In 2010, the EU and Malaysia entered into parallel negotiations on a Partnership and Cooperation Agreement (PCA) and a Free Trade Agreement (FTA) with a view to considerably broadening the scope of existing ties between the two economies. These agreements are set to pave the way for a future inter-regional FTA between the EU and the Association of South-East Asian Nations (ASEAN). At present, the 1980 EC-ASEAN agreement is the legal basis for EU-Malaysia trade, economic and development cooperation.
From GSP beneficiary to FTA partner
Malaysia has made a rapid transformation from developing country to upper middle income country, according to the World Bank’s classification. As a result, as of January 2014 it will no longer benefit from preferential access to EU markets under the Generalised Scheme of Preferences (GSP). In the absence of a bilateral preferential trade agreement most-favoured nation (MFN) treatment would apply to EU-Malaysia trade relations. Concluding a strategic PCA featuring trade and non-trade matters, and in particular a comprehensive FTA which would not be subject to the MFN principle, would thus fill a gap. It would also contribute to Malaysia’s aspiration of achieving high-income status by 2020, through unlocking untapped economic potential. In 2012, Malaysia ranked 24th among the EU’s trading partners, accounting for just 1% of overall EU trade. With a 9.5% share, the EU was Malaysia’s fourth largest trading partner after China, Singapore and Japan. EU-Malaysia trade totalled €34 billion.
Intellectual property rights (IPR), competition, the automotive and palm oil sectors, public procurement and services are deemed particularly sensitive areas. In respect of IPR, opponents of an FTA have raised concerns about future accessibility of affordable generic medicines. In the automotive sector, the competitive edge of Malaysian cars, which to a great extent results from high import duties, excise and sales taxes on foreign cars, is at stake. The different scope of Malaysian and EU competition law (the former focuses on anti-trust, while the latter also covers mergers and state aid) is another issue. Controversy has developed over biofuel from Malaysian palm oil, which does not meet the sustainability criteria of EU law and thus is not attractive for the EU market. Malaysia is the world’s second largest exporter of palm oil, while the EU is the second export destination for this commodity.
The ethnic dimension of trade barriers
A long-standing affirmative action scheme of preferential margins and quotas favours ethnic Malays and other indigenous ethnic groups (collectively known as Bumiputras, accounting for 67% of the population). This has emerged as a crucial barrier for foreign companies to access key sectors of the Malaysian economy, such as services or public procurement. It was introduced in 1971 under the “New Economic Policy” to narrow the Chinese/Bumiputra income differential and to ensure political stability in a multi-ethnic society. Reform of this policy tool from ethnic-based to market-friendly, transparent and needs-based was launched in 2010 under the “New Economic Model“. Malaysia is not a party to the WTO Government Procurement Agreement (GPA) but became an observer in July 2012.
Parliament’s position on the PCA
The recommendation on the negotiations for an EU-Malaysia PCA, drafted by the Foreign Affairs Committee (rapporteur Emilio Menéndez del Valle, S&D, Spain), welcomes the potential for closer EU-Malaysian cooperation in fields like the environment, green technology, climate change and maritime security. It recalls however that renewable energy production must neither jeopardise local food security nor reduce biodiversity. It suggests encouraging Malaysia to sign and ratify key international human rights instruments, to guarantee fundamental political rights effectively and to fully implement social rights enshrined in core International Labour Organisation (ILO) conventions.