New Zealand-Malaysia Free Trade Agreement

A Study on the Benefits of a Free Trade Agreement (FTA) between New Zealand and Malaysia

Chapter Six: Bilateral Trade in Goods¹⁰

• 6.1 General
• 6.2 New Zealand to Malaysia
• 6.2.1 Malaysian Tariff Policy
• 6.2.2 New Zealand Exports to Malaysia (measured as partner imports)
• 6.2.3 The More Detailed Analysis
• 6.2.4 Duties on New Zealand Exports to Malaysia
• 6.3 Malaysia to New Zealand
• 6.3.1 New Zealand Tariff Policy
• 6.3.2 Malaysian Exports to New Zealand
• 6.3.3 Duties on Malaysian Exports to New Zealand
• 6.4 Detailed Sector Analysis
• 6.4.1 Malaysian Agricultural Sector
• 6.4.2 The Dairy Sector
• 6.4.3 Meat
• 6.4.4 Fruit and Vegetables

Non-agricultural Products

• 6.4.5 Fisheries
• 6.4.6 Forestry
• 6.4.7 The Automotive Sector
• 6.4.8 Electrical Equipment and Machinery
• 6.4.9 Textiles, Clothing and Footwear (TCF's)
• 6.4.10 Other Manufacturing
• 6.4.11 Environmental Goods
• 6.5 Other Policies Affecting Trade in Goods
• 6.6 Rules of Origin
• 6.7 Overall Impact of Liberalising Trade in Goods
• 6.7.1 Static Gains
• 6.7.2 Dynamic Effects

6.1 General

New Zealand–Malaysia bilateral trade is broadly complementary.  This is illustrated in Table 6.1.  Agricultural goods, and dairy products in particular, dominate New Zealand’s merchandise exports to Malaysia.  Non-agricultural goods, with minerals and fuels prominent in recent years, dominate Malaysian merchandise exports to New Zealand.

Table 6.1: Bilateral trade (December years, NZ$ million)

	Malaysia exports to NZ (cif)			NZ exports to Malaysia
Product	2001	2002	2003	2001	2002	2003
Agriculture	59	66	69	583	443	338
Non-agriculture*	909	779	666	231	221	182
Forestry	11	14	15	55	57	36
Minerals (HS25-27)	364	251	142	1	11	1
Other manufactures	534	514	509	175	153	145
Grand Total	986.6	845.6	724.7	814.7	665.0	520.7

Source: World Trade Atlas, recorded from the respective countries’ import data. 

*Note that Forestry, Minerals and Other manufactures are sub-groups of Non-agricultural goods, as the WTO definitions have been used.

Figure 6.1 presents a longer-term picture of the trading relationship. New Zealand’s exports to Malaysia were stable through the middle and later years of the 1990s before achieving a record high in 2001.  Imports from Malaysia climbed steadily during the 1990s before retreating after 2001.  

Fig 6.1: Malaysia-New Zealand: Historical Trade (NZ$ million, CIF, December years)

 

Source: World Trade Atlas, Statistics New Zealand data

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The effect of using US dollars to denominate these bilateral flows is shown in Figure 6.2. The appreciation of the New Zealand dollar against the US dollar since 2001 would appear to be a contributing factor in the reduction in New Zealand export returns over the past two years (the Malaysian Ringgit has been pegged at 3.8 to the US dollar since 1999). However, it is interesting to observe that over the same period Malaysian returns on exports to New Zealand have also reduced.

Fig 6.2: Malaysia-New Zealand: Historical Trade (US$ Million, CIF, December years)

 

Source: World Trade Atlas, Statistics New Zealand data

Table 6.2 expands on Figure 6.1.  The export data is drawn from each partner’s import data, and thus the value of New Zealand’s exports to Malaysia may be different from that shown in Figure 6.1.  However, the balance remains in Malaysia’s favour, with a trade surplus of $162 million in 2003. 

Table 6.2: Bilateral Trade (December years, NZ$ million–measured as partner imports)

	Total Trade		Malaysian Exports to NZ		NZ Exports to Malaysia
	NZ$m	Change%	NZ$m	Change%	NZ$m	Change%
1997	963	na	384	-1%	579	na
1998	933	-3%	464	21%	470	-19%
1999	1,096	18%	573	24%	524	12%
2000	1,416	29%	756	32%	660	26%
2001	1,727	22%	913	21%	815	23%
2002	1,467	-15%	802	-12%	665	-18%
2003	1,204	-18%	683	-15%	521	-22%

In 2003, New Zealand was Malaysia’s 27th largest source of imports (the same as in 1997) and 27th largest destination (33rd in 1997) for exports. As before, this is calculated after aggregating the EU-25 into a single trading entity. Conversely, and again aggregating the EU into a single entity, Malaysia was New Zealand’s seventh largest (10th in 1997) source of imports and 10th (ninth in 1997) most important destination for exports.

6.2 New Zealand to Malaysia

6.2.1 Malaysian Tariff Policy

Like New Zealand, Malaysia operates a relatively light (applied) tariff regime.  Malaysia’s simple average MFN applied tariff rate was 9.2 percent in 2001, a rise from 8.1 percent in 1997.11  However, concessions afforded as a result of preferential agreements and for capital/intermediate production lower this average rate substantially.  The average rate of duty collected on total (global) imports was just 1.3 percent in 2000.12

While Malaysia’s trade policy is characterised by relatively low applied tariff rates (the notable exception being the automotive sector), barriers have been raised “temporarily” in the past in response to economic shocks. This has contributed to a degree of uncertainty for business.  Import and export duties are generally revised annually during budget exercises, though essentially they can be revised at any time. 

One example was in the wake of the Asian financial crisis (1997/1998), when tariffs were increased across sectors including automotive, construction equipment, certain appliances, alcoholic beverages and tobacco.  This increase in tariff protection was made easier by the fact that many lines of the Malaysian tariff schedule are unbound 13 or are subject to considerable binding overhang.14

While Malaysia’s tariff barriers are the main border measure affecting imports, other policies also warrant mention.  Import prohibitions are maintained for moral and national security reasons, while an import licence requirement is operated across products including dairy, forestry, fish, animal products, telecommunication equipment and electrical goods.  The WTO contends that Malaysia occasionally employs its import licensing system on a discretionary basis to regulate trade with a view to developing infant and strategic industries, and promoting industry integration15.  Tariff quotas, while technically in place, are not an operational feature of Malaysia’s trade policy.

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6.2.2 New Zealand Exports to Malaysia (measured as partner imports)

Table 6.3 shows the top 12 import lines from New Zealand into Malaysia at the HS 2 level in 2003.  Also shown are: (a) the percentage of total imports from New Zealand imported under that HS line of the (% imp); (b) New Zealand’s share of Malaysian imports in that HS line (share Im); and (c) Malaysia’s share of New Zealand’s global exports in that HS line (share Ex). 

Table 6.3: Malaysia’s Imports from New Zealand (December 2003, NZ $million and %)

As suggested earlier, New Zealand dairy products account for a significant proportion of this trade, representing 38 percent of the total figure. New Zealand dairy products have a 37 percent market share in Malaysia and that represents a much smaller (though still very important) 5.3 percent share of New Zealand’s basic dairy exports.  The second largest import is organic chemicals, although this is not recorded in the most recent New Zealand export data, as the main item is methanol and this product is tagged as a confidential item.16 Both meat products and wood pulp have significant double-digit market share in Malaysia at the aggregated level. 

6.2.3 The More Detailed Analysis

Table 6.4 provides more detailed information on New Zealand’s exports to Malaysia.  It uses Malaysian import data, combined with the Malaysian tariff schedule, to calculate the tariff rates for the main trade lines (at the HS 4 level).  In addition, it shows the imports from Australia in these same products and calculates the respective import share of the Malaysian market for both New Zealand and Australian imports.

Table 6.4: New Zealand and Australian Imports into Malaysia (NZ$ million and market share)

Source: MFAT analysis from Malaysian World Trade Atlas data 

Table 6.4 has several significant points:

• 81.7 percent of New Zealand exports are concentrated in these lines; 
• the major export lines to Malaysia face relatively low duties;
• the top six HS 4 lines account for $325.2 million, and are duty-free;
• 10 of the 19 lines have a market share of 25 percent or more;
• 13 lines have a market share greater than Australia’s, and another four lines have a similar market share to Australia’s;
• 14.8 percent of Australia’s exports are concentrated in these lines, suggesting that Australia’s export mix is very different from New Zealand’s export mix to Malaysia.

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6.2.4 Duties on New Zealand Exports to Malaysia

Malaysia’s tariff schedule is relatively “clean”, with 99 percent of exports encountering a simple ad valorem tariff rate17.  Table 6.5 sets out an estimate of the duties paid on New Zealand exports to Malaysia in 2003.  Total exports of $520.6 million attracted estimated tariffs of $7 million, at an average rate of 1.3 percent. 

Table 6.5 Estimated Duty on New Zealand Exports to Malaysia (2003, NZ$ million)

Source: Ministry of Foreign Affairs and Trade, New Zealand.
* Alternative Specific Rates have been converted to Ad Valorem for the purpose of presentation in the table.

Tariffs applied to New Zealand’s exports are less, both in absolute and percentage terms, than those encountered by Malaysia at the New Zealand border.  That said, some specific products do face moderate barriers.  Processed wood and paper products attracted the largest tariff charges in absolute terms in 2003, with duties totalling over $1.7 million on exports valued at $21 million. This translates to an average tariff of 8.2 percent.  An important point to note is that Malaysia’s tariff regime tends to afford greater protection to value-added forestry and paper products such as fibreboard, kraftliner and newsprint, while timber enters duty free.  New Zealand exports of cheese faced an average applied tariff of up to 6.5 percent in 2003, with tariff charges totalling $0.7 million.  Other New Zealand products that face substantial tariff barriers to the Malaysian market included plastics (exports of $2.5 million encountered an average tariff of 26 percent), chocolate products (a tariff of 15 percent on exports of $2.2 million), carpet (tariffs of 30 percent), and electrical products (an average tariff of 8 percent).

While Table 6.5 indicates that an FTA would offer limited savings for New Zealand exporters in terms of current trade, consideration must also be given to areas where high tariff barriers may be acting to restrict or stifle potential trading opportunities.  Products with potential barriers that may be affecting New Zealand exporters include:

• road wheels and tyres (30-40 percent);
• further processed wood products such as fibreboard, plywood and other articles (20-40 percent);
• refrigerators / freezers (30 percent);
• galvanised wire (30 percent);
• air conditioners (30 percent);
• aluminium foil, plates and other articles (20-30 percent);
• yoghurt (25 percent), casein glues (25 percent), and chocolate and cocoa paste (20 percent and 15 percent respectively);
• dishwashing machines (20 percent);
• kiwifruit (15 percent);
• waters (20 percent), wine and ethyl alcohol (specific duties).

6.3 Malaysia to New Zealand

6.3.1 New Zealand Tariff Policy

Currently 95 percent of global imports by value enter New Zealand duty free,18 either because the Most Favoured Nation (MFN) tariff is set at zero, because of preferential tariff arrangements with Australia, Singapore, Pacific Island countries and Less Developed countries, or because they fall under the tariff concession system in Part II of the New Zealand Tariff.  New Zealand applies “normal” MFN tariff rates to countries that are not party to preferential trade agreements.  “Normal” tariff rates on protected sectors in New Zealand are typically in the region of 5-7 percent.  Certain sectors, however, receive higher protection.  For example, some clothing, and footwear items currently face a 19 percent tariff (or more when “alternative specific” tariffs, expressed in dollar terms per garment, are applied to low-cost clothing).  New Zealand’s average applied MFN tariff is 4.1 percent.19  Average rates applied to agricultural and industrial products are 2.1 percent and 4.4 percent respectively.20  The average rate for textiles, clothing and footwear is 9.5 percent.

The outcome of the New Zealand Government’s review of tariffs for post-2005 was announced on 30 September 2003.  Under the review’s decisions, New Zealand’s applied tariff rates will reduce to either 5 or 10 percent.  All tariffs currently at 12.5 percent or lower will reduce to 5 percent by 1 July 2008.  New Zealand’s highest tariffs (17-19 percent) will reduce gradually between 1 July 2006 and 1 July 2009 to 10 percent.  Tariffs currently between zero and 5 percent will remain unchanged.  All alternative specific tariffs will be converted to ad valorem rates on 1 July 2005. These will then be phased down on the basis of the reduction programme outlined above.  A further tariff review scheduled for 2006 will determine tariff policy post-2009.  

Figure 6.3 New Zealand’s (Simple) Average Applied Tariff Rates

Source: Ministry of Foreign Affairs and Trade.

Figure 6.3 provides an overview of New Zealand’s applied tariff protection across a number of key sectors. It indicates the higher protection afforded to the textile, clothing and footwear industry.  

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6.3.2 Malaysian Exports to New Zealand

More information on the main imports from Malaysia into New Zealand during the 2003 December year is shown in Table 6.6.  Column one shows the aggregate product line along with its associated HS code.  Column two shows the value of the imports (CIF basis), while column three shows the percentage of that HS line that is sourced from Malaysia. Columns four and five are derived from Malaysian export data.  Column four shows the percentage of Malaysian exports in that HS line that are destined for New Zealand, while the final column shows where New Zealand ranks as a destination from Malaysia.

Table 6.6: Malaysian Exports to New Zealand (NZ imports) (2003 and NZ$ million)

NZ Imports from Malaysia			Malaysia Export data
Description (HS code)		% from Malaysia	% total	Rank
Grand total	683.2	2.29	0.34	27*
Machinery (84)	155.5	3.81	0.32	28
Electrical machinery (85)	137.3	5.06	0.14	30
Fuels (27)	133.5	4.9	0.89	13
Furniture (94)	37.8	10.1	1.13	13
Plastics (39)	36.9	3.32	0.76	18
Fats/oils (15)	30.7	24	0.3	44
Rubber (40)	22.1	6.04	0.43	35
Paper and products (48)	13.1	1.55	1.95	12
Special (98)	7.1	8.32	0.85	22
Fertiliser (31)	6.8	2.33	2.52	9
Wood (44)	6.7	4.99	0.09	45
Iron/steel (73)	6.7	1.43	0.34	32

Source: World Trade Atlas and Statistics New Zealand data, MFAT analysis.

* Recall that New Zealand is the 27th destination for Malaysian exports if the EU is aggregated into a single trading entity.

The 12 top imports shown in Table 6.6 account for $594 million (87 percent of the total imports from Malaysia) in 2003.  The top three lines – machinery, electrical machinery and fuels - account for 62.4 percent of the total imports. Overall, 2.29 percent of New Zealand’s imports were sourced from Malaysia.  The table also shows that in fats and vegetable oils, furniture, electrical machinery, rubber products and the special category of goods under $10,000 not classified elsewhere, Malaysia holds a share above 5 percent of New Zealand’s global imports. 

For New Zealand, Malaysia is an important source (currently fourth largest) of supply for computers and computer parts. Malaysia is New Zealand’s main supplier of rubber clothing and palm oil. Malaysia regards New Zealand as an important destination for nitrogen fertilisers and, at the more detailed level (not shown), for plastic sheeting and soybean oil.

6.3.3 Duties on Malaysian Exports to New Zealand

While Table 6.7 confirms that MFN duties applied to Malaysian exports in 2003 were modest, it does indicate that Malaysian exporters stand to benefit from the immediate and reciprocal elimination of tariffs under an FTA with New Zealand.21 

Table 6.7:  Estimated Duty on Malaysian Exports to New Zealand (2003, NZ$ millions)

Tariff brackets*	Exports	Est. duty paid	Average rate (%)	%of exports
Zero	502.1	0.0	0.0	73.5
Zero to 5%	17.9	0.7	4.0	2.6
5.1% to 10%	159.5	11.3	7.1	23.3
10.1% to 20%	3.8	0.5	14.6	0.6
Greater than 20%	0.0	0.0	25.3	0.0
Total	683.2	12.6	1.8	100.0

*Alternative Specific Rates have been converted to Ad Valorem for the purpose of presentation in the table.
Source: Statistics New Zealand

Duties levied on furniture products from Malaysia accounted for 16 percent of total tariffs collected in 2003.  Furniture exports of $36.3 million attracted duties of $2.0 million at an average rate of 5.5 percent.  Other exports that attracted substantial tariffs included some plastic products (exports of $11.4 million incurred duties of $0.5 million), insulated electrical conductors (tariffs of $0.3 million at 6.6 percent) and rubber tyres (average tariff 11.4 percent).

6.4 Detailed Sector Analysis

6.4.1 Malaysian Agricultural Sector

The share of agricultural exports in Malaysia’s total exports was 8.1 percent in 2003, while the share of agricultural products in total imports was 3.1 percent.  ASEAN was the main trading partner, taking 21.2 percent of these exports and providing 37.3 percent of the imports.  Fats and oils (palm oil) valued at $10.4 billion dominated exports, followed by cocoa exports totalling $0.6 billion.  The main imports were cereals, fats and oils, cocoa, dairy products and vegetables. New Zealand was the source of 5.0 percent of Malaysia’s agricultural imports.

Using a different definition of food, the Ministry of Agriculture and Fisheries found the major suppliers of food to Malaysia to be Australia (17.5 percent), Thailand (14.2 percent), USA (9.5 percent), China (9 percent) and New Zealand (7.2 percent). In 2001, New Zealand was the leading supplier of dairy products and second largest supplier of fresh/chilled beef, lamb, infant food and frozen vegetables.  Australia was the leading supplier of fresh/chilled beef, lamb, fresh temperate vegetables, fruit juice and wine (tied with the US), and the second largest supplier of dairy products and fresh temperate fruits. New Zealand and Australia have the advantage over several other suppliers of shorter, and therefore cheaper, shipping times.  The US was the leading supplier of frozen poultry, potato based snack products, frozen vegetables, wine (tied with Australia) and the second largest supplier of breakfast cereals, pet food, dried fruits, edible nuts and fruit juice.  China was the leading supplier of canned vegetables, fresh temperate fruits, dried fruits, canned fruits and edible nuts, and the second largest supplier of frozen poultry, fresh vegetables and beer.  India was the leading supplier of frozen beef.  Thailand was the leading supplier of pet food and the second largest supplier of non-alcoholic beverages.  France was the largest supplier of non-alcoholic beverages and the second largest supplier of wine and spirits.

Malaysia’s economy is comparatively open to both trade and investment.  Overall, Malaysia maintains a liberal agricultural tariff and few non-tariff border measures. Applied tariffs are significantly lower than Uruguay Round bound commitments.  Many sectors are completely open with applied tariffs of zero (meat, much of the dairy, cereals, oilseeds and animal feed). In other sectors such as horticulture and processed foods there are some high-bound tariffs, particularly specific tariffs, along with quotas and import licences. 

Malaysia included selected agricultural products in its Uruguay Round Schedule for tariff quota purposes, but allows significantly higher imports of these than it committed to.  In general, tariff quota rates are not applied and most imports enter duty free.  Malaysia has reserved, but not used, the right to apply the special safeguard provisions under the WTO Agreement on Agriculture. 

A range of New Zealand’s exports are subject to import licensing, as well as sanitary and phytosanitary (SPS) measures.  An increasing proportion of tariff lines is subject to import licensing. Food items are subject to mandatory technical regulations, and packaging and labelling requirements.  These are amended from time to time. Halal certification is also a requirement for some imports.

Malaysia has no export subsidy programmes that are subject to WTO reduction commitments.  The Government provides support and protection to the rice and tobacco sectors.  Production subsidies and subsidies on fertiliser apply only to rice production.

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6.4.2 The Dairy Sector

The dairy sector is New Zealand’s single largest merchandise goods export sector and a key contributor to the New Zealand economy. It accounts for 17 percent of total merchandise exports and generates approximately 24,000 rural jobs.²²  The New Zealand market is open and 15 percent of all dairy products consumed domestically are foreign sourced. 

Although New Zealand’s share of world milk production is relatively small at just 2.5 percent, it is the world’s second largest exporter of milk and cream products. The range of destinations is diverse, with around 25 countries receiving more than 1 percent of New Zealand’s total dairy exports. 

Malaysians are amongst the lowest consumers of dairy produce in Asia, with only 58 percent of households purchasing any dairy produce.23  The Food and Agriculture Organisation (FAO) reports that Malaysia’s dairy milk production totalled 30,000 mt in 2000.24  This is a small figure when compared with New Zealand’s 14,354,112 mt and considerably less than either Indonesia’s or Thailand’s domestic production of around half a million tonnes each.

As the local dairy industry does not produce sufficient quantities of fresh fluid milk to satisfy Malaysia’s needs, fresh milk is supplemented by reconstituted fluid milk and other milk products.  Ingredients such as skimmed milk powder, whole milk powder and whey needed to produce condensed milk and other milk products are imported, mainly from New Zealand and Australia.  The Malaysian Government wants to raise the level of self-sufficiency in fresh liquid milk production from the current 6 percent to 10 percent by 2010 and is working with factories and farmers to achieve this goal.  However, the United States Department of Agriculture (USDA) reports that milk production is not expected to expand.25

Malaysia relies on imports of powdered milk for the dairy product industry and of butter and cheese for its consumer market. Although there is no duty on milk powder, a 2 percent duty is levied on butter and duties of between 5 and 10 percent are levied on butter and cheese imports.  Importers of these products also require an import licence.  Overall there appear to be few other barriers to the Malaysian market.

New Zealand is the main source of supply of milk powders for Malaysia.  This accounts for exports valued between $400 and $500 million each year (although exports totalled $735 million in 2001) since 1997.  Between 1997 and 2000, New Zealand held approximately 50 percent of the market, although this has declined since 2001 to around 40 percent.  Australia is the second largest supplier, with a market share of 25-30 percent, while recently Thailand has managed to gain nearly a quarter of the market.  It is likely that Thailand’s exports are re-exports from New Zealand or Australia.  Butter is another major import, with Australia just ahead of New Zealand in the CER-dominated market valued at around $30 to 40 million annually.

Overall, Malaysia is New Zealand’s seventh largest market for dairy products, taking $261.9 million or 4.6 percent of total dairy exports. 26

6.4.3 Meat

The meat sector is another significant part of the New Zealand economy, representing 15 percent of merchandise exports.  In 2003 meat exports, comprising predominantly sheepmeat and beef, totalled $4.36 billion. Around 29,000 New Zealanders were estimated to be employed in beef and sheep farming in 1998.  However since the early 1980s sheep numbers, and more recently beef farming, have decreased as land use has shifted to dairy, deer farming, and forestry.

As in the dairy sector, most production is sold in international markets.  Approximately 85 percent of beef and veal production, and 80 percent of sheep meat, is exported.  New Zealand is a net importer of frozen pork meat and bacon products.

The majority of the Malaysian population is Malay (61 percent) and Muslim.  As the Koran prohibits Muslims from consuming "non-halal" food and alcoholic drinks, the nature of processed food ingredients is important.  Consumption of meat products is greatly influenced by religion, which affects consumer purchasing and dietary habits. Malaysian-Chinese tend to eat more pork, and Indians prefer mutton, while Malays consume halal processed meat, especially beef.  Poultry is the most popular meat and is consumed by all ethnic groups.  The poultry industry has been self-sufficient since 1984 and the pig industry since 1981.  The domestic production of ruminants, however, has declined in recent years, in spite of small increases in cattle and sheep populations in the early 1990s. Malaysia is now only 19.8% self-sufficient in beef and mutton.

Malaysia has ambitions to become a regional hub for producing and processing halal products for the world’s 1.8 billion Muslims.  As a pioneer in promoting halal food globally, Malaysia's locally developed halal certification serves as an example for other nations and has been commended by the United Nations as a model system.  Where meat products are concerned, halal certification is awarded when the producer has strictly followed procedures for slaughtering, processing and other related operations as prescribed by Islam.  The halal certificate is not just a religious requirement. In order to gain halal certification, manufacturers must adhere to strict cleanliness and quality controls.

For other food products, the "halal" designation means that all ingredients used in manufacturing the products have Islamic approval.  Raw materials used as feed-stocks and as intermediate goods to manufacture value-added products are inspected to ensure halal standards are met.  Currently, halal products certified in Malaysia range from processed chicken and beef products to ice cream, chocolate and food supplements. 

New Zealand exports of meat products to Malaysia totalled $62.2 million in 2003, or 11.4 percent of total exports to that destination. New Zealand data shows that sheepmeat ($23.4 million), frozen beef ($22.1 million) and edible offal ($12 million) all ranked in the top six export products to Malaysia during 2003. Malaysian import data shows that New Zealand was the main supplier of sheepmeat but second to India in beef imports.  New Zealand is the main supplier of edible offal, with imports of $23 million (a figure nearly double the comparable New Zealand reported export value).  Tariffs on meat products into Malaysia are zero.

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6.4.4 Fruit and Vegetables

The New Zealand horticultural industry has expanded markedly since 1990.  Exports (to more than 110 countries) have almost doubled in value over the past 13 years, driven primarily by growth in kiwifruit, apples, onions and wine.²⁷  Employment in this sector totals over 30,000 people. 

New Zealand export statistics for 2003 show Malaysia to be the seventh most important destination for vegetable exports ($10.6 million), the 14th most important destination for fruit ($18.1 million), and the third most important destination for preserved foods ($9 million).  Within these broader categories, the most important products are apples ($9.4 million), potatoes ($1.6 million fresh and $6.5 million frozen), frozen berries ($5.6 million), frozen vegetables ($4.0 million – mostly mixed vegetables), onions ($3 million) and persimmons ($1.6 million).  Malaysian import data broadly confirms this trade at the aggregate level, but shows differences in many of the detailed products.  In particular, Malaysian data suggests higher import values for frozen vegetables and fruit juices.

The fruit and vegetable industry in Malaysia is small and fragmented, with considerable scope for technological improvements.  The Government, through its present five-year economic plan, has provided investment incentives to the private sector to venture into primary fruit and vegetable production and processing. The aim is to increase local fruit and vegetable production both to meet domestic demand and help facilitate exports.  Tax incentives for commercial fruit cultivation include pioneer status, investment taxation allowance, re-investment allowance and agricultural allowance.  Priority will be given to the promotion of large-scale horticultural cultivation, as Malaysia sees fruit production as the country’s new “wealth generator”. 

Malaysia maintains modest tariffs on some imports in the three HS chapters of vegetables (07), fruit (08) and processed vegetables and fruit (20).  Imports of vegetables are largely duty free, while fruit attracts tariffs of between zero and 15 percent. Most of New Zealand’s trade attracts a 5 percent duty.  In the processed vegetable and fruit products, duties vary from zero to 30 percent.  Most of the New Zealand trade seems to attract duties of either 5 or 6 percent.

Malaysia is one of the world’s largest exporters of pineapples and other tropical fruits such as jackfruit, starfruit (carambola), guava, roselle and papaya. They may be canned in syrup or brine, pickled in vinegar or dehydrated.  Fruits such as pink guava, passionfruit, rambutan and soursop are also canned or processed into juices, concentrates, puree and jam.

The complementary nature of Malaysian and New Zealand production suggests an FTA would offer further opportunities for New Zealand exporters without displacing Malaysia’s domestic industry.  Further, an FTA would ensure New Zealand producers could compete with other countries exporting into the Malaysian market.

Non-agricultural Products

6.4.5 Fisheries

Over the past 50 years the international fisheries catch/production has increased more than six-fold, from around 19 million tons in 1950 to around 130 million tonnes today.  Production from aquaculture has expanded considerably over the past two decades, a trend that is likely to continue. Regional production in Asia during 2002 was around 39 million tonnes, with Chinese production accounting for 26 million tonnes (67 percent of total production).  Indonesia, Thailand, Philippines, Viet Nam, Malaysia and Myanmar are amongst the world’s top 20 harvesters/producers of fish, crustaceans and molluscs etc.

Until the mid-1990s, Malaysia was a net exporter of fish, but now it is the second largest importer of fisheries products in the region after Thailand.  Unlike Thailand, though, most imported fish products are consumed domestically. These imports are expected to increase because fish is an important food ingredient for all ethnic groups in Malaysia and national production is unlikely to meet increasing demand.  The domestic sector is well managed, but close to exploitable limits.  Sea fishing contributes some 80 percent of the national catch, but an increasing role is being played by aquaculture production. The main aquaculture exports are fresh and frozen fish, prawns and shrimp.

New Zealand’s fishing zone is the world’s fourth largest in area, although compared with similar fisheries in the Northern Hemisphere it produces a relatively low total harvest. A feature of New Zealand’s resource is the Quota Management System (QMS), which requires commercial fishing to be conducted under individual, property-based harvest rights.  This eliminates much of the “race for fish” and propensity for over-capitalisation common in open-access fisheries.  Associated with the changes in management structure has been the recognition of Maori fisheries claims. Collectively, Maori have become the biggest owners of fisheries rights in a sophisticated commercial sector.

Much of the New Zealand fisheries resource is finfish from the extensive deep-water zone, and catch limits for almost all commercial species are set at levels to ensure maximum sustainable yield.  A very high percentage of the catch is exported, and the sector has become one of the most important export sectors.  The predominant species is finfish, although rock lobster, abalone, squid and farmed greenshell mussels are becoming increasingly important.

The fishing and seafood sector is a significant component of the New Zealand economy and, like many other primary sectors, is of particular importance to New Zealand’s regional economies.  Seafood exports totalled $1.17 billion in 2003, accounting for around 4 percent of total exports.  Malaysia (12th largest seafood market) took exports valued at $15.2 million. Over half of these exports were fish fillets, followed by crustaceans.

Malaysian imports generally are duty free for commodity-type fisheries products, but the more value-added products generally face higher duties of up to 20 percent.  Although most of the imports from New Zealand are currently duty-free fish fillets, an FTA would assist the New Zealand sector to widen its export mix into higher tariff products.

6.4.6 Forestry

The South East Asian sub-region has an average forest cover of around 50 percent and it is a major player in the international trade of tropical timbers.  However, the natural forest resource for hardwoods in the region is becoming depleted, and greater reliance is being placed on plantation forestry.  Malaysia is the world’s largest exporter of tropical logs and sawn timber.  In response to international criticism of destructive logging practices, Malaysia has developed a management policy aimed at maintaining a sustainable permanent estate while maximising social, economic and environmental benefits of the resource.  The ban on exports of raw logs has been extended to all states except Sarawak.  Consequently log production is declining.

In 2003 Malaysia’s exports of forestry products totalled $3.1 billion. Japan was the largest market, taking 24 percent of Malaysia’s exports.  New Zealand was Malaysia’s 26th largest market, taking 0.28 percent of its forestry exports. Malaysia imported $1.28 billion worth of forestry products, 36 percent of it from ASEAN, the largest supplier.  New Zealand was Malaysia’s 14th largest supplier of forestry products, providing imports valued at $26.4 million.

The export of indigenous logs is strictly controlled in New Zealand, and the large export trade of logs, sawn timber and wood pulp is based entirely on privately owned sustainable softwood plantations.  In 2003 exports were valued at $2.8 billion. Over half of New Zealand forestry exports to Malaysia were in the form of wood pulp. New Zealand imports of forestry products from Malaysia were worth $22 million, making it the 12th most important source of forestry products. Paper products were the main imports.

A particular feature of the Malaysian (and many other ASEAN destinations) tariff schedule in forestry products is the degree of tariff escalation.28 The highest effective tariff rates (ETRs - a measure of the tariff escalation effects) are those calculated for Malaysia, followed by the other ASEAN states of Thailand, the Philippines and Indonesia.  An FTA offers New Zealand an opportunity to address these escalating tariffs.  

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6.4.7 The Automotive Sector

Malaysia’s automotive sector, long protected by very high tariffs, is facing restructuring.  The sector ranks amongst the top 20 in the world and is second in the ASEAN region after Thailand.  Most of the annual production of 450,000 units remains in Malaysia, although in 2003 some 9,289 units valued at $89 million were exported.29 Malaysia is a major exporter of vehicle parts, with exports valued at around $600 million in 2003. Around 40 percent of this total was destined for ASEAN markets.

New Zealand imposes relatively high tariffs, from zero to 11.5 percent, on imports of automotive parts, including radiators, exhaust pipes, alloy wheels, tyres and other automotive components and accessories.  There are also some tariffs levied on imports of bicycles, trailers and some special purpose vehicles.  Imports of cars and most light commercial vehicles from all sources have been duty free into New Zealand since 1998.  New Zealand has not recorded any vehicle imports from Malaysia in the last three years, and only $4 million in parts and other imports in the HS Chapter 87.

New Zealand no longer has a vehicle assembly industry but has some expertise and capability in producing and exporting automotive components such as alloy wheels and tyres, as well as special purpose-built vehicles. Exports of these vehicles and components totalled $330 million in 2003.  Some $7 million (2.1 percent) of exports were destined for Malaysia (up from 1.3 percent in 2002).  Malaysian records show imports from New Zealand valued at $0.107 million (down from imports valued at $9.43 million in 2002.  These imports during 2002 were classified as “other special purpose vehicles”, which, according to the Malaysian schedule, would have attracted a 50 percent tariff).

6.4.8 Electrical Equipment and Machinery

Malaysia is a significant global producer of electronic data processing equipment, consumer audio and visual products, and components for ICT equipment.  The WTO considers that this sector in Malaysia is a striking example of the benefits of an open regime in fostering economic development because it has attracted significant FDI and operates with few tariff or non-tariff measures.  The sector has grown in recent years to account for around 2.5 percent of global production. It is regarded as one of the engine rooms of Malaysia’s overall economic growth.30

The export of integrated circuits also contributed significantly to Malaysia’s export earnings in 2003. Total trade in electrical and electronic products was valued at $64.6 billion and accounted for 37.6 percent of total exports.  The main market was ASEAN, with a 21.3 percent export share, followed by the US and the EU.  Chapter HS 85 (electrical goods) was, in turn, Malaysia’s leading import sector, with imports recorded at $59 billion, or 43.2 percent of the total global imports.  In 2003 the sub-sector of parts for electronic integrated circuits and micro-assemblies comprised Malaysia’s largest import item within the overall Chapter of electrical and electronic products. 

Although Malaysia is a competitive exporter of electrical equipment and machinery, its sixth-place share of New Zealand’s imports has reduced slightly in the last three years, from 5.33 percent in 2001 to 5.01 percent in 2003 (after a high of 6 percent in 2002). 

New Zealand’s tariffs on mechanical appliances range from zero to 10 percent.  Almost all (94.3 percent) of the imports from Malaysia entered duty free in 2003. Only three detailed lines of insulated electrical conductors and electrical transformers paid duties, of between 5.5 and 7 percent.  Elimination of tariffs under the FTA framework could help stimulate trade in this sector and increase Malaysia’s export competitiveness in the New Zealand market.

New Zealand is a competitive exporter of mechanical and electrical machinery in certain niche areas.  Exporters in these sectors face significant tariff barriers into Malaysia of up to 55 percent, but tariffs of 15 percent are more usual.  

6.4.9 Textiles, Clothing and Footwear (TCF's)

Over the last seven years Malaysia’s global exports of TCF products has ranged from $5.98 billion in 2000 to $3.9 billion in 2003.31 The main destinations have been the US, which takes around 30 percent of exports, and the EU, which receives  around 20 percent.  New Zealand is well down the list of Malaysian export markets.  By HS codes the main exports from Malaysia have been apparel products in HS 61 and 62, and synthetic fibres in HS 54 and 55. Between 2001 and 2002 Malaysia held a global export share of 1.4 percent in apparel products (down marginally from its share of 1.6 percent between 1999 and 2000).32  During 2000 Malaysia held market shares of 1.6 and 1.1 percent in apparel products into the US market.  TCF products are therefore important exports from Malaysia, although, like most other exporters, Malaysia appears to be losing global market share to China.  

Malaysia’s exports have recently held a share of less than 1 percent of New Zealand’s TCF imports.  This is primarily a result of competition from China.  In 2003 Malaysia was New Zealand’s 21st largest source of TCF imports.33 They were  valued at $5.4 million (0.47 percent market share), down from the $7.5 million (0.63 percent share in 2001). More than half of these imports were in two detailed lines of rubber gumboots and in rubber gloves.

The clothing, footwear and carpet industries remain protected by New Zealand’s highest tariffs, although this protection has declined significantly since the mid-1980s, when many clothing tariffs were as high as 65 percent. Tariffs are scheduled to reduce further under the provisions of the post-2005 review.  In recent years, New Zealand has experienced a transformation of its clothing sector, in which production and resources have largely switched from unsustainable, low-cost clothing to niche, higher-value production areas.  Manufacturers have chosen to build on areas of natural advantage such as fast turnaround (something which distant competitors struggle to match), quality, design and fit of product to retain competitiveness.  A shift of focus towards design, logistics and marketing (with some firms choosing to outsource production) are key features of the industry over the past decade. Australia has been the main export destination.  

In 1999, New Zealand was reported as having 1,017 enterprises employing 7,249 people in the production of clothes.  This is much smaller than the comparable sector in Malaysia, where 3,071 enterprises employed 58,400 people over the same period.34

For apparel products, New Zealand applies either ad valorem or alternative specific tariffs on imports.  The ad valorem rates range from 0 to 12.5 percent on textile commodities and 0 to 19 percent on apparel products.  During 2003 the imports of $5.4 million paid an average duty of 4.30 percent.  

Given the factors outlined above and wider trade liberalisation through New Zealand unilateral tariff reductions, the WTO process and other bilateral FTAs, an FTA with Malaysia is likely to have only minimal effect on existing trends within New Zealand’s TCF sector.

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6.4.10 Other Manufacturing

The New Zealand manufacturing industry also has strong capability in several sectors that may be relevant to future trade between New Zealand and Malaysia:  aviation, marine, tooling and specialised plastics manufacture and packaging. New Zealand-based businesses design, manufacture, develop and service hardware and technology for all areas of the aviation sector, including airframes, engines, avionics, and navigation and mechanical equipment for both commercial and military aircraft.  In the marine sector, competitive yachting has accelerated the development of well-designed, innovative products ranging from racing yachts to aluminium and steel superyachts and luxury cruisers. 
 

6.4.11 Environmental Goods

This sector comprises goods manufactured to measure, prevent, limit, minimise, or correct environmental damage to water, air and soil, as well as goods related to waste, noise and ecosystems.  They include cleaner technologies and products that reduce environmental risks and minimise resource use.  Specific products include air pollution and control equipment, waste water management equipment, solid waste management systems, solar power energy systems, wind power etc.  Bilateral trade in these products is not large at present, but as the global market for environmental goods is rapidly expanding there is considerable scope to increase trade in this area.

6.5 Other Policies Affecting Trade in Goods

Market access issues are defined by more than tariff constraints.  In some industry sectors the costs of meeting technical standards, regulations and other non-tariff measures now exceed the cost of the tariff.  Modern trade agreements therefore recognise the central importance of identifying avenues to reduce these costs and ensure bilateral rules and broader regulatory approaches seek to facilitate trade directly.  Rules of origin and trade remedies, for example, should reflect trade-enhancing principles.  Similarly, there is a need to encourage regulator-to-regulator cooperation to identify processes that reduce technical constraints/costs on trade. 

This study has identified as matters that should be dealt with under an FTA a range of non-tariff issues affecting bilateral trade in goods between New Zealand and Malaysia.  These include SPS, labelling, standards and technical requirements, licensing issues with respect to halal certification, intellectual property protection, import licensing and issues related to treatment of goods at the border.  While no Malaysian export subsidies have been identified, subsidies to domestic producers in the forestry sector have been cited as posing a significant problem for New Zealand imports into Malaysia.  A number of cross-cutting themes have also been raised, including the transparency, consistency of application and enforcement of relevant requirements, and whether some measures are more trade-restrictive than necessary.  (These issues are discussed further in Chapter Nine.)

6.6 Rules of Origin

The rules of origin (ROO) are a central component of preferential trade arrangements since they determine whether goods traded between the parties will be allowed to enter under preference.  They are therefore an important aspect of an FTA and need to be designed with a view to supporting its overall trade facilitation objectives.

Goods that incorporate production inputs – components and raw materials – originating in one or more countries not party to the agreement will qualify for the tariff preference only if they have been “substantially transformed” in a party to the FTA.

The chosen criteria for determining whether or not inputs from a third country have been substantially transformed may be one or more of the following:

• change of tariff classification (CTC) – the most common single criterion;
• value-added rule – often termed Regional Value Content (RVC);
• a specified process rule. 

Several factors should be taken into account when evaluating alternative ROO models.  It needs to be considered which are the most likely to facilitate trade, encourage more efficient allocation of resources, provide opportunities for manufacturing initiatives and open up new sources of input supply, and can be effectively enforced.  The ROO should not be used to create trade barriers.

There are many differences between the RVC ROO for partly manufactured goods in AFTA and those in New Zealand’s recently negotiated agreement with Thailand.  Under the AFTA, ROO are used to ensure that “partly manufactured” goods traded between parties have a minimum RVC of 40 percent of the FOB export price.  Under the Thailand-New Zealand CEP, eligible products must comply with CTC rules specified on a product basis.   In addition, textiles, clothing, carpets and footwear must achieve a minimum RVC of 50 percent of their export FOB price (price at export port or airport), as opposed to the 40 percent RVC used under AFTA.  (New Zealand and Australia have also agreed in principle to change to a CTC model under the CER, instead of the current RVC rule – 50 percent of factory cost, or cost of production.)

New Zealand wishes to standardise its ROO model to the fullest extent possible.  Most products would be subject as appropriate to either wholly obtained or CTC criteria, with additional RVC requirements kept to a minimum. 

It is accepted that certain special characteristics might need to be reflected in variations between the ROO applied under FTAs. New Zealand, however, maintains the position that ROO under the FTA should: 

• recognise substantial transformation as a guiding principle;
• take account of all genuine local content;
• maximise trade under preference (“preference utilisation”);
• be generalised, with minimum use of exceptions to a simple CTC rule;
• provide a net economic benefit to the parties by being pro-competitive;
• not impose unnecessary compliance costs on business or unnecessary administrative costs on government;
• be compatible with the ways in which businesses operate in a global trading environment and attempt to minimise input costs and capture economies of scale;
• allow efficiency gains to be captured as markets open up;
• be readily enforceable at the border;
• be periodically open to review, taking account of changes in the parties’ MFN tariff regimes and international developments with regard to ROO models.

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6.7 Overall Impact of Liberalising Trade in Goods

An FTA between New Zealand and Malaysia should aim to remove tariffs and quotas on all goods on a reciprocal basis.  Given that two-way trade is complementary and few items on either side are subject to high duties, removal of duties on merchandise goods should not pose too many problems.  

6.7.1 Static Gains

According to economic theory, trade liberalisation between two complementary economies will lead to welfare enhancement for both countries as a result of reduced prices, trade creation and a reduction in deadweight loss through improved economic efficiency.  Following tariff elimination, consumer welfare will increase from a reduction in import prices and a greater variety of available goods and services.  In the short run, tariff reductions will reduce this source of government revenue.

6.7.2 Dynamic Effects

Trade liberalisation, and the accompanying increase in openness to trade, is widely understood to promote productivity increases and economic growth within a country. This is attributed to an increase in the efficient allocation of resources among countries and encouragement of the efficient allocation of resources among economic sectors.  Allocative gains represent a traditional theory on productivity gains from trade liberalisation and suggest the countries that liberalise the most will benefit the most.

More recently, work at the World Bank and elsewhere has indicated that there are other gains from trade openness that cannot be solely attributed to allocative efficiency changes.  These are known as second-order gains, and are frequently more substantive and longer lasting than the static allocative gains.  Specifically, trade reform will increase competition and have positive spillovers for the wider economy.  Businesses are encouraged through competition to use better technology and improve their business practices, including through innovation and/or quicker adoption of new ideas and improved business processes.  These improvements to productivity through efficiency as a consequence of improved work practices (as opposed to resource re-allocation) are referred to as “dynamic productivity gains”. 

The literature on dynamic efficiency gains from trade openness is relatively recent and dates to the late 1990s, when trade economists sought to explain why economies with no or very low tariffs were still experiencing net improvements across their economies, despite the fact that the static gains (ie. derived from tariff liberalisation) were now non-existent or minimal.  Economic modellers have made significant improvements in their modelling techniques and are now better able to understand, explain and determine the size of the link between competition (and its positive spillovers) and dynamic productivity growth.  There is now general agreement that dynamic gains are important over time and if they are not fully reported there is the potential to under-estimate the net benefits to the economy.  The recently published Joint Study Report on the Free Trade Agreement Between China and New Zealand expands on this and provides model estimates of the dynamic gains.35

Malaysia and New Zealand are a classic example of complementary economies and this is reflected in the current pattern of bilateral trade in goods.  Malaysia exports manufactured goods to New Zealand in return for primary goods and some industrial items.  Removing tariffs and other barriers under an FTA would allow this natural trade to reach its full potential, resulting in modest economic benefits to both countries.  There would be some real welfare benefits for the people of Malaysia and New Zealand in the form of lower prices for consumers and improved opportunities for exporters.  In turn, these benefits should stimulate greater economic activity in both countries, providing for more jobs and increased production.  Technology and investment exchanges that accompany the flow of goods would also lead to productivity gains.  It would also be expected that, following the reduction of trade barriers and publicity surrounding an FTA, exporters in both countries would have access to new and profitable opportunities.

[10] Trade data consistency is a problem.  For a variety of reasons, the export data from one country seldom reconciles with the import data of the partner country.  To overcome this problem the study follows the practice of using the import statistics from each partner to represent the official trade flow. In this study, New Zealand export figures are based on Malaysian Customs import data.  This practice reflects the generally held view that imports are scrutinised more closely than exports.  All data is expressed in New Zealand dollars.

[11] World Trade Organisation, Trade Policy Review: Malaysia (Report by the Secretariat), 5 November 2001, WT/TPR/S/92. This could be, however, an underestimate given that ad valorem equivalents were not available for "other" rates. 

[12] Ibid

[13] Only two-thirds of Malaysia's WTO Tariff Schedule is subject to bindings.

[14] Bound rates considerably exceed tariff rates.

[15] World Trade Organisation, Trade Policy Review, Malaysia, 2001.

[16] For commercial reasons traders may ask Statistics New Zealand to suppress details of their imports or exports for up to 24 months.  A value for all “Confidential” trade appears under catch-all Chapter HS 98 in New Zealand’s trade statistics.  A full list of the goods classified under this heading is available on the Statistics New Zealand [external link]website.

[17] Ad valorem rates are a percentage cost charged against the import value.

[18] New Zealand Customs.

[19] World Trade Organisation, Trade Policy Review: New Zealand (Report by the Secretariat), 14 April 2003, WT/TPR/S/115.

[20] Ibid

[21] It is important to note that this tariff phase-out only provides an indication of “static” gains from a Malaysia-New Zealand FTA.  It is expected that “dynamic” gains would be substantially higher, as both economies profit from enhanced business relationships, technology transfer, competition and other benefits of closer integration.

[22] This figure is a measure of farm workers only and excludes downstream employment in areas such as processing.

[23] TNS Gallup website downloaded 17 November 2004.

[24] FAO data [external link]

[25] USDA Foreign Agricultural Service GAIN Report, Malaysia Dairy Products, Report Number MY4058.

[26] Most of New Zealand’s exports are concentrated in milk powder. Malaysia is New Zealand’s third most important market for milk powder.

[27] Strictly speaking, wine is a viticulture product, but is mentioned here as it has been a success story for New Zealand and is based upon a horticultural product (grapes).

[28] The trade impacts of this tariff escalation are analysed in a New Zealand Ministry of Foreign Affairs and Trade paper “Tariff Escalation in the Forestry Sector”, August 2002. 

[29] Vehicle exports were down from 14,193 in 2002, and nearly half were destined for Australia.

[30] “Trade Policy Review of Malaysia”, Report by the WTO Secretariat, 5 November 2001.

[31] The fluctuating New Zealand dollar would be a factor in the variation of these export values.

[32] Dirk van Seventer, WITS trade data base, analysis for MFAT.

[33] As defined by HS codes 58 to 64 inclusive (Source:  MFAT “Grey Book”, December 2003, “New Zealand External Trade Statistics” ). If the definition is extended to include codes HS 51 to 57 inclusive, imports were $9 million, mostly cotton and fabrics.  These latter imports were largely duty free, with assessed duty of 0.5 percent.

[34] The United Nations International Yearbook of Industrial Statistics, 2003.

[35] The study Joint Study Report on the Free Trade Agreement Between China and New Zealand is available on-line.

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