by Sri Murniati. First published in The Edge 10 November 2014

Among arguments used by those opposing free trade agreements, especially the Trans-Pacific Partnership Agreement (TPPA) negotiations, is the potential decline of Malaysia’s trade surpluses if we join a big trade group with dominant players such as the United States.

They argue that Malaysia’s exports to countries in the trade group such as the TPP 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 (BOT), 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 the 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 export and import 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 exported lamps and lighting fitting to European Countries like Germany, but we imported some parts to produce the lamp from other countries.

By processing these intermediate imported goods, a country adds value into the goods and this means value is added into the country’s economy through creation of jobs that probably would not exist in the first place had the intermediate goods were not 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 about how to increase Domestic Value Added (DVA) that can be retained from increased trade. The higher the DVA retained within a country, the higher the benefit the country will gain from global trade.

Rashmi Banga, an economist at UNCTAD, in her latest paper, which in the last few weeks has been quoted to back up the above argument, shows 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 shows that the DVA in exports to the TPPA countries will continue to decline if Malaysia signs up to this extensive FTA. Banga then argues it is much better for countries to focus on “producing more” and not “exporting more”.

This recommendation is unconvincing and confusing. What will we do with the increased production if not export? 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. But 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 Economic Monitor published earlier this year recommends a number of actions to increase Malaysia’s value added in global trade including increasing productivity of firms currently involved it the GVCs and moving into new supply chains with higher value added shares.The question that 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 competitive environment?

Surely Malaysia will gain more by learning to be competitive and productive in a competitive environment. Protectionism does not work and has never propelled any country into becoming a developed nation. More free trade is what should be pursued and if this means negotiating and signing up to more FTAs, then so be it. Of course we must have a smart strategy in the negotiation but it is important to not be blinded by anti-trade rhetoric that will only provide benefit cronies and protected businessmen.

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