Asia-Pacific Free Trade Agreements from the Perspective of ASEAN and Malaysia

June 8, 2023
By Juita Mohamad | Perry World House

Juita Mohamad is the director of the Economics and Business Unit and the director of research at IDEAS. This piece was written for Perry World House’s 2023 workshop “Economic Security and the Future of the Global Order in the Indo-Pacific.”

The world is now bracing for the further slowing down of the global economy. Even though projections have improved, the pace of global growth will still fall this year compared with last year, but by a smaller margin than predicted in October. The International Monetary Fund  is now forecasting 2.9 percent growth for 2023 – up from a 2.7 percent forecast in October – versus 3.4 percent growth in 2022.

This revision is made due to several factors, including the resilience in demand in the American and European markets, easing of energy costs, and the reopening of China's economy after Beijing abandoned its COVID-19 restrictions. In developing and emerging Asia, growth rates since 2022 have been relatively higher compared to counterparts in other regions. For the next two years, growth rates are projected to be 5.3 percent and 5.2 percent in the region, the highest in the world.

Nevertheless, regional growth will be impacted by how well the developed world absorbs inflationary pressures because further tightening of fiscal policies will impact consumers' demands for imported products and services. This upcoming recession is multifaceted: it is not just driven by inflationary pressures, but also compounded by supply chain bottlenecks and the fear of rising energy costs.

Southeast Asia is quite resilient compared to other parts of the world, but a recession in most parts of the world will hit the region sooner or later. As a group of small countries in Southeast Asia, trade has always been the backbone of cooperation and collaboration within the Association of Southeast Asian Nations (ASEAN). Even though trade within ASEAN countries has not exceeded 25 percent, ASEAN trades with the world more due to the non-tariff measures that countries are unable to eliminate, even though, on paper, the ASEAN Trade in Goods Agreement (ATIGA) should eliminate more than 99.65 percent of import tariffs for intra-ASEAN trade. But the good news is that ASEAN trades with the world as well, and this share has grown since the ASEAN Free Trade Agreement came into force in 2010.

This upcoming recession is multifaceted: it is not just driven by inflationary pressures, but also compounded by supply chain bottlenecks and the fear of rising energy costs.

Trade is very important for the growth of ASEAN economies, which further supports social stability. As a small open economy, Malaysia is party to many bilateral and multilateral agreements. To date, it has ratified both the Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). It is important to note that while China is a member of RCEP, ASEAN and the ASEAN centrality mechanism drove its negotiation.

As a small open economy, these free trade agreements (FTAs) are important for Malaysia to attract foreign direct investment (FDI). Additional FDI will in turn help the country to transition into the Fourth Industrial Revolution, supported by automation and digitization solutions. Malaysia would like to transition from producing low-value-added products to that of higher-value-added products and from depending less on unskilled workers, and trying to  attract skilled workers to support our industries in the medium term.

Stability is key to attract FDI—not just stability in the country, but also in the region. The trade tensions between China and the US are not something new to Malaysia, so it tries to maneuver by not choosing sides, as both countries are close trade partners of Malaysia. This sentiment would be somewhat the same for most countries in the region.

In the past, trade tensions between the US and China have led to the growth of the solar panel industry. Chinese producers moved away from China and set up production facilities in Malaysia and research facilities in Singapore. This transition led to Malaysia being the biggest exporter of solar panels to the US in the 2000s. Nevertheless, not all trade tensions have led to trade diversion into Malaysia. At the onset of the trade war a few years ago, trade diversion was greater into Vietnam and less so into Malaysia. Additionally, the current chip war may not impact Malaysia now as its strength is very much at the back end, through product testing, but it may impact production lines if the country moves up the supply chain in the next few years.

With the current global slowdown, smaller countries like Malaysia are banking on FTAs to provide rules and standards in trade and investment activities. With CPTPP, Malaysia looks forward to reforms made on the labor and environment side. In RCEP, it looks forward to the growth of e-commerce activities guided by standards, although it is very much at its basic level of commitments and reforms.

Even though RCEP and CPTPP are both mega-regional FTAs involving the Asia-Pacific region, they are each unique in their own way. There are large overlaps in membership between the two trade agreements. It is interesting to note that while RCEP is ASEAN-centered, CPTPP members are mostly made up of upper-middle and high-income economies, including North and South American countries like Canada, Mexico, Chile, and Peru.

A sea port in China

While China is a ratified member of the RCEP, it is not yet a member of the CPTPP even though it submitted its formal application at the same time as Taiwan. While Taiwan is ready to be a ratified member of the CPTPP, whereby its policies and laws are very much in line with the standards outlined by the agreement, some experts have doubted China’s intention and readiness to conform to the very high standards highlighted in the labor, government procurement, and environment chapters of the agreement. It is important to note that to be a member of CPTPP, all the ratified members must accept the new members in one voice. While the United Kingdom is now the latest member to join the CPTPP, China’s accession into the CPTPP is not yet confirmed.

Additionally, while there has been an upgrade to the ASEAN-China FTA (ACFTA), there is another platform within the region that may not include China or is used by major powers to contain China: the Indo-Pacific concept. To date there are at least six interpretations of the Indo-Pacific. In 2019, ASEAN published its own take on the framework through the publication of the ASEAN Outlook on the Indo-Pacific (AOIP). Even though not much attention has been given to AOIP and its progress, cooperation and collaboration on the pillars of AOIP have continued incrementally through different, existing ASEAN platforms like the ASEAN Economic Community (AEC) targets, ASEAN Defence Ministers Meeting (ADMM), and ATIGA upgrade talks.

From the ASEAN’s perspective, the AOIP would not derail targets set out by the AEC blueprint or ATIGA commitments. It is hopeful though that AEC progress and other ASEAN-led reforms can be expedited by achieving the targets set within the AOIP framework as the AOIP can “further strengthen and optimise ASEAN-led mechanisms, including the East Asia Summit (EAS), the ASEAN Regional Forum (ARF), the ASEAN Defence Ministers Meeting Plus (ADMM-Plus), the Expanded ASEAN Maritime Forum (EAMF) and others such as the relevant ASEAN Plus One mechanisms”.

Nevertheless, some experts doubt that the AOIP itself can help expedite the realization of the AEC ASEAN Community Vision 2025. As it stands, ASEAN leadership is needed to change the status quo. While the Outlook on the Indo-Pacific is inclusive in terms of cooperation and membership, it is less so compared to the Indian and American definitions of the Indo-Pacific region. Given China’s relationship with ASEAN in terms of investments and trade, it is difficult not to include China in any ASEAN-led platforms, including the AOIP. Even though ASEAN has taken a more diplomatic view on the Indo-Pacific, “there was a sense [from China] that ASEAN should have maintained its emphasis on the Asia Pacific region rather than respond to the Indo-Pacific nomenclature.

ASEAN's AOIP is a positive sign that showcases ASEAN centrality, and shows ASEAN’s voice at play not just on trade  issues, but also on security and maritime issues, which is important in “maintaining peace and stability” within the region.

Other than these platforms, the Belt and Road Initiative (BRI) championed by the Chinese has had impacts on the host countries within the region and beyond. Even though the BRI has led to better access of funding for countries in need of critical infrastructure, BRI projects are also linked to non-transparent bilateral dealings and governance gaps such as opaque procurement evaluations, lack of transparency in feasibility studies, cost overruns, and project delays, among others for projects in Malaysia. It is important to note that ASEAN counterparts also need to step up in setting their own terms to ensure that such investments are safe and transparent. Accountability needs to be improved on both sides.

To date, talks on the upgrade of ACFTA 3.0 have started, and this may include improvements on the e-commerce sector, which is a critical one for both ASEAN and China. To make this upgrade a meaningful one, amidst the various frameworks recently signed, ACFTA 3.0 needs to explore commitments on both traditional and non-traditional issues, such as provisions for a single window network (for non-tariff measures), e-commerce, and the environment. These are needed to eliminate the introduction of unjustified non-tariff measures to regulate and govern data transfer and possibly streamline data localization policies, as well as to protect the environment to support trade and investments activities in a sustainable and non-invasive manner.

From the Malaysian side, with the boom of investments in the information and communications technology (ICT) and e-commerce sectors, naturally this has led to digital trade transactions within Malaysia and beyond, especially during the pandemic. Based on Malaysia’s Department of Statistics Digital Economy 2018 report, Malaysia’s digital economy, which includes the e-commerce and ICT sectors, was estimated to be valued at about RM270 billion, or about 18.5 percent of GDP. Due to the rapid growth of the digital trade activities, boosted by the lockdowns and restrictions of movements during the pandemic, some estimates suggested that this share in GDP would have reached more than 20 percent by the end of 2020.

Like Malaysia, China has developed its priorities to grow its digital economy. To date, China’s plans are far more ambitious than those of Malaysia in the medium to long term. China is focusing on three overarching areas of the digital economy: cloud computing, industrial internet, and data. The recently launched MyDigital Blueprint represents the government’s vision to nurture the growth of key sectors, such as data sharing, cloud computing, and the Fourth Industrial Revolution.

The next possible area of collaboration to focus upon is the digital economy through the improvements in the provisions of the e-commerce chapter that is more comprehensive than the CPTPP and RCEP combined. Though the e-commerce chapter may highlight market access to certain subsectors, it should highlight how to navigate matters including data transfer, data localization, data ownership, cybersecurity, and equal access to the digital economy. This is important so that data protection and data governance guidelines can be spelled out clearly to protect members and their citizens. Before embarking on discussions about market access in e-commerce, disciplines on data treatment need to be thought out, as they may or may not be in line with aspirations highlighted in bigger and more advanced FTAs like the CPTPP and the Digital Economy Agreements (DEAs) signed by developed countries in the region like Australia and New Zealand. The development of the e-commerce chapter should ideally combat the issues of NTMs within the digital economy activities. The ACFTA upgrade should aim to aggressively eliminate NTMs between ASEAN and China in the medium to long term. This goes back to the readiness of ASEAN countries and the willingness to reform by eliminating the usage of unjustified NTMs.

On the digital economy, Malaysia needs to prepare itself beyond the commitments outlined by the MyDigital Blueprint. The Malaysia Personal Data Protection Act needs to be upgraded for several reasons, including conforming to certain commitments in CPTPP and RCEP and other Digital Economy Agreements (DEAs) that it aspires join in the next few years. Other issues on cybersecurity also need to be examined and addressed within the e-commerce chapter of the possible ACFTA 3.0 upgrade. Such a strategy is vital for Malaysia to set its own standards not just for the possible upgrades of ATIGA and ACFTA 3.0, but also to prepare itself while negotiating with Indo-Pacific Economic Framework partners on critical issues concerning the digital economy among others.

Going forward, the ASEAN-China FTA will be upgraded, as will the CPTPP five years after entering into force—with or without the US in the picture. ATIGA will also be upgraded soon. Southeast Asia observes a movement toward integration and cooperation which is very different to developed country counterparts in the region, who are becoming more inward-looking and protectionist. For now, ASEAN will continue to trade with members and external partners.

Economic integration has been a pillar of ASEAN. Over the past three decades, its member states have undertaken efforts toward a more comprehensive form of integration through several different agreements and partnerships, all of which seek to promote trade and investment for mutual benefits and regional cooperation. However, it is critical that economic integration and growth is inclusive and delivers sustainable economic growth, especially in times of crisis. With the global economy slowing down as early as the last quarter of 2022 due to the war in Ukraine, soaring energy prices, and inflationary pressures, ASEAN can use existing platforms to combat issues related to supply chain bottlenecks and food security instead of adopting inward-looking measures to combat these externalities.