The EU-Malaysia FTA: an overdue assignment
New Europe | 29 August 2010
The EU-Malaysia FTA: an overdue assignment
Author: Javier Delgado Rivera
In terms of commercial engagements, Southeast Asia represents a region still relatively untapped by the EU – the kind of panorama that the EU craves in its road to economic recovery. Following the collapse of the EU-Asean FTA negotiations, the ongoing EU-Malaysia FTA talks evidence Brussels’ understanding of such prospective. A number of issues will be settled promptly during the negotiations: the EU is aware that there is no time to lose if it wants to bring the prosperity of Asia a little closer to Europe.
In the current rigor of Europe’s economies, the European Union (EU) market looks far east. Partly due to its growing domestic consumption, Southeast Asia is emerging from the global economic downturn much faster than the old continent –- a scenario that holds a vast potential for the EU to push further its exports. On the other side, as Shada Islam, from the Brussels-based European Policy Centre put it, “Asian nations, meanwhile, need to boost sales in Europe to maintain their impressive growth.”
Following conversations earlier this year, Malaysia joins Singapore and Vietnam —and at some point down the line, the Philippines— on the current wave of free trade agreements (FTAs) talks being held by the EU with a number of Southeast Asian states. At least from the Malaysian side, it is official: a few weeks ago, Datuk Mustapa Mohamed, Malaysia’s International Trade Minister, confirmed that “Malaysia had begun talks for a FTA with the EU.” The EU will most likely announce the launch of the trade negotiations with Kuala Lumpur at the Asia Europe Meeting (ASEM), to be held this October 4-5 in Brussels.
The intended EU-Malaysia FTA, thought to be signed within a year, seeks to primarily cut Malaysia’s trade barriers on wines, spirits, cars and financial services. Besides, EU officials have indicated that “they also want rules allowing EU business executives to work in Malaysia.”
Malaysia is the EU’s 22nd trading partner —in the same range as Libya and Mexico,— its second in Southeast Asia, though. The EU is obviously a rather larger market for Kuala Lumpur, placed fourth in the country’s trading partners rank — just after Singapore and China, and at the same level as the US.
The EU-Asean FTA frustration
The Association of Southeast Asian Nations (Asean) is a regional grouping comprising Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar/Burma, Philippines, Singapore, Thailand and Vietnam. In December last year, EU member states instructed the European Commission (EC) to explore FTA talks with Asean countries in a state-to-state basis. It marked the failure of the previous EU trade policy towards the region, that envisaged to secure an overarching FTA with the bloc as a whole.
Remarkably, the freeze of the EU-Asean FTA talks was not essentially caused by a commerce disagreement, but by a longstanding disregard for human rights by one of Asean’s members. As a prerequisite to any FTA discussions, the EU requires the signatory state to agree on a Partnership Cooperation Agreement, which includes provisions for the respect of human rights principles and democratic values. Myanmar/Burma’s notorious abuses on these two fronts are blamed for the halt of the trade negotiations.
Digging a bit deeper though, two additional issues appear to have played its part on the collapse of the talks: the reluctance of Asean’s members -or the demanding EU requirements- to further adjust their government procurement to European companies; and the region weak intellectual property rights.
What stands in the way of the EU-Malaysia FTA deal?
The prospective EU-Malaysia FTA is taking shape in a needy context. As Vicent Piket, Ambassador and Head of the EC Delegation to Malaysia, pointed last April, ”the economic crisis wiped out about 20% of the EU and Malaysia’s external trade last year.” The appreciation of the Malaysian currency, the ringgit -one of the best performing currencies in Asia-, has not been mirrored into an increase of Kuala Lumpur’s imports from the EU. Because of the economic recession and the growing diversification of Malaysia’s import partners, the country imports from the EU did actually shrink in 2009. The economic crisis has also had its tool on the European foreign direct investment (FDI) into the Southeast Asian nation.
The EU-Malaysia FTA negotiators are yet to work out a number of contentious issues. For starters, Malaysian opponents to the treaty warned that the deal “is likely to require at least 80% of Malaysia’s tariffs on European products to be reduced to zero.” According to these critics, it would imply the entrance of a huge influx of rather competitive European commodities right into the Malaysian market, undermining the capability of many local small and medium enterprises (SMEs) to do business as usual.
On top of this, two further touchy subjects guarantee a laborious final stage of the trade negotiations: the EU’s Renewable Energy Directive (EU RED) and Brussels’ demands on government procurement.
On the EU target of increasing the share of its renewable and clean energies, the EU RED establishes sustainability criteria for biofuels. Malaysia happens to be the world’s second largest exporter of palm oil, a plantation widely used for biofuels. Over the last years, this industry has been pushing the degradation of a sizeable part of Southern peninsular Malaysia. While Malaysian palm oil exporters will still be allowed to import to the EU, the production that would not meet the sustainability criteria will not be entitled to receive any incentives. It would make it virtually unmarketable “given that biofuel prices are well above fossil fuel prices and therefore not competitive without incentives [and subsides].”
Talking about this specific provision, Fredrik Erixon, director of the Brussels-based European Centre for International Political Economy, recently asserted that “Malaysia has a strong case against the EU RED requirements for palm oil use as biofuel, should it file a discrimination claim to the World Trade Organisation (WTO). “ In fact, Kuala Lumpur –along with Yakarta- is studying to appeal to the WTO if the EU ends up implementing the sustainability criteria.
The second contentious issue involves government procurement. According to Third World Network, a non-profit international network, “based on existing EU FTAs, [the one between the EU and Malaysia] is likely to require Malaysia to open up its government procurement.“ If this does happen, European firms will gain additional market access to compete for most of the public works, projects and services that the Malaysian authorities grant, in open bidding, to private enterprises.
A host of other issues will certainly be discussed in the FTA talks, though they are expected to be settled with no major setbacks. The most significant are the unsatisfactory Malaysian intellectual property protection; the sanitary shortcomings of the country’s fisheries and seafood sector; and the excise duties imposed in the Malaysian car market to shield local automaker Proton.
Brussels’ last call
As mentioned earlier, the EU has on Southeast Asia a huge and partially untapped market to expand its hungry exports. If Brussels really intends to seize this opportunity, it should better hurry up, as other trade giants have already gained the upper hand. This January, the China-Asean Free Trade Area came into effect, in what the facto is the world’s largest trade accord. As it happens in so many other pacts, Beijing only seems to care about its economic and trade might. As a result, Myanmar/Burma’s appalling human rights record did not stand in the way of this agreement, as it rightly did in the European case.
Last December the US, the world’s second trading power after the EU, notified that is ready to engage in negotiations with the Trans-Pacific Treaty, a free trade pact which among other, includes the Southeast Asian states of Singapore, Vietnam and Brunei.
This week, K. De Gucht, the EU Trade Commissioner, is participating in the 42nd Asean Economic Ministers’ Meeting in Vietnam. He is not embarked on a menial mission. By talking trade with the organisation’s major commercial powerhouses, Brussels must now make up for the futile two and a half years that the EU unsuccessfully committed to reach a FTA with Asean as a bloc.
Javier Delgado Riviera is a political researcher, he also runs EU SoutheastAsia Intelligence, a Twitter Feed about the latest developments and analysis on the ties between the European Union and Southeast Asia
