Ideas: More free trade should be pursued

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AMONG ARGUMENTS used by those opposing free trade agreements, especially the Trans-Pacific Partnership Agreement (TPPA), is the potential decline in Malaysia’s trade surplus if we join a big trade group with dominant players such as the US.

They argue that Malaysia’s exports to countries in the TPPA may probably increase, but our imports from those countries may increase even more. This will result in a net reduction in our balance of trade, creating a trade deficit. They argue that this is a bad thing for our country.

Using trade surplus to measure the impact of free trade is not necessarily appropriate, and could be misleading. Free trade agreements are supposed to help increase cross-border exchange of goods and services.

It increases trade volume. Studies have shown that trade and increased trade volume can be a catalyst for national growth and development. Increased exchanges mean that both exports and imports will increase.

Additionally, in a globalised economy, where production of a final product involves sourcing goods and services from different producers in different countries, increased imports cannot possibly be a bad thing.

There can be situations where the bulk of a country’s imports are intermediate goods, which are then processed into final goods and subsequently exported. We export lamps and lighting fittings to European countries like Germany, but we import some parts from other countries to produce them.

By processing these imported intermediate goods, a country adds value to the goods and also the economy through the creation of jobs that probably would not exist in the first place, had the intermediate goods not been imported.

If we want to further integrate our economy into the global economy, we should not be obsessed with increasing export volume so as to ensure it is above import volume. Rather, we should think of how to increase domestic value added (DVA) that can be retained from increased trade. The higher the DVA retained in a country, the higher the benefit the country will gain from global trade.

Rashmi Banga, an economist at the United Nations Conference on Trade and Development, in her latest paper, showed that Malaysia’s DVA in exports to its major TPPA partners, such as New Zealand, Mexico, Singapore, Japan, and the US, has been declining. She also noted that the DVA in exports to the TPPA countries will continue to decline if Malaysia signs up to this extensive free trade agreement.

Rashmi argued that it is better for countries to focus on “producing more” and not “exporting more”.

But this recommendation is unconvincing and confusing. What will we do with the increased production of goods if not export them? For a small country like Malaysia, we cannot afford to produce more without selling them, because our domestic consumption alone will not be able to absorb everything.

If, by “producing more” she meant increasing production that will further integrate Malaysian firms into the global value chain (GVC) and elevate their positions in the international arena, then it is indeed in our interest to do so.

The World Bank’s Economic Monitor, published earlier this year, recommended a number of actions to increase Malaysia’s value added in the global trade, including increasing the productivity of firms currently involved in the GVCs and moving into new supply chains with higher value-added shares.

The question we have to ask is: are we going to take these measures while protecting our economy from competition or are we going to learn to be more productive and competitive in a challenging environment?

Surely Malaysia will gain more by learning to be productive and competitive in a challenging environment. Protectionism does not work and has never propelled any country into becoming a developed nation.

More free trade should be pursued, even if it means negotiating and signing up to more free trade agreements. Of course, we must adopt a smart strategy during the negotiation rounds, but it is also important not to be blinded by anti-trade rhetoric that will only protect the interests of businessmen.

Sri Murniati is manager of political economy and governance unit at the Institute for Democracy and Economic Affairs

This article first appeared in Forum, The Edge Malaysia Weekly, on November 10 - 16, 2014.