November 05 2007): The long-awaited Free Trade Agreement (FTA) with Malaysia has been finalised which would be implemented from January 2008, after formal approval of the Cabinet, sources in Commerce Ministry told Business Recorder.

Initially, an agreement on ’Early Harvest Program’ (EHP) was signed in December 2005 during the Prime Minister’s visit to Malaysia and effective from January 2006. Sources said that reduction of tariff on palm oil was a major issue in the negotiations as import of palm oil from Malaysia involves substantial quantity having annual value of over $375 million. Pakistan offered to reduce tariff on palm oil by 10 percent on a margin of preference on January 1, 2008 and further 5 percent on January 1, 2010 and to which Malaysia finally agreed.

The schedule of concessions, which is an integral part of the agreement, has been divided into four Faster Tracks (FT) suggesting elimination of tariff in two reductions by January 1, 2009 and Normal Tracks (NT), on products in this track would be eliminated by January 2012.

Sensitive Tracks(ST) has been further divided into three-sub-tracks ie (a)Sensitive track -where tariff will be reduced to 5percent by 2011. In case of Pakistan, however, for certain products, attracting applied MFN tariff of 15percent tariff would be reduced to 5percent in 2014.

(b) Sensitive track (2) - where tariff would be reduced to 10 percent by 2014.

(c) Sensitive track (3) - where tariff will be reduced to 20 percent by 2009 or 2011.

Pakistan has also offered reduction of 20 percent tariff on margin preference concerning 129 tariff lines where Pakistan had given the same treatment to China in FTA.

Sources said that both countries have also kept a list of products in the highly sensitive category where tariff will not be reduced for the present. Besides, there was also an exclusion list, which would be kept outside the bilateral agreement. These products are mostly related to national security requirements, protection of human health or safety, animal or plant health, environment and for religious reasons.

Malaysia will eliminate tariff on about 80 percent of Pakistan’s existing imports into Malaysia whereas Pakistan has covered only about 23 percent of current imports of Malaysia in this category.

Commerce Ministry claims that it has protected all its core manufacturing industries which include auto sector, electronics, footwear, leather products, locally manufactured chemicals and machinery, paper, garments and synthetic textiles, articles of wood and furniture etc.

Pakistan has gained market access for all our core products like cotton yarn, cotton textiles, bed linen, home textiles, jewellery, kinnow, mangoes, some engineering goods, leather products and minerals etc.

To ensure that no circumvention takes place and preferential tariff is applied on the goods originating from the respective FTA partners, the provisions of Rules of Origin, appearing in chapter 3 of the agreement would be followed by both the countries.

The criterion to confer origin is that either the goods are wholly produced; or the value-addition is not less than 40 percent of its contents, or that the goods produced undergo a change of tariff heading on 4-digit HS. Besides, product-specific Rules of Origin were also negotiated with the consensus of all the stakeholders in Pakistan.

Sources said that product-specific rules provide further protection to agriculture and industrial products.

For agricultural products including prepared foodstuffs, the criterion of wholly obtained or produced in the territory of exporting country has been adopted. Since Malaysia, except palm oil, depends mostly on imported fruits, vegetables grains and other agricultural produce, the net beneficiary for market access will be Pakistan where such products are produced in large quantities.

For cotton and blended textiles, the criterion of conferring origin would be a ’Yarn Forward Rule’ ie only the import of fibers is allowed and spinning, weaving and finishing of fabrics should be carried out within each country to get the benefit of preferential tariffs. Pakistan can easily comply with this criterion of origin.

Accordingly, the tariff reduction modality read with the product-specific Rules of Origin ensures protection to our core industrial and agricultural products.

Although most of the goods placed in the fast track by Malaysia have applied tariff of zero percent, the Bound Rates of Malaysia in WTO are much higher. Under this bilateral FTA, Malaysia has bound the rates of tariff, which were at zero percent on January 1, 2006. The rates of tariff, which were higher, especially textiles, would also be reduced to zero percent creating a level playing field for Pakistan.

Pakistan will authorise Trade Development Authority of Pakistan (TDAP) to issue certificate of origin to the exporters. In the case of Malaysia, the certificate of origin shall be issued by Ministry of International Trade and Industry (MITI).

In the area of trade in services, both countries have offered market access to each other beyond their current multilateral commitments in the WTO.

In the ongoing Doha Round of negotiations, both countries have also tabled their respective initial offers for negotiations at the multilateral level. These initial offers will become binding on both countries after the conclusion of the Doha Round.

While preparing the initial offer to WTO under the Doha Round a mandate was secured by the Ministry of Commerce from the ECC. Under the FTA with Malaysia, Pakistan has offered market access on services to Malaysia within the parameters decided by the ECC. In fact, the ECC had agreed to provide equity of 70 percent in mode 3 (commercial presence) but the equity offered to Malaysia is only 60 percent. In the financial services, the offer of Pakistan is 49 percent. Compared with our multilateral commitments of Uruguay Round, Pakistan’s offer to Malaysia is WTO plus.

Malaysia in its schedule of commitment for ’services’ has offered a WTO plus package by opening more sectors and sub sectors and increasing equity limits for investment in the field of services. The most important concession secured from Malaysia is in the field of Islamic Banking and Takaful.

Malaysia has allowed 100 percent equity to Pakistan in these sub-sectors sources said, adding that this is a concession which is even beyond Malaysia’s initia1offer to the WTO in the Doha Round. Besides, Pakistan will be the first country, which has been offered 100 percent equity in these sectors by Malaysia.

The overall package of trade in services was negotiated with Malaysia with the complete consensus by all relevant stakeholders like State Bank of Pakistan (SBP), Ministries of Information Technology, Industries, Production and Special Incentives, Food Agriculture and Livestock, Higher Education Commission, Board of Investment, Telecommunication Corporation, Securities and Exchange Commission of Pakistan etc.

For real market access in trade in services, mutual recognition arrangements are also necessary. As an overall package of the FTA, a framework agreement on ’Mutual Recognition Arrangements’ was also negotiated.

This framework agreement will enable stakeholders of both countries to move forward and avail the market access provided under the FTA.

For initiatives in investment, the negotiations built upon an earlier bilateral agreement on the ’promotion and protection of investment’ which was signed in Kuala Lumpur on July 7, 1995. Board of Investment was the focal authority to negotiate the investment chapter.

The commitments negotiated for investment shall not be available to any other country and the bilateral investment treaties signed by Pakistan so far will also have no impact on the bilateral investment regime in FTA.

Both countries have agreed that investors shall be accorded a treatment by both countries not less favourable which is accorded to their own investors. This principle (National Treatment) will have certain exceptions as agreed in the negotiations annexed to the chapter of investment.

For reducing cost of doing business cooperation between customs administrations of both countries is essential as all the imported and exported goods pass through this barrier.

Although both countries have undertaken to reduce/eliminate tariff gradually yet to safeguard against any surge of imports due to trade on preferential tariff bilateral safeguard measures have also been agreed by both countries. The Rights and Obligations to initiate trade remedy measures available under the WTO have been kept intact.

Recognising the fact that to increase bilateral trade, cooperation and harmonising sanitary and phyto-sanitary measures and standards is essential, the agreement contains specific provisions in these areas. The concerned stakeholder Ministries like Ministries of Food, Agriculture and Livestock, Science and Technology and Pakistan Standards and Quality Control Authority will interact with their counterparts in Malaysia to ease non-tariff measures which affect the movement of goods across borders. Similarly, the observations of international applications relating to intellectual property have also been reaffirmed.

While implementing the bilateral FTA, certain disputes relating to interpretation or application of the agreement may arise. A dispute settlement mechanism was agreed.

To resolve the bilateral disputes emphasis has been placed on bilateral consultation. In case disputes are not resolved in this manner, a settlement of arbitral tribunal comprising arbitrators of both countries and chaired by a third arbitrator from a country other than Pakistan and Malaysia has been agreed. The arbitrator will work in accordance with a procedure similar to mechanism of dispute resolution in the WTO.

Sources said that Federal Board of Revenue (FBR) may issue a notification for reduction in tariff for imports from Malaysia with effect from January 1,2008.

 source: Business Recorder