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Wednesday, 9 July 2008

Malaysia and trade relations – where are we heading?

Malaysia and trade relations – where are we heading?

By: Ahmad Syah Ejaz Bin Hj. Ismail

[In this brief article of mine about trades and bilateral trade agreement (BIT), I will touch on the issues of trade evolution, factors contributing to wealth accumulation in developing countries, voluntary exchange in trade as a whole, GATT and Most Favoured Nations (MFN), and the effects of Free Trade Agreements (FTAs) for Malaysia]

If we look at the history of trades in Malaysia, it can be categorized into four main phase which are i) pre-world war; ii) post World War II; iii) pre-1970s; and iv) post-1970s. Much had changed in trade activities ever since the European introduced the gun boat diplomacy with the arrival of the Portuguese in Malacca circa 1510. Before the invasion of Malacca by the Portuguese, traders and rural peoples’ of Malacca conducted trades based in mutual agreement and voluntary exchange. In as much, the way the Arabian traders who anchored in Malacca never forced South East Asian traders to do business with them and as such it had helped in professing most of the Malays in South East Asian region to embrace Islam.

With the arrival of the European traders in Malacca straits, the way the Asian conducted trades activities also changed. The differences of ones capabilities in producing crop, output and products had foster an interdependent linkages between world populations as such it had created the first comparative advantage of doing businesses among the worlds’ populations. The European would enjoyed the uniqueness of silk and porcelain craft from China and spices from Malacca, while the South East Asian populations would enjoyed the toys products from China and garments from the West.

But the major impact of trades never before had been felt after World War 2 when major superpowers depended on their colonies to keep supplying raw materials for their industry. In trades, without interest, trades and business itself cannot be accomplished. In an interdependent world, the only factor which makes trades and business possible is interest itself. In secluded or hermit nations which they think they can survive without trades, they will end up having a low quality for their peoples. This is because interest are absent and don’t play a major part in their daily business activities and life. One way or another, interest needs to come first before any trades come into play. The situation I might call as relative advantages that ensure growth and increase of the well being.

For small nations such as Malaysia to venture into trades, it needs three major factors to be prepare for trades which are i) interest; ii) ideology; and iii) institutional structure. This three main factor will ensure a smooth sailing for Malaysia into free trades. Malaysia need to have a big chunk of interest into global economy by supplying the world populations not merely a raw materials, but a finish products which can be used as a relative advantages for imports for other necessities products. To have a robust economy and strong beliefs in free markets, Malaysia need to nurture a wealth amassing community a clear cut breakaway from passive community which relies heavily on governmental expenditure and government fiscal policy. The responsibilities of private sectors in contributing towards nations development is a must and this can be encouraged through a right institutional structure especially in terms of macro and micro economic management of the government.

The differences of nation’s provisions doing trades between world nations’ create an impetus for the introduction of General Agreement of Trade and Tariffs (GATT). Tariff was often used as a barrier to entry for players in trades especially among the developed and developing nations. The need for protectionism policy in trades isn’t something new but arises long before the worlds were fully reciprocated through trades. It was debated heavily when Richard Cobden challenged Robert Peel [British Prime Minister], in the episode of the repeal of the Corn Laws which occurred in 1846 and which ushered in Britain’s nineteenth-century embrace of free trade.

But the weaknesses of GATT itself in determining a totally free market were questioned by the developed nations when most of the nations [Third World Nations] that were trading with them used the countervailing duties (CVD), hostile tariffs and anti-dumping measures in ensuring the competitiveness of domestic producers in trades and business. As from my reading, the benefits of CVDs’ itself were very large and trading nations benefits largely from such measures in development funds. This however were not agreeable for the exporting nations and thus catapulted the introduction of World Trade Organisation (WTO), which were believe to open a wide opportunity for business among the major trade players.

The changes of world trade contour also were felt post-1970s period when most of the business players were no more states actors but multinational companies. But one also needs to bear in mind that multinational companies also were posturing towards nations berth in terms of its policy and trade activities. The implementation of GATT saw the developing nations have a sovereign power to choose their trading partners based on mutual agreement and voluntary exchange. As such, the particular trading system was labelled by the Western world as Most Favoured Nations (MFN). For MFN, reciprocal relationship a particular privilege granted by one party only extends to other parties with which it has a most favoured nation agreement. The autonomy of doing business were under a certain and particular states which is good for free markets, when the words free itself translate the voluntary exchange of doing business among trading partners.

The Kennedy Round (1964-1967, Geneva Switzerland), is the first serious steps for free market when signatories nations agreed to i) slash tariffs by half with a minimum of exceptions; ii) to break down farm trades restrictions; iii) to strip away non-tariffs regulations; and iv) to aid the developing nations through so called free trades activities. However, the agreed terms of farm trades and aiding the developing nations were merely a lip service for world community and the clear evidence of neglect the trades terms which make possible the introduction of GATT and later WTO were left out in every bilateral trade agreements and free trade agreement signed by the trading parties.

This is the major risk and setback in the true spirits of free trade.

Reference: Protectionism – The Ohlin Lectures by Jagdish Bhagwati. MIT Press Paperback, 1998.

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