Elevating The Malaysia-EU Bilateral Trade Relations

By Evelyn S. Devadason,

The negotiations for a Free Trade Agreement (FTA) between Malaysia and the European Union (EU), known as the MEUFTA, began in 2010 but reached an impasse in 2012. In place of that, was a Sustainability Impact Assessment (SIA) of the economic, social, and environmental effects of trade-related provisions by both parties to support the FTA negotiations.

A stumbling block for the resumption of the MEUFTA is the sustainability action (such as deforestation and loss of biodiversity) taken by the EU in relation to palm oil. The long-standing palm oil debate has in fact detracted the Malaysia-EU bilateral relations from reaching new altitudes. Maintaining a broader perspective on the Malaysia-EU bilateral relationship despite the odds is imperative since environmental and sustainability concerns are now incorporated into the new generation of FTAs and are likely to be the dominant issues in future agreements.

Malaysia should therefore move ahead to elevate its broader trading relationship with the EU, especially since the EU is at the forefront of the global sustainability agenda!

First, commanding a market share of 8.63% of Malaysia’s global trade, the EU27 (excluding the United Kingdom; hereafter the EU), is the country’s third largest trading partner. In fact, Malaysia has consistently been a net exporter to the EU, with growth rate of total trade with the Union averaging at 4.81% for the 2000 to 2019 period. The EU is an important export market and source of investment (particularly Netherlands), and Malaysia cannot afford to comprise its relationship with the Union, especially when the other ASEAN member states (AMS) are moving ahead with this partnership. Singapore and Vietnam have concluded bilateral FTAs with the EU and the agreements have entered into force in 2019 and 2020, respectively.

Second and more importantly, as a global green leader, the connections with the EU are important for Malaysia in progressing along the green agenda. A related issue for Malaysia is its low exports of environmental goods (EGs), which constitute, on average, only 2.67% of Malaysia’s total exports over the 2000 to 2019 period. There is an urgent need to develop and strengthen Malaysia’s export capabilities in EGs through international cooperation.

For example, compliance with eco-labelling requirements is important for penetrating the developed markets for EGs. Worth noting is that among the top 20 global exporters of EGs and ahead of Malaysia (which was ranked at the 17th position) are five EU countries, Germany, followed by Italy, France, Netherlands, and Denmark.

Apart from eco-labelling, is the rise in other high intense forms of “non-green” non-tariff measures (NTMs). Sanitary and phytosanitary (SPS) measures and technical barriers to trade (TBTs), known as ‘standard-like NTMs’, are highly used in regulating global trade. Yet, despite countries having some identical NTMs, those regulations are found to have diverse effects on traders as the application and administration of standard-like NTMs remains country-specific.

Evidentially, the qualitative differences in the conformity assessment procedures, such as approval, certification, accreditation, testing, sampling, inspection, and quarantine, that are often tied to standard-like NTMs have yielded higher trade costs in Asia relative to the EU. From that vantage point of addressing the high trade costs related to standard-like NTMs, the EU can offer targeted capacity building programmes to help countries like Malaysia to improve its design and implementation of NTMs.

Also, related to the issue of going green and other forms of sustainability is ensuring that the Malaysian businesses have an environmental, social and governance (ESG) strategy. The allegations of forced labour, child labour and other labour rights infringements imply a need for more concerted efforts for Malaysian companies to adopt good ESG practices, especially the ‘S or social aspect. Apart from the rising demand for ESG compliance by local companies, there are also greater expectations for sustainability disclosures from foreign stakeholders. Here again, there can be lessons learnt from the EU, since ESG investing is prevalent in Europe.

Businesses in Malaysia need to comply with stringent NTMs and have strong ESG credentials to access markets and capital. With Europe leading the way as a global green leader and driver of sustainability, namely through (green) NTMs and ESG-related regulatory measures, it only seems rational for Malaysia to push ahead and intensify its connections with the Union.

Evelyn S. Devadason is Professor at the Faculty of Economics & Administration, University of Malaya, and Vice-President of the Malaysian Economic Association.

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