Why Trade Matters

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Launch ofWhy Trade Matters16 November 2015

These reports discuss trade issues to raise awareness among our fellow Malaysians on the importance of international trade and trade policy as enablers integrating the effects of globalisation into the domestic economy.

Part One of Why Trade Matters discusses how international trade is measured, as well as the interlinkages between trade and food policy, and trade and regional integration. While some of the subject areas for the chapter on trade and food policy may be more identifiable, concepts such as measuring international trade as well as trade and regional integration may be more abstract.

Part Two focuses on people-centred subject areas, with chapters on trade and the healthcare services sector, trade and the movement of people, and trade and labour.

These reports are the first two in a publication series on international trade and trade policy. We hope this series will act as thought-starters for the Malaysian public to appreciate the complexity of international trade and trade policy. We also hope this series will promote greater inclusivity of the stakeholders’ views in shaping the policy agenda and design as their design will affect our daily lives.

Our future work will include expanding the discussion of the chapters in this report, and highlighting and discussing the linkages between trade policies and other domestic policies.

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Contents

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1 Background on International Trade Agreements

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Trade and Regional Integration3

Measuring International Trade

4 Trade and Food Policy

5 Trade and the Healthcare Services Sector

6 Trade and the Movement of People

7 Trade and Labour

8 Concluding Remarks

Background on International TradeAgreements in Trade Policy

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Most countries have made commitments in the multilateral trading system

The World Trade Organisation (WTO) is considered the best platform for trade rules-setting in view of its large and diverse membership base. It currently has 161 Members.

Most countries use the WTO agreements as the basis for their international trade agreements.

Since November 2001, Members have been engaging in negotiations in the Doha Round to make improvements and amendments to the existing WTO agreements. Negotiations are still ongoing today.All sources can be found in the Why Trade Matters reports

Why is this important?Countries enter into trade agreements with one or more other countries for the purpose of facilitating trade. In these international trade agreements, participants agree to reduce tariffs, quotas and other restrictions on trade between them.

These agreements usually incorporate commitments that affect non-trade domestic policies. The commitments made in these agreements could affect our daily lives in many ways. Multilateral trade agreements Interactions between trade policy and

other domestic policies

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There is an increasing trend of FTAs around the world Due to the challenges in negotiating at the WTO, many countries are shifting or have shifted their focus on negotiating free trade agreements (FTAs) at other levels:• Bilateral FTA – between two

countries, for example the Malaysia-Australia FTA (MAFTA);

• Regional FTA – between countries in the same region, for example the ASEAN FTA (AFTA);

• Plurilateral FTA – between many countries from different regions, for example the WTO Government Procurement Agreement (GPA)

Cumulative number of FTAs in force

All sources can be found in the Why Trade Matters reports

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Since Malaysia’s first FTA in 2005, Malaysia has participated in 18 other FTAs

Malaysia’s multiple FTAs with its trading partner


Malaysia’s FTAs

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FTAs are getting more complex and comprehensive

FTAs are increasingly used to commit trading partners to what had been traditionally non-trade matters such as labour, culture, and the environment.

This can be seen in the FTAs negotiated with the developed trading partners, especially the US and the EU.

Many chapters in an FTA are involved in the discussion of broad policy issues.

These chapters have extensive breadth and depth of commitments.


Case #1: Malaysia’s first FTA was less complex

Malaysia’s first FTA was with Japan, which was signed in December 2005 and entered into force in July 2006.

Traditional WTO issues covered in the FTA include trade in goods, trade in services, and intellectual property (IP) rights.

WTO-plus issues include provisions on controlling anti-competitive activities.

Chapters

Contents Articles

1 General provisions 1-152 Trade in goods 16-263 Rules of origin 27-504 Customs procedures 51-585 Technical regulations, standards and

conformity assessment procedures59-67

6 Sanitary and phytosanitary measures 68-727 Investment 73-938 Trade in services 94-1119 Intellectual property 112-130

10 Controlling anti-competitive activities 131-13311 Improvement of business environment 134-13812 Cooperation 139-14413 Dispute settlement 145-15314 Final provisions 154-159

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Case #2: By comparison, the TPPA is more extensive

Chapters Contents1 Initial Provisions and General Definitions

2 National Treatment and Market Access for Goods

3 Rules of Origin and Origin Procedures4 Textiles and Apparel5 Customs Administration and Trade

Facilitation6 Trade Remedies7 Sanitary and Phytosanitary (SPS) Measures

8 Technical Barriers to Trade (TBT)9 Investment 10 Cross-Border Trade in Services 11 Financial Services12 Temporary Entry for Business Persons 13 Telecommunications14 Electronic Commerce15 Government Procurement (GP)16 Competition Policy17 State-Owned Enterprises (SOEs) and

Designated Monopolies18 Intellectual Property (IP)19 Labour

Chapters Contents20 Environment21 Cooperation and Capacity Building

22 Competitiveness and Business Facilitation23 Development24 Small and Medium-Sized Enterprises (SMEs)25 Regulatory Coherence

26 Transparency and Anti-Corruption27 Administrative and Institutional Provisions

28 Dispute Settlement29 Exceptions and General Provisions30 Final Provisions

The US has been using the NAFTA model as a template for its other FTAs. The template is complex and there may be problems in implementing the commitments.

Note the WTO-plus issues that are included in the FTA.

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Key Messages

International trade agreements usually incorporate commitments that affect non-trade domestic policies. The commitments made in these agreements could affect our daily lives in many ways.

Due to the several setbacks seen at the WTO, many countries are shifting or have shifted their focus on other levels of international trade agreements such as bilateral FTAs, regional FTAs and plurilateral FTAs.

FTAs are getting increasingly complex and comprehensive. They are no longer just about trade liberalisation and establishing free trade areas; they are also being used to commit trading partners to non-trade matters.

Measuring International Trade

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Trade is an integral component of the Malaysian economy

Why is this important?Malaysia has always been an open economy. Malaysia’s trade, as a percentage of GDP, has been consistently greater than 100% since 1988. In 2014, it was 131%.

With the exception of the global financial crises years in early 1980s and 1990s as well as late 1990s, Malaysia has always been recording relatively high net exports as percentage of GDP. Malaysia’s net export in 2014 was RM83b or 8% of GDP.

Malaysia’s total trade in goods (1964-2014)


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Trade data tells us a lot about Malaysia’s external sector

Malaysia’s export and import compositions:• Malaysia’s main exports

are electrical and electronics (E&E), petroleum products, and liquified natural gas (LNG.)

• Malaysia’s main imports are E&E, petroleum products, and chemical products.

Malaysia’s trading partners:• Malaysia’s main trading

partners are mostly located in the Asia Pacific.

• The top five export destinations and import sources were the same countries which were: China, Singapore, Japan, the US, and Thailand.

Malaysia’s exports in 2014 Malaysia’s imports in 2014

Malaysia’s export destinations in 2014 Malaysia’s import sources in

2014


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However, the emergence of the global value chain (GVC) necessitates the rethinking of how trade data is reported

Today, it is common for a product to be manufactured using inputs from many countries.

A popular example is the iPhone:• Credit for

manufacturing iPhone is usually attributed to China because that is where the product is assembled.

• In reality, less than 4% of the value of an iPhone actually originated from China.

The US trade balance in iPhones (USD m)


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The GVC model is not used in just the E&E industry

Apart from the E&E industry, the GVC model is also used in other industries. The Nutella GVC is another example.

The production of Nutella uses ingredients sourced from all over the world: palm oil from Malaysia, cocoa from Nigeria, hazelnut from Turkey, sugar from Brazil (and Europe), and vanillin from China. International trade facilitates the production of Nutella on a global scale, allowing the manufacturer to source ingredients from around the world and locate factories close to the final consumer markets.

The Nutella global value chain


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The GVC brings up the question: “how much of a country’s exports actually originated domestically?”The big idea in GVC is that countries can specialize in tasks (instead of products) that they are good at.

The production activities of a product do not have to take place entirely within one country.

GVC is also known by other names such as global supply chain, international production network, and offshoring.

This brings up the question of how much of a country’s export originated domestically?

Economists have proposed a new way of measuring trade called trade in value added (TiVA).

Gross exports versus value added (three-country trade)

The traditional method of measuring trade:Malaysia’s gross export would be recorded as USD120.

TiVA:Malaysia’s export in value added would be recorded as USD20.

USD100 of the USD120 gross export originated from Japan. The remaining USD20 originated from Malaysia.


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Traditional measure of trade vs. TiVA

Traditional measure TiVAWhat it measures

Value of goods each time they cross the national borders

The economic contribution to the production

How it is measured

Using data from the customs departments

One of the methods is to use the input-output (IO) tables1

Advantages •Timely • Clearly specifies a country’s economic contribution to production

Disadvantages • Does not measure trade in services2

• Does not take into account the country’s actual contribution (value added) to the production

• Does not capture ‘unofficial’ trade activities

• Can be complicated to calculate and interpret

• The publication of IO tables may not be timely

• Calculations involve a lot of technical assumptions

• Does not capture ‘unofficial’ trade activities

1 IO Table is a table that describes the relationship concerning the production and consumption of commodities and services between producers and consumers across different sectors in the economy.2 Date on trade in services is measured under the current account of the balance of payment which is compiled by Bank Negara Malaysia (BNM).


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Key Messages

International trade is an important component of the Malaysian economy and trade data tells us a lot about our country’s external sector. ‘Traditional’ trade data is usually sourced from the customs departments. It records the movements of goods in and out of the country.

However, the emergence of GVC forces us to rethink about how trade data is reported. Traditional measure of trade fails to take into account that the value of a country’s exports may not entirely originate domestically. Trade economists have proposed a new way to measure a country’s contribution to productions called TiVA.

Both measures (traditional measure of trade and TiVA) are useful in their own way. It is important to be aware of what they actually represent and their respective advantages and disadvantages.

Trade and Regional Integration

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Malaysia is part of two mega FTAs


Why is this important?Apart from the WTO, Malaysia is part of two mega FTAs – the Trans-Pacific Partnership Agreement (TPPA) and the Regional Comprehensive Economic Partnership (RCEP). These mega FTAs are seen to be in competition to become the foundation agreement of an FTA covering all the Asia Pacific Economic Cooperation (APEC) countries, known as the Free Trade Area of Asia Pacific (FTAAP). Mega FTAs and Malaysia

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What is the AEC?

In addition, Malaysia is also part of the Association of Southeast Asian Nations (ASEAN) Economic Community. In 2007, ASEAN Leaders agreed to the creation of the ASEAN Community by 2015.

Briefly, the ASEAN Community will consist of three pillars:• The ASEAN Economic Community (AEC), which has the goal of a regional

economic integration by 2015.• The ASEAN Political-Security Community (APSC), which aims to promote shared

responsibility for a comprehensive regional security.• The ASEAN Socio-Cultural Community (ASCC), which aims to undertake

cooperation on regional human development, thus, improving the quality of life for the ASEAN population.

Specifically, the AEC aims for ASEAN to become: • A single market and production base by promoting and enabling free flow of

goods, services, investment and capital as well as labour within the region.• A highly competitive economic region through the adoption of laws related to

competition policy, consumer protection, IPR, and e-commerce. • A region of equitable economic development through developing SMEs and

other cooperation initiatives within the region. • A region fully integrated into the global economy by maintaining the ‘ASEAN

centrality’ in ASEAN’s external economic relations (such as through ASEAN-plus agreements). The AEC also works towards the enhanced participation of ASEAN businesses in global supply networks .All sources can be found in the Why Trade Matters reports

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How do the mega FTAs and the AEC interact with each other?


The complexity of key FTAs signed or are being negotiated/ considered among the RCEP and the TPPA countries

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ROO is an issue due to the complex mix of FTAs

The ability to lower the cost of doing business between the RCEP or between the TPPA countries could allow for better GVCs for sectors in these countries.

However, the country of origin for the goods is important to indicate whether the good qualifies for the preferential tariff treatment under the specific FTA – the rules of origin (ROO) could promote or hinder trade in goods. Each FTA has its own ROO. It can be both complicated and complex for the businesses when there are many FTAs with different ROOs. Which one of these would apply? A single ROO that covers a large grouping of countries could potentially solve part of this problem.


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The rise of China provides an interesting geopolitical dimension to the complex mix of FTAsOn 7 October 2014, the IMF announced that China had overtaken the US to become the world’s largest economy, a distinction held by the US since 1873.

China overtaking the US in terms of economic and trade sizes had been a matter of time. In 2011, the IMF projected for China’s share of output to the world total to surpass those of the US and the EU by 2016.

China also managed to grow its trade a lot faster than the other two major trading countries, the US and Japan.

China overtakes the US in terms of economic size

Trade value for the US, Japan and China during their ‘Golden Periods’ of trade


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China’s new aggressive stance in negotiating FTAs

Negotiating FTAs to gain market accessChina has pursued a multi-track trade policy: • Multilateral trade agreements: China acceded to the WTO on 11 December 2001,

after 15 years of protracted negotiations. • Bilateral trade agreements: China’s first FTAs were with Hong Kong and Macau in

2003. Since then, FTAs include those with ASEAN, Australia, Chile, Costa Rica, Iceland, New Zealand, Pakistan, Peru, Singapore, South Korea, and Switzerland.

The FTAAP: The US or the Chinese model?Both China and the US are competing to provide the FTA model for the future FTAAP. They have different philosophies in negotiating FTAs:• No one-size-fits-all versus template-based.• Early harvest versus single undertaking.• Progressive versus competitive liberalisation.


Currently China is negotiating FTAs with the Gulf Cooperation Council (GCC) countries, Norway, Sri Lanka, and a trilateral FTA with both Japan and South Korea. China is also currently negotiating the RCEP. It is also studying the feasibility of negotiating FTAs with India and Colombia.

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Key Messages

FTAs are painfully negotiated agreements. Thus, the political will has to be strong and the economic benefits have to be large to incentivize countries to agree to make binding commitments, particularly on sensitive issues.

The overlaps of trade agreements between countries cannot be ignored – these many agreements both shape the expectations in future agreements and the usefulness of trade agreements in general.

We are currently working on a book to highlight the new issues in FTAs and FTAs negotiations. This includes analysis on the TPPA.

Trade and Food Policy

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Trade and Food Policy: global food prices and Malaysia’s vulnerability‘Food security’ is when “people, at all times, have physical and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life.”

Why is this important?As part of the effort to ensure global food security, the United Nations Food and Agricultural Organisation (FAO) keeps track of world food prices via the Food Price Index. Historical records thus far, showed price volatility.

Further to this, the Malaysian consumer price index (CPI) for food has been higher than the overall CPI.

This poses an issue to poor households, especially since an average Malaysian household spends RM444 or 20.3% of its total expenditure per month, on food.

As such, increasing food prices and volatility would pose a financial burden to both Malaysia and Malaysians.

FAO – Global food prices, January 2000-September 2015 (2002-2004=100)

Malaysia – Consumer Price Index vs. Food Price Index (2010=100)


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Food price volatility: domestic responses with global influencesGovernments and trade measuresFood affects the overall social, political, and economic landscape of a country.

Non-trade issues such as environmental and socio-economic considerations could impact the global supply and demand of food. As a consequence, these factors contributed towards price volatility and fears of food security issues.

To protect the country from global food price volatility, governments globally have implemented various policies to control both the demand and supply of food.

In general, the pass-through effects of each policy option would need to be studied to determine the actual impact of specific policies on the domestic economy. Among the range of policy options available to governments in addressing high food prices, trade policies is one option.

Food Crises and Government responsesGovernments for example, may respond to the high food prices by introducing food-related trade measures.

Unfortunately, these responses, in the form of export restrictions, had played a role in the food crises along with other trade measures such as tariffs and subsidies.

An example of the range of countries’ trade policy responses to mitigate rising food prices during the 2007/2008 food crisis are shown in the next table. All sources can be found in the Why Trade Matters reports

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Country Malaysia Indonesia Thailand Philippines India China

Reduce import duties Increase supply using reserves

Build reserves/ stockpiles

Increase imports/ Relax restrictions

Raise export duties Export restrictions Price controls/ Consumer subsidies

Minimumsupport prices Minimum export prices

Assistance/ Subsidy to farmers

Promote self-sufficiency


Policy responses to the food crisis in selected Asian countries

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Food security is viewed as an important domestic and international issue by many countries.

In response to these issues, a government’s trade policies meant to protect its domestic interests, may very well exert negative consequences.

The FAO has identified four dimensions to food security as well as examples of trade measures that could impact the dimensions of food security.

Additionally, the relationship between food security policies and trade as a tool for development should also be considered.

For example:• A wealthy country may have the resources to provide subsidies to its domestic

producers to sell Product A at a low price. • A poorer country on the other hand may not be able to provide similar subsidies but

still aims to export its Product A to developed markets.• However, given that Product A is sold at a low price in the developed country due to

the subsidy, the poor developing country would not be able to compete.• Thus, the poor developing country’s access to developed countries’ markets could be

restricted, therefore limiting the use of trade to facilitate developmental goals.

Trade Policy and Food Security: possibility for a counter productive outcome


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Dimensions of food security as identified by the FAO Examples of trade measuresPhysical AVAILABILITY of food: Addresses the supply side of food security and is

determined by the level of food production, stock levels and net trade.

Import and export restrictions could impact the supply of food available.

Domestic and export subsidies could impact the level of food production.

Price support could induce greater supply than market forces would permit.

The liberalisation of financial services related to the agriculture and/or the food sector could impact domestic producers’ access to finance and thus impact production.

Import tariffs could increase the cost of food within the country.

General trade measures that impact employment.

An example of Malaysia’s application of trade-related measures that is linked to food security issues is in the rice sector. Malaysia is seen to provide subsidies on the paddy rice to farmers, on the consumer price ofrice, and on paddy fertilizers.

Economic and physical ACCESS to food: An adequate supply of food at the national or

international level does not automatically guarantee food security at the household level.

Concerns over insufficient access to food have led to a greater policy focus on income, expenditure, markets and prices in achieving the objectives of food security.

Food UTILISATION: Utilisation relates to the way the body makes the most

of various nutrients in the food. Sufficient energy and nutrient intake by individuals

result from good care and feeding practices, food preparation, diversity of the diet and intra-household distribution of food.

This, in combination with good biological utilisation of food consumed, determines the nutritional status of individuals.

STABILITY of the other three dimensions over time: Even if an individual’s food intake is adequate today,

the individual is still considered to be food insecure if there is periodic inadequate access to food, thereby risking a deterioration in nutritional status.

Adverse weather conditions, political instability or economic factors (for example, unemployment, rising food prices) may impact an individual’s food security.


Dimensions of food security and examples of trade measures

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The influence of non-tariff barriers to the food industry


Sanitary and phytosanitary (SPS) measures

These are measures introduced to protect human, animal or plant life or health.

However, the enforcement of these measures could result in being non-tariff barriers at various levels of the food production.

For example in 2008, seafood products from Malaysia were banned from entering into the EU market due to their failure to observe the EU health standards. This was based on the EU’s observation that Malaysian producers used contaminated ice from unhygienic ice factories and dirty landing jetties to store their seafood products. Fortunately, the import ban was fully lifted in November 2010, a month after both the EU and Malaysia agreed to commence negotiations for a bilateral FTA.

The WTO GATT Article XX ensures that SPS measures are adhered to, without being discriminatory to the producing countries.

Halal certifications

Although the Halal standards per se may not restrict trade, the processes involved in obtaining the necessary Halal certification could be seen as a non-tariff barrier.

For example, the inspection fees imposed and the audit process required to maintain Halal certification could also be seen to be unnecessarily costly.

Exporting countries such as the US has raised this issue where it sees the implementation of the Halal standard as a trade barrier. For example, Kuwait requires both a Halal food certificate and a health certificate to import meat into the country. In the case of Qatar, this requirement is applied for only beef and poultry products.

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Strong IP rights to plant breeders via FTAs

Intellectual property & FTAsIntellectual property is another area where trade policy interacts with food policy.

In some developed countries such as the US, Australia, Germany, and France, the patenting of plants is allowed and the relevant legalities within these countries are well developed.

The US for example, grants 20 years patent protection to any inventor who has produced a distinct new variety of plant.

The controversy is that, once patented, the inventor has the right to prevent farmers from saving and reusing seeds from a previous harvesting season. At each crop season, a new batch of seeds must be bought.

The case of Monsanto lawsuitsMonsanto, a Fortune 500 company based in the US, has filed at least 145 lawsuits against farmers who have saved and replanted seeds obtained which were bought from the company.

Taking the example above, the US is observed to grant strong IP rights to plant breeders. The trade dimension for the issue of patents on plants is that US FTAs for example, are known to include the commitment to make patents available for inventions on plants and animals.

This means that any country that signs an FTA with the US may end up allowing for the patenting of plants and animals in their national IP laws.


Governments have the political and legal rights to provide for the basic needs of their population through the implementation of their trade and food policies. These measures may indeed provide added advantages to their domestic agriculture and food industries.

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In each country, these measures are intended to be positive interventions. However, in some cases, it may have negative implications by becoming non-tariff barriers to trade.


Governments need to balance between enforcing measures that are necessary for the country and at the same time, managing their cross-border effects, thereby avoiding protectionist policies.

Key Messages

Trade and the Healthcare Services Sector

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The liberalisation of healthcare services is a sensitive issue worldwide …


Why is this important? In general, the liberalisation of healthcare services is a sensitive issue worldwide, and Malaysia is no exception. Governments tend to be especially cautious when it comes to policies regarding the healthcare services sector, as it is their responsibility to ensure that all healthcare service providers are of good quality when practicing in the country. Liberalisation of the services sectorLiberation of services could happen via:• Unilateral liberalisation. • Commitments in trade

agreements.

The main value of binding services liberalisation via FTAs is that it is hard to reverse the liberalisation, once committed in such agreements.

Total health expenditure for Malaysia 1995-2013

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… but countries have been more willing to commit to the liberalisation of healthcare services in their FTAs


Since the signing of the WTO GATS, studies have shown that countries have been more willing to commit to the liberalisation of healthcare services in their FTAs. However, their level of commitments in this sector remains low compared to those in other services sectors.There are four modes of supply for services:• Mode 1: Cross-border supply.

Services are supplied from the territory of one Member into the territory of any other Member.

• Mode 2: Consumption abroad. Services are supplied in the territory of one Member to the clients of any other Member.

• Mode 3: Commercial presence. Services are supplied by a service supplier of one Member, through commercial presence in the territory of any other Member.

• Mode 4: Presence of natural persons. Services are supplied by a Member, through the presence of natural persons of a Member in the territory of any other Member.

Commitments on hospital services in trade agreements (AFAS and MICECA)

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FTAs may provide different types of access for the movement of people


FTAs may provide different types of access for the movement of people:• Liberalisation of market access –

this refers to the types of professionals allowed to work in Malaysia. In the case of the healthcare services sector, this could be the types of specialisations, for example, where foreign medical practitioners are allowed to provide their services.

• Mutual recognition of qualifications – this refers to the recognition that the qualifications earned by the foreign workers are of at least of an equivalent standard as those of the domestic workers.

To be able to legally practice in Malaysia, all doctors have to obtain a certificate known as the Full Registration Certificate issued by the Malaysian Medical Council (MMC). This certificate grants a medical practitioner the ability to fully and independently work as a doctor in Malaysia.

The number of new fully registered foreign and domestic medical practitioners in Malaysia 2008-2013

In the Malaysia-India Comprehensive Economic Cooperation Agreement (MICECA), Malaysia committed to allowing doctors from India to provide medical services in the country on a temporary basis. Doctors seeking to supply services in Malaysia temporarily can be categorised as ‘independent professionals’ as they are self-employed Indian citizens. However, they can only work in specialised areas of medicine and only in large private hospitals.

Key Messages

The provision of healthcare services is affected by trade policy via the commitments undertaken by the government in the various international trade agreements including the FTAs.

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Malaysia’s experience is not unusual and indeed, many other WTO Members have similar commitments, regardless of their level of development.

Trade and the Movement of People

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The WTO GATS includes commitments on the movement of people across bordersWhy is this important?The movement of people (strictly speaking, the movement of natural persons, or MNP) falls under Mode 4 of the WTO GATS. Commitments made in international trade agreements may affect the movement of foreign workers across borders.

WTO GATS and MNPThe existing WTO GATS provides a broad definition, scope, and coverage of MNP. This has led to challenges in interpreting Mode 4, such as:• Mode 4 is limited to the

temporary movement of workers. However, it does not specify what ‘temporary’ is. Thus, different Members grant different lengths of stay.

• Mode 4 theoretically also covers less skilled and unskilled labour, not just highly skilled labour. However, in practice, WTO Members’ Mode 4 commitments are markedly biased towards highly skilled workers.

Malaysia’s general commitments in Mode 4


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Some countries are seeking greater Mode 4 liberalisation at the WTOThe current Mode 4 commitments by WTO Members are generally focused on two categories:• Intra-corporate transferees, including employees of a company who have been

transferred to work in the offices (such as a branch) of the company located in a foreign country.

• Business visitors, including employees of a company who travel to a foreign country for the purpose of conducting business activities, without directly entering into the foreign country’s labour market.

These two categories also form the basis for MNP commitments in FTAs, as seen in the Malaysia-Pakistan Closer Economic Partnership (MPCEPA) Agreement, where Malaysia made commitments on intra-corporate transferees and business visitors, in addition to specialists/experts and professionals.

There have been discussions in the current Doha Round negotiations (and in FTAs) for the scope of MNP to be expanded to include commitments on the ‘new’ categories such as goods sellers, installers/servicers, and contractual service suppliers.


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Progress for MNP negotiations at the WTO have been limited

Large recipients of remittances in 2014

However, negotiations among the WTO Members to further liberalise Mode 4 at the ongoing Doha Round have been slow.

The WTO Secretariat has described the improved Mode 4 commitments offered by the WTO Members in the current negotiations to be “rather disappointing”.

Some developing countries are interested in getting increased access for the movement of their workers across borders. This may be because the money that its citizens working abroad send back to their home country could be a source of earnings for their relatives back home.


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MNP chapters in FTAs may not provide the full solutionIn light of the uncertainties as to the development of the Doha Round, some WTO Members have refocused their efforts to liberalise MNP through FTAs with like-minded partners. However, FTAs may not be the optimal solution to improving commitments to liberalise MNP.The case of the H-1 B-1 visa:Following the US-Singapore FTA (USSFTA), the US introduced a special class of visa for Singapore, the H-1 B-1. This visa essentially gives the holder the right to legally remain in the US indefinitely.

Already, foreign workers from other countries are using Singapore as a backdoor to gain employment in the US.

The US no longer prefers to incorporate such extensive MNP liberalisation commitments in its FTAs.


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The movement of people is inter-linked with other government policies

Brain-drain and brain-gain:• Accessibility on a long term

basis for employment which, added to the existing attractiveness of the host country, may further encourage a ‘brain-drain’ problem in the supplying country.

• ‘Brain-gain’, on the other hand, may look attractive to a host country like Malaysia.

• Thus, countries need to be aware of the possible impact of their MNP policies to ensure that the policies do not unintentionally result in brain-drain when the aim is for brain-gain.

As illustrated previously, the movement of people interacts closely with international trade activities. Additionally, it is also inter-linked with other government policies, notably, the immigration and labour policies.

Immigration policy:• While Mode 4 refers to the ‘temporary’

movement of people, the immigration policy mainly addresses the ‘permanent’ movement of people, not just for delivering services but also for other purposes such as seeking refugee or asylum status, and citizenship.

• This affects the implementation process including visa categories and requirements, which could mean stricter entry criteria, such as the workers’ potential to be upright and law-abiding citizens, and their willingness to relocate to the rural areas of the host countries

Labour policy:• Labour policy attempts to respond to the

domestic market needs.• This can be seen in the memoranda of

understanding (MOUs) Malaysia has undertaken with selected Asian countries to respond to the need for low-skilled workers in the construction and plantation sectors.


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Key Messages

Some countries are interested in getting further liberalisation for the movement of their workers across borders. The existing commitments as per the WTO GATS are generally limited, as are efforts to negotiate greater MNP commitments in the ongoing Doha Round.

In the meantime, some countries are seeking further MNP liberalisation in FTAs. However, MNP chapters in FTAs may not be the optimal solution to improving MNP commitments, as seen in the case of the USSFTA.

MNP policies are also inter-linked with other government policies. Thus, the decision to liberalise the movement of people using the FTA route should be assessed in a holistic manner.

Trade and Labour

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Why labour is a trade issue: the story of offshoring

Why is this important?Trade policy does not just affect the liberalisation of the labour market (which refers to the movement of foreign workers into the country). It also influences other parts of the labour policy, notably the rights of the domestic workers (labour rights).

Background on offshoringThe 1980s saw the expansion of the E&E industry in Malaysia.

Many multinational corporations (MNCs) opened their factories in Malaysia partly because of the relatively good infrastructure and low wages.

Initially the industry had focused mainly on the relatively low-skilled downstream activities such as assembly.

This was not unique to Malaysia. More recent examples include Apple Inc.’s and Lenovo’s manufacturing plants in China.

This was part of the GVC phenomenon previously discussed.


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Lower trade costs (in the form of lower tariffs as well as transportation and communication costs) had made it cheaper to move goods and services across national borders.

These factors enable firms to offshore their labour-intensive, low-skilled and high-volume operations (or parts of the value chains) to areas with lower labour costs.

These firms tend to come from developed economies while the areas into which the activities were offshored tend to be developing countries.

In 1985, developed economies’ imports from the developing countries were just below 25% of total imports. By 2014, the number had grown to just above 40%.

Source of developed economies’ imports


The GVC model allowed firms to move their labour-intensive operations to areas with low labour costs

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Offshoring: good news for low-income countries, but not entirely well-received in high-income countries

Arguments against offshoring

The MNCs are taking away jobs from the locals and giving them to workers in developing countries who are paid substantially less.

Offshoring is responsible for the transfers of ‘middle-class’ jobs in manufacturing to developing countries. Unskilled and semi-skilled workers in developed countries are unable to compete with, or match, the much lower wage of their counterparts in developing countries. This lowers the firms’ demand for the former which, in turn, drives down the wage of the unskilled workers in the developed countries relative to that of their skilled workers.

Arguments for offshoring

Moving labour-intensive production to countries with lower labour costs had helped to lower the overall production costs and therefore the prices that consumers pay. This subsequently increases the welfare of everyone.

Offshoring is just an extension of the comparative advantage aspect of trade. Developing countries, with their lower wages, have advantage in producing labour-intensive products.


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The labour cost in developing countries is low because of the lack of labour laws and their enforcement

Examples

In April 2013, a garment factory in Dhaka, Bangladesh collapsed killing more than 1,100 people. It was estimated that the number of workers in the building was as high as 5,000.

In 2008, a local garment factory which supplied to international brands such as Nike, was found guilty of forcing migrant workers to live in “unacceptable housing”, confiscating their passports, and taking a cut out of their wages to pay for agent and work permit fees.

This becomes the basis for developed countries to address labour issues through trade policies.

Another argument against offshoring

Apart from the lower wages, another reason for the lower labour cost in developing countries is the lack of labour laws and their enforcement. This allows firms to lower their production costs by exploiting their workers in developing countries.


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The labour laws of developed countries can affect developing countriesThree examples will be discussed:

• The US Trade Promotion Authority (TPA) legislation

• Initiatives by the US’ Department of Labour: Executive Order 13126 and Trafficking Victims Protection Reauthorisation Act of 2005 (TVPRA) List

• The US’ and EU’s The Generalised System of Preferences (GSP)


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The US Trade Promotion Authority (TPA) legislation includes labour-related provisions

In 2014, Malaysia was downgraded to Tier 3 after being on Tier 2 Watch List (one step above step 3) for four consecutive years.

The 2014 TIP report expounded on the human trafficking activities happening in Malaysia, which include “practices indicative of forced labour” subjected towards “many migrant workers on agricultural plantations, at construction sites, in textile factories, and in homes as domestic workers,” and the inadequate efforts by the Malaysian government to prevent them.

In the latest TIP report, the US Department of State decided to upgrade Malaysia’s ranking back to Tier 2 Watch List. In the report, it was noted that although “the Government of Malaysia does not fully comply with the minimum standards for the elimination of [human] trafficking, … it is making significant efforts to do so.”

This decision by the US Department of State was met with criticisms (both in the US and in Malaysia) that the move was politically motivated to ease the passage of the TPPA which Malaysia was negotiating with the US and ten other countries.

Trade Promotion Authority (TPA) legislation helps the US government speed up the process of ratifying its trade agreements. This is done by requiring the US Congress to either accept or reject the agreements without any amendments.

This fast-track privilege is not available for trade agreements with countries which are classified under Tier 3 of the US Department of State’s Trafficking in Persons (TIP) report.

Tier 3 refers to (a) countries which do not comply with minimum standards relating to the prevention of human trafficking and (b) countries whose governments are not making enough efforts to comply with the said standards.

Consequently, this stipulation may delay the ratification of US trade agreements with Tier 3 countries.


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International trade is affected by initiatives by the US’ Department of Labour

Trafficking Victims Protection Reauthorisation Act of 2005 (TVPRA) List

EO List only covers issues related to forced or indentured child labour, while the TVPRA List covers a larger scope of labour issue as it also addresses “adults in forced labour and children in exploitative labour that is not necessarily forced or indentured”.

The US GP process is restricted by the EO List and not by the TVPRA List.

Malaysia was included under the latest TVPRA List for practices of forced labour (in the E&E and garments industries) and both forced labour and child labour (in the oil palm industry).

Other countries and products under this list include Thailand (shrimp), India (soccer balls), and Myanmar (rice).

Executive Order 13126 (EO13126) on the Prohibition of Acquisition of Products Produced by Forced or Indentured Child Labour

The aim of this executive order is “to ensure that the US federal agencies do not procure goods made [by] forced or indentured child labour.”

Under the EO13126, the US Department of Labour is required “to publish and maintain a list of products … which [it has] a reasonable basis to believe might have been mined, produced, or manufactured by forced or indentured child labour.”

This list affects international trade because it penalises exporters which are suspected of exploiting child labour. These exporters are hindered from getting their products purchased by the US federal agencies.All sources can be found in the Why Trade Matters reports

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Some Generalised System of Preferences (GSP) programmes also include labour provisions

The EU’s GSP programme:To be eligible for additional reduction on import tariffs under the ‘GSP+’ scheme, the beneficiary countries must have ratified 27 core international conventions, some of which are related to labour rights.

Moreover, the beneficiary countries must also agree to submit the following binding undertakings: • “To maintain the ratification of these

27 conventions and to ensure their effective implementation;

• To accept without reservation reporting requirements and monitoring imposed by those conventions; and

• To accept and cooperate with the EU monitoring procedure.”

The US’ GSP programme:In 1984, the programme was amended to require the beneficiary countries to show that they “have taken or are taking steps to grant internationally recognised worker rights” which are:• “The right of association• The right to organise and bargain

collectively• A prohibition on the use of any form

of forced or compulsory labour• A minimum age for the employment

of children• Acceptable conditions of work with

respect to minimum wages, hours of work, and occupational safety and health.”


The GSP is a programme implemented by developed economies to facilitate the growth of low-income countries by promoting trade. This is done by reducing the import tariffs on certain products.

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The International Labour Organisation (ILO) sets out the basic principles of labour rightsThe ILO is an agency under the UN. It formulates the basic principles of labour rights through negotiations among its social partners which include governments, employers, and workers.

Some of these basic principles or labour standards are ILO recommendations which are non-binding guidelines.

Others are ILO Conventions which are only binding if they are ratified by the Member Countries.

Out of the 189 Conventions issued by the ILO, there are eight Fundamental Conventions that represent the fundamental principles of labour rights.All sources can be found in the Why Trade Matters reports

Fundamental ILO Conventions

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Malaysia has made labour-related commitments in the ILO


Malaysia has been a Member of the ILO since 1957 and has ratified 17 ILO Conventions, 16 of which are currently in force. Out of the 16, five of them are ILO Fundamental Conventions.

In 1990, the Malaysian government denounced one of the ILO’s eight core Conventions – Convention Number 105 on the abolition of forced labour. Malaysia’s decision to denounce it was taken in response to the continued criticism on the existence of compulsory prison labour in Malaysia.

Fundamental ILO Conventions

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Labour standards are increasingly addressed by FTAs

“Promotional elements”Other trade agreements with labour provisions are more lenient. Instead of explicitly requiring Member Countries to comply with the labour standards, this type of trade agreements aims to promote cooperation among the signatories.

Such “promotional elements” can be found in the remaining 60% of trade agreements that contain labour provisions. These types of provisions are common among FTAs signed by the EU and New Zealand, as well as in South-South FTAs which refer to trade agreements between developing countries.

“Conditional elements”Some FTAs include labour provisions which require the Member Countries to comply with the said labour standards in order to receive some form of economic benefits or to avoid being penalised.

According to the ILO and International Institute for Labour Studies (IILS) study, this type of FTAs are common among those sponsored by the US and Canada. Moreover, such “conditional elements” can be found in approximately 40% of trade agreements that contain labour provisions.


In 1995, only four trade agreements contain labour provisions. By 2013, this figure had risen to 58.

Labour provisions are more commonly found in North-South trade agreements, which refer to trade agreements between developed countries and less-developed countries.

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Currently, labour standards are not subject to WTO rules


Because the WTO requires the agreement from all of its Members before any rulings can be made, labour standards are currently not subjected to WTO rules and disciplines.

The 1996 WTO’s Singapore Ministerial Declaration states that the WTO Members renew their “commitment to the observance of internationally recognised core labour standards.” However, the ILO, instead of the WTO, would be “the competent body to set and deal with these standards.”

Moreover, the WTO Members “reject the use of labour standards for protectionist purposes, and agree that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question.”

In 1996, developed countries introduced in the WTO, a debate on whether the WTO should establish a committee to examine the issue. This was later proposed as one of the agendas under what is known as the Singapore Ministerial Declaration.

Unsurprisingly, the majority of developing countries were not agreeable to the proposal.

They viewed the proposal to include labour-related issues in the WTO as an attempt by the developed countries to introduce protectionist measures by undermining their comparative advantage in low-wage, labour-intensive production.

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The US includes labour provisions in its FTAs

The case of US-Colombia FTAAs part of the US-Colombia FTA, the Colombian government agreed to the Colombian Action Plan Related to Labour Rights to address concerns raised by the US stakeholders regarding labour issues.

These include “violence against Colombian labour union members, inadequate efforts to [prosecute perpetrators of such violence], and insufficient protection of workers’ rights”.

Colombia also agreed to amend its Criminal Code to make it a criminal offence, with up to five years of imprisonment, “for employers that undermine the [workers’] right to organise and bargain collectively.”

Thus, through the FTA with the US, both the Colombian Government and businesses in Colombia have to comply to new, higher labour standards.

The US FTA policyIn 2007, the US FTA policy became significantly stricter on the need to address labour issues as it required the US trading partners to: • Adopt and maintain laws and practices

that are in accordance with the 1998 ILO Declaration on Fundamental Principles and Rights at Work.

• Agree not to lower their labour standards.

• Agree that a lack of resources or a need to prioritise other enforcement issues is not a basis for failure to enforce core labour standards.

• Agree to apply the dispute settlement mechanism to labour issues.

The impact of having labour-related provisions of this nature in the FTAs is that their trading partners must adhere to the higher labour standards as demanded by the US.All sources can be found in the Why Trade Matters reports

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Key Messages

Trade policy goes beyond regulating the exportations and importations of goods and services – it also increasingly addresses the rights and the well-being of the workers who are involved in the production of the said goods and services.

At the moment, Malaysia is not part of any FTAs which both contain labour provisions and have entered into force. However, Malaysia is affected by other externals laws and standards such as the US’ GP policy (through the EO List), the US’ TVPRA List, and the ILO’s standards.

The debate of whether or not ‘traditionally non-trade issues’ such as labour standards should be included in trade policy, remains to be concluded.

Concluding Remarks

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Part One of Why Trade Matters discusses how international trade is measured, as well as the interlinkages between trade and food policy, and trade and regional integration. Part Two focuses on people-centred subject areas, with chapters on trade and the healthcare services sector, trade and the movement of people, and trade and labour.

These reports illustrate how commitments made in international trade agreements may affect non-trade related matters. As such, in assessing the impact of any trade agreement, the breadth and depth of the issues covered should be taken into consideration.

Our future work will include expanding the discussion of the chapters in this report, and highlighting and discussing the linkages between trade policies and other domestic policies.

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