Chapter 2 The Malaysia-Australia Free Trade Agreement – National Interest
Free Trade Agreements
International agreements regulating trade come in two forms. The first
are the multilateral agreements, intended to apply a universal set of rules for
trade between nations. There are three major multilateral agreements: the
General Agreement on Tariffs and Trade (GATT), which regulates the
international trade of goods; the General Agreement on Trade in Services
(GATS), which regulates international trade in services; and the Trade Related
Aspects of Intellectual Property Rights (TRIPS) Agreement, which regulates the
treatment of intellectual property rights.
In general, these three agreements are intended to liberalise trade
through individual national commitments to reduce barriers, such as tariffs and
quotas, to international trade. The agreements are administered by an
international agency, the World Trade Organisation (WTO).
The second form of international agreement regulating trade is the bilateral
or plurilateral free trade agreement or regional trade agreement (referred to
as ‘free trade agreements’ henceforth). These agreements are negotiated
between two or more countries and are intended to liberalise trade between the
signatories by providing them with more favourable access to each other’s
markets than is available to other countries.
Negotiation of free trade agreements has increased significantly since
the 1990s as a result of the slow negotiation process for the improvement of
the three multilateral agreements. As of January 2012, 511 free trade
agreements had been notified to the WTO.
The Australian Government has negotiated a number of bilateral and
plurilateral free trade agreements, using the agreements as a mechanism to
obtain market access for Australian exports to some of Australia’s largest
trading partners. At the time of writing, Australia has six ratified free
trade agreements and eight free trade agreements under negotiation.
The treaty under examination here, the Malaysia-Australia Free Trade
Agreement (MAFTA), is the only agreement undergoing domestic approval at
Criticism of free trade agreements
While the WTO is in general supportive of free trade agreements, it does
express a number of concerns about the impact of these agreements on the
freedom of trade generally. For example:
- the WTO points out
that, by their very nature, free trade agreements are inherently discriminatory
because they build in a systemic advantage to the signatory countries;
- the net economic
impact of free trade agreements on signatory countries depends on the
agreement’s internal parameters and architecture;
- the expected benefit
of free trade agreements to signatory countries may be undercut by distortions
in resource allocations and trade and investment diversion; and
- overlapping free
trade agreements tend to generate a system of coexisting different trade rules
in a single country, hampering trade as a result of the costs to exporters of
negotiating these coexisting rules.
The Productivity Commission has also been a critic of bilateral and
plurilateral free trade agreements. In its Research Report, Bilateral and
Regional Trade Agreements, released in December 2010, the Productivity
Commission made the following observations on Australia’s free trade
- while the theoretical
analysis suggested that tariff preferences in free trade agreements would
significantly increase trade flows between signatory countries, in reality, the
increased trade flows were in part generated by the diversion of trade from
other trade partners, resulting in only modest increases in national income;
- the process for
assessing and prioritising free trade agreements lacked transparency and tended
to oversell the likely benefits; and
- other policy options may
be more cost effective for Australia.
The Productivity Commission recommended that:
- the economic
modelling of free trade agreements should include realistic scenarios and
should be overseen by an independent body; and
- a full and public
assessment should be made of each provision of the negotiated outcome.
Australia’s trade relationship with Malaysia
According to the National Interest Analysis (NIA), Malaysia is
Australia’s tenth largest trading partner, and the third largest trading
partner in the Association of Southeast Asian Nations (ASEAN). The two way
trade between Australia and Malaysia is believed by the Department of Foreign
Affairs and Trade to have been A$16 billion in 2011, or 2.6 per cent of
Australia’s total trade in goods and services.
Australia exported A$4.49 billion worth of goods to Malaysia in 2011.
Australia’s principal exports were crude petroleum, copper, coal and wheat.
The value of Malaysia’s exports to Australia in 2011 was A$8.56 billion,
and included: crude petroleum; electronic equipment such as computers,
monitors, and televisions; and refined petroleum.
In relation to trade, Australia’s exports to Malaysia in 2011 were
valued at A$1.64 billion, with significant contributions from education and
tourism. Australian imports of Malaysian services in 2011 were valued at A$1.33 billion,
including major contributions from transport services and tourism.
In terms of investment, Malaysians invest significantly more in
Australian shares than Australians invest in Malaysian shares. Malaysian
investment in Australian shares amounted to A$13.99 billion in 2011, while the
reciprocal figure was A$5.69 billion.
MAFTA is the latest bilateral free trade agreement with a member of
ASEAN. As with the previous bilateral free trade agreements with Thailand and
Singapore, this agreement has been made to build upon the ASEAN, Australia and
New Zealand Free Trade Area Agreement (AANZFTA), which entered into force on 1
In addition to the AANZFTA and the two extant free trade agreements,
Australia also has bilateral investment treaties with Indonesia, Laos, the
Philippines and Vietnam.
The NIA for MAFTA claims that:
Entry into force of MAFTA will deliver additional benefits to
Australian producers, exporters, consumers and investors and provide a platform
for securing further trade and investment liberalisation in the future.
The Department of Foreign Affairs and Trade (DFAT) emphasises the
benefits of MAFTA as a part of a broader strategy to engage with the ASEAN
…MAFTA will enhance the integration of the Australian economy
into the region by building on AANZFTA and complementing Australia’s two existing
bilateral free trade agreements (FTAs) with individual ASEAN countries
(Thailand and Singapore). MAFTA will also strengthen Australia’s broader
bilateral relationship with Malaysia, support Australia’s objectives for
progressing its AANZFTA built-in liberalisation agenda and, at a regional
level, deepen Australia’s engagement with the Asia-Pacific.
Reasons for Australia to take the proposed treaty action
DFAT argues that MAFTA will provide greater certainty for Australian
exporters and investors through the Agreement’s commitments to goods and
services market access and the temporary movement of skilled personnel.
MAFTA is also expected to improve the transparency and predictability of
regulatory regimes through consultation and cooperation between the parties.
MAFTA contains a range of market access commitments by Malaysia that go beyond
those contained in the AANZFTA. MAFTA also includes improvements in regulatory
disciplines that will improve decision making transparency, and includes better
legal protections for Australian investments in Malaysia.
Tariffs are customs duties on imported goods the aim of which is to
create a competitive advantage for similar locally produced goods.
MAFTA is expected to result in tariff reduction and elimination at a
rate significantly greater than that agreed in the AANZFTA. The following have
been agreed in relation to tariffs:
- Australia will
eliminate all tariffs on Malaysian imports on entry into force (this was not
scheduled to occur under AANZFTA until 2020);
- Malaysia will not
increase tariffs on 99 per cent (based on 2009-11 data) of Australian exports
to that country;
- Malaysia will
eliminate tariffs at a higher rate and at a faster pace for a range of products
than previously agreed under AANZFTA;
- Malaysia will provide
tariff free access to 94.8 per cent of tariff lines on MAFTA’s entry into
force, covering 96.7 per cent of Australia’s exports to Malaysia; and
- the number of tariff
free lines will increase to 98.6 per cent in 2016, 98.8 per cent in 2020, and
98.9 per cent in 2026.
In relation to specific exports:
- Malaysia will remove
virtually all tariffs on auto parts on entry into force;
- the Malaysian tariff
on smaller cars will be removed by 2016;
- 96.4 per cent of iron
and steel tariff lines exported to Malaysia will be tariff free by 2016, rising
to 100 per cent by 2020;
- virtually all
Malaysian tariffs on plastics and chemicals will be removed on MAFTA’s entry
- Malaysian tariffs on
a range of processed food and manufactured products will be eliminated on
MAFTA’s entry into force;
- Malaysian tariffs on
fruit will be eliminated on MAFTA’s entry into force;
- Australian milk
exporters will be able to access additional Malaysian quotas, including for
higher value products on MAFTA’s entry into force; and
- Australian rice
exporters will have open access to the Malaysian market from 2023, with the
complete elimination of tariffs by 2026.
Rules of origin
When a product is wholly produced in-country, its origin is not in
question, but where a good is produced that includes elements that originate in
another country, rules of origin are applied to determine whether that good is
eligible for preferential tariff treatment under the Agreement.
MAFTA retains the innovations in the application of rules of origin
introduced by the AANZFTA. Under MAFTA, exporters will be able to choose
either a Change in Tariff Classification methodology or a Regional Value
Content approach to meet the rules of origin test.
The Change in Tariff Classification Method defines a good that is
produced using elements that come from another country as originating in the
exporter’s country when the production process results in a change in the tariff
classification that applies to the good. In other words, the production
process results in sufficient change in the good for it to be considered
something different under the agreement’s classification system.
The Regional Value Content approach uses an equation to determine the
value of the work carried out on a product in the exporter’s country as a
percentage of the total value of the product. If the percentage is higher than
the regional value content applying to that product, the exporter will be able
to avail themselves of any preferential tariff treatment available under the
free trade agreement.
In addition to the option of which rule of origin to use, exporters may
also choose which of the two applicable agreements, the AANZFTA or MAFTA, to
apply to a particular transaction.
DFAT argues that the choice of tariff rate will not necessarily be only
based on the lowest rate, which would result in the selection of MAFTA as the
applicable agreement. Exporters may choose a higher tariff rate in the
AANZFTA, for example, in order to avail themselves of the benefit of the
regional rules of origin it contains.
Over and above the innovations offered in the AANZFTA, MAFTA
additionally permits Australian exporters to issue a ‘Declaration of Origin’ as
either part of a commercial invoice or as a letter under company letterhead.
This arrangement replaces the requirement for a third party ‘Declaration of Origin’
as required under the AANZFTA.
DFAT stated that Australia's general preference is for the use of
‘Declarations of Origin’ and that this had been the approach taken with
previous free trade agreements, such as the one with Chile.
Malaysian exporters to Australia will still be required to obtain a
third party ‘Certificate of Origin’.
Reduction in Malaysian non-tariff measures
MAFTA includes provisions ameliorating a number of Malaysian non-tariff
measures that apply to Australian exports. In addition, MAFTA provides for
future consultation on non-tariff measures.
Specific provisions in MAFTA in relation to non-tariff measures include:
- in relation to
automotive exports, the removal of Malaysian quantitative restrictions on motor
vehicle exports from Australia; and
- in relation to liquid
milk exporters, a liberalisation of licencing arrangements allowing Australian
exporters to gain access for higher value retail products.
In relation to services, MAFTA includes provisions providing greater
access to Australians wanting to invest in Malaysian companies providing
services. Malaysian investors will benefit from an increase in the Foreign
Investment Review Board (FIRB) threshold for specific services below which Malaysians
will be able to invest without having to submit to an FIRB assessment.
Malaysian investors will also benefit from some specific service sector
commitments by Australia.
In a number of instances, MAFTA provides better outcomes than those
contained in the AANZFTA. DFAT specifically identify the following benefits
for Australians wanting to invest in Malaysia:
- Australians will be
allowed to own up to 70 per cent of any given Malaysian higher education
institution upon MAFTA coming into force, increasing to 100 per cent in 2015;
- Australians will be
permitted 70 per cent ownership in a range of other education services;
- in investment banking
and direct insurance, Australians will be permitted to own up to 70 per cent of
any given entity;
- Australians will be
able to own accounting, auditing, bookkeeping and management consulting
- Australians will be
permitted to own 70 per cent of any given telecommunications entity; and
- majority ownership of
51 per cent will be permitted in taxation services, mining related services,
tourism, travel, and research and development related entities.
Australia’s service commitments to Malaysian investors are as follows:
- the FIRB screening
threshold applying to identified services will be increased from $100m as it
currently stands under the AANZFTA to $244m under MAFTA; and
- sector specific
commitments on private hospital services, hospital support services, research
and development services, and some construction services.
According to DFAT, MAFTA provides greater access to the Malaysian labour
market for Australians with a number of specific skill types. No reciprocal
changes will be necessary because Australia already provides the level of
access for qualified personnel identified in MAFTA.
The improved access for Australians will include:
- an increase in the
number of Australian senior managers, business executives and experts who will
be allowed to live and work in Malaysia;
- the definition of ‘business
visitors’ has been expanded to include goods sellers and investors – business
visitors are entitled to enter Malaysia and stay for a period of 90 days;
- spouses and
dependants of Australians working in Malaysia for periods longer than 12 months
will be allowed to stay, and sometimes work, in Malaysia;
- Malaysia has
committed to a more timely and transparent visa application process, including
ensuring that visa applicants are advised of the outcome of their application
before they arrive in Malaysia; and
- the provisions for
temporary movement of skilled persons will apply to Australian citizens and
Economic and technical cooperation
MAFTA also contains commitments for Australia and Malaysia to engage in
economic and technical cooperation by identifying specific strategic
interests. There are five priority areas identified in MAFTA for such
- clean coal
- electronic commerce.
The arrangements for cooperative projects in these areas are contained
in Attachment IV to the NIA for MAFTA, a non-legally binding Implementing
Arrangement for Economic and Technical Cooperation in Agreed Areas.
The objective of the economic and technical cooperation provisions is
…provide a strategic framework for existing and future
economic cooperation. It covers areas of mutual interest and of benefit to both
Australia and Malaysia and the costs of the cooperation projects will be
shared. The activities will focus on strengthening existing relationships and
building new ones, advancing human resource development, creating new
opportunities for trade and investment and contributing to the role of the private
sector. The activities will also build on existing cooperation and
relationships and enhance bilateral trade.
By their nature, free trade agreements contain a large number of very
specific obligations intended to liberalise trade between the signatory
Having said that, and bearing in mind the benefits to Australia detailed
above, the bulk of the obligations in relation to MAFTA lie with the Malaysian
Australia’s specific obligations will be as follows:
- all Australian
tariffs on Malaysian imports will be eliminated on MAFTA’s introduction into
- Australia will permit
Australian exporters to produce their own certificates of origin for export to
- the establishment of
the Malaysia-Australia Automotive Industry Dialogue, intended to improve
networking between the industries and identify opportunities for cooperation;
- a reduction in the
FIRB screening threshold for Malaysian investors in identified services; and 
- sector specific
commitments on private hospital services, hospital support services; research
and development services, and some construction services.
According to the NIA, MAFTA will have no net impact on the 2012-13
Budget. In the following financial years, MAFTA will reduce tariff income by A$80m
over the forward estimates.