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By Karel De Gucht
The author of the article
NEWS UPDATES 6 October 2010

Europe and Malaysia will grow together with a bilateral Free Trade Area (FTA)

by EU Trade Commissioner Karel De Gucht

                 Trade and investment are crucial elements in the global recovery, which is a necessary condition for resuming our own growth. However, in spite of its benefits, trade is often an extremely contentious political issue, both domestically and between governments.

The British historian Thomas Macaulay had this paradox in mind when he said that “Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular.” That was back in 1824, yet it still rings true today.

Open markets are still under pressure; international competition is still seen as a source of unemployment and impoverishment; and trade in itself is still all too often seen as unfair.

The challenge for policy makers is therefore clear: at a time when trade is often seen as one of the things that got us into a crisis, we have to turn around this idea and support international trade to get out of it.

Eighteen months ago, global economic confidence was at its lowest in the wake of the Lehman Brothers collapse and its aftershocks. Financial markets had plummeted, sending shockwaves through many of our largest banks and causing some of them to crumble.

The financial crisis then took a heavy toll on the real economy, setting off a chain of job losses. International trade drives economic growth, but it also suffers heavily in recession, and we saw a drop of around ten percent in world trade in 2009.

One and a half year on, we may not be out of the woods yet but things look decidedly better. I believe this is in good part the result of a determined response from many governments.

Europe has played a key part in stimulating the global recovery. It is estimated that the European Union (EU) is spending some 5 percent of its gross domestic product (GDP) on fiscal measures, not only on automatic stabilisers such as unemployment benefits and other social security payments, but also on future-oriented spending, for instance broadband infrastructure and green technologies.

The EU has also been at the forefront of global efforts over the past year to avert the risks of a protectionist spiral, both by what we did and by what we didn't do.

Thanks to the strength of our internal market discipline, our borders have been kept open for business and foreign investment kept flowing. Europe has not wavered on its commitment to free trade - and will not do so in the future.

Jose Manuel Barroso
President of the European Commission

We have argued for and obtained strong political statements by the G20 against protectionism and in favour of completing the Doha Development Agenda – stressing its potential value as the best single way of addressing protectionist risks at the global level.

Globally, World Trade Organization (WTO) rules have provided insurance against a protectionist race to the bottom and it is fair to say that the multilateral rules-based system has passed its worst stress-test yet.

In this respect, the EU and Malaysia should continue to work together in the WTO to secure a balanced and comprehensive Doha deal which would not only favour a quick and smooth recovery by injecting a significant boost to the global economy but would address longstanding concerns of developing countries, notably on agriculture.

However, the current deadlock on Doha should not put our wider vision on hold and should not stop us from trying to foster our trade relations at the bilateral level.

Malaysia is the EU’s second largest trading partner in Asean, behind Singapore but clearly ahead of much larger countries like Indonesia, Thailand, the Philippines and Vietnam. Our 2009 bilateral trade amounted to around €23bn. In terms of approved FDI projects, the total EU stock is €8 billion. That is serious money.

But we cannot sit on those laurels. After all, the economic crisis has wiped out about 20 percent of both the EU’s and of Malaysia’s external trade. Moreover, on inward FDI the picture is far from rosy. Malaysia's recent figures suggest that in 2009 inward FDI fell by more than 50 percent compared to 2008.

In other words, there is a job to be done on foreign trade and investment. How? First of all, as anywhere else, through domestic policies. We have seen some encouraging signals from the Malaysian government in the past year, with the unilateral liberalisation and dismantling of several barriers in the services sector and restrictions on investment. Of course I hope the liberalisation drive will continue beyond the sectors affected to date. This will also be consonant with the policy of creating the New Economic Model (NEM).

But next to domestic policy, we need to build up a new framework for the Malaysia-EU bilateral trade. Why? Firstly, because a long-term, stable trade relation would make a world of difference as compared to the current unilateral granting of preferences by the EU under the so-called Generalised Scheme of Preferences (GSP). Essentially this is an EU scheme for developing countries and, evidently, we need to anticipate the day when Malaysia no longer qualifies for it.

Secondly, because the gains of a new, more ambitious arrangement for liberalising our bilateral trade can be huge. A study conducted in 2006 indicated that Malaysia would be a clear "winner". Let me just quote one figure: Malaysia's GDP would be boosted by 8 percent by 2020 if a deep and comprehensive Free Trade Area (FTA) were to be concluded. The wider the scope of the FTA and the deeper the liberalisation, the more gains, especially in the services area.

We tried to create this new framework for our trade and investment relations through the EU-ASEAN FTA negotiation. But in March last year, ASEAN and EU came to the conclusion that, at present, the conditions do not exist for such a region-to-region FTA.

The Hon. Dato’ Sri Mohd Najib bin Tun Abdul Razak
Prime Minister of Malaysia

Of course, especially in the present economic circumstances, we cannot afford to sit still and wait for the wind to turn. For that reason, the EU is now seeking alternative ways forward, namely through the negotiation of FTAs with individual Asean countries. Let there be no mistake about this: the EU is not giving up on Asean as a region. We are committed to Asean and it is a strategic goal to promote and assist Asean economic and political integration. Nobody else knows and understands the challenges of regional integration as well as we do.

But, in the face of the faltering region-to-region FTA talks, we need to find an alternative way of constructing the EU-ASEAN FTA in the longer term. Negotiating bilateral FTAs with individual ASEAN members is such a way. It is like producing the bricks, the building blocks that can later form a bridge.

In this perspective, Prime Minister Najib and the EU Commission President Barroso launched the EU-Malaysia FTA negotiations on 5 October in Brussels. In the same vein, bilateral FTA negotiations with Singapore were launched in December last year and are proceeding well, while it has been agreed with Vietnam to do the same in the very near future.

The EU is keen on having an FTA with Malaysia. Not for the sake of having an FTA at all costs and for the sake of it but as part of an effort to boost our economies by freeing up trade and investment in areas that are currently beyond the reach of the World Trade Organisation, including in those which are sensitive, economically or politically.

They are part of an effort to make trade work for our economies at a time when they need the boost. And they are also part of an effort to make trade be seen to work for the benefit of our citizens, whose faith in open markets is dwindling.

The objective of the FTA negotiations with Malaysia is simple: we wish to create new opportunities for businesses from both sides. Companies wishing to sell goods or offering services between the two sides should enjoy preferential treatment. And consumers should get access to a wider variety of products at better prices.

For the EU, Malaysia represents a growing market for exports and investments, as well as a crucial link to the wider Asean region. European companies who are thinking about setting up shop in one of the Asean countries may well be encouraged by the FTA do so in Malaysia.

Likewise, it makes eminent sense for Malaysia to get preferential access to the EU, the world's largest market. The EU with its half a billion largely prosperous consumers is without doubt an attractive destination for Malaysian exports.

In my view, establishing a free-trade agreement is a means to an end. That end is encouraging more – and more beneficial — economic partnerships and forging closer people-to-people links. Ordinary European and Malaysian citizens should be the ultimate beneficiaries of the decision to deepen our bilateral relations.

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