Syed Fazl-e-Haider
Nov 19 - 25, 2007

Last week, Pakistan signed its third comprehensive Free Trade Agreement (FTA) with Malaysia after Sri Lanka and China. Pakistan's High Commissioner to Malaysia and Malaysian Minister of International Trade and Industry (MITI) signed the agreement in Kuala Lumpur on behalf of their respective governments. The treaty, which covers trade in goods, services and investment on preferential basis, will come into operation from January 1, 2008. It is Malaysia's first bilateral FTA with any South Asian country.

Under the agreement, Malaysia would scale down tariff to zero per cent on Pakistan's 78 per cent tariff lines including textile products except garments by the year 2012. While Pakistan would reciprocate the same on 36 per cent tariff lines including palm oil. The FTA will give Pakistan the market access for all its core products like cotton yarn, cotton textiles, bed linen, home textiles, jewellery, kinnow, mangoes, some engineering goods, leather products and minerals etc. Pakistan has also protected its core manufacturing industries which include auto sector, electronics, footwear, leather products, locally manufactured chemicals and machinery, paper, garments and synthetic textiles, articles of wood and furniture sector. The agreement will provide a strong foothold to Pakistan in the ASEAN region and help her achieve summit level partnership with ASEAN.

The negotiations on a comprehensive FTA between the two countries started in early 2005. Kula Lumpur and Islamabad could not conclude the proposed FTA due to their differences on some crucial parts of the agreement. The outstanding issue which delayed the conclusion of the agreement was the Malaysia's demand from Pakistan to reduce duty on palm oil and its products. While Islamabad was reluctant to give any reduction in duty on palm oil, Kula Lumpur had linked market access for Pakistani textile products with reduction in import duty on palm oil.

The 10 percent duty on palm oil was the major issue of two and-half-year talks between Kula Lumpur and Islamabad. It has now been agreed that the duty on palm oil would be reduced from January next year while 5 per cent further reduction would start from January 2010. Under the pact, the schedule of concessions has been divided into four Faster Tracks (FTs) suggesting elimination of tariff in two reductions by January 1, 2009 and Normal Tracks (NTs), on products in this track would be eliminated by January 2012.

Pakistan is the third largest importer of palm oil from Malaysia after China and the EU.

Malaysia is currently the largest producer and exporter of the world. It has produced around 15.88 million tonnes of crude palm oil (CPO) during 2006 as compared to 14.96 million tonnes during 2005 Total export revenue of palm oil products in 2006 was $8.84 billion, which was one of the biggest prime movers of the Malaysian economy. Pakistan has also been unwilling to give any reduction in duty on palm oil because it gives a bad signal to countries exporting other oil seeds, particularly the United States and Indonesia.

According to some experts, the net beneficiary for market access would be Pakistan, as except palm oil, Malaysia depends mostly on imported fruits, vegetables grains and other agricultural produce and these products are produced in Pakistan in large quantities. Textile is one of the major revenue spinners for the south Asian country. Islamabad wants market access for its textile products in Malaysia under the FTA. The textile products constitute more than 64 per cent of Pakistan's total exports. Pakistani textile products are facing a tough competition from Thailand and Indonesia in the Malaysian market due to the Asean treaty. For Asean members, the customs duty ranges around five per cent while it ranges between 20 and 25 per cent for non-Asean countries. If the textile products are not given market access, the FTA would become meaningless for Pakistani exporters as it would not provide a level-playing field to Pakistani products in the shape of reducing the customs duty to the level of Asean member countries.

Bilateral trade between Malaysia and Pakistan has been on the rise during last five years. The two countries had signed the early harvest programme (EHP) in October 2005, which came into effect from Jan 1, 2006. Under the programme, the two countries granted reduced tariffs on 125 and 114 export items, respectively. The initiative was scheduled to expire upon implementation of the FTA. As talks on FTA remained inconclusive due to some differences, Pakistan and Malaysia had already extended operation of the EHP.

Malaysia and Pakistan are exploring more downstream business partnership in areas such as advanced food applications, eleo-chemicals, animals' food, energy, telecommunication and many more sectors. The establishment of Malaysia-Pakistan joint ventures in bulking installation, refinery and the liquid jetty, indicate mutual understanding between the two countries. Malaysian companies are presently eyeing vast investment opportunities in mass transit and public transport, particularly CNG buses in Pakistan. A reputed Malaysian Company, Landesign Group Sendirian, has already shown interest in making investment in major projects of mass transit and operating CNG buses in Karachi on BOT basis.

There are opportunities for both the countries to strengthen cooperation in the palm oil sector. Malaysian palm oil industry is growing fast and its palm oil products' export revenue reached $8.84 billion during 2006. Malaysia signed an agreement in 2000 to assist Pakistan Oilseeds Development Board (POSB) by supplying palm oil seed to Pakistan. Malaysian Minister of Plantation Industries and Commodities recently pledged that his country would continue to support the development of palm oil industry in Pakistan. This April. the Malaysian minister inaugurated the expansion project of MAPAK Qasim Bulkers terminal at Port Qasim. The minister had stressed joint venture between the two countries in infrastructure and industrial projects, particularly in palm oil.

This year, the Malaysian manufacturers at the Fourth International Trade and Industry Fair held in Karachi, received total 458 trade enquiries, with potential sales of ringgit 5.59 million. The fair provided Malaysian exporters with enormous opportunities in the growing Pakistan market and access to surrounding markets in South Asia and Central Asia. According to the Malaysia External Trade Development Corporation (Matrade), the event attracted about 100,000 trade visitors and potential buyers. During the event, Matrade facilitated the participation of 11 Malaysian companies under the Malaysian pavilion. Exports to Pakistan amounted to ringgit 3.31 billion last year.

Malaysia in its schedule of commitment for 'services' has offered a WTO plus package by opening more sectors and sub-sectors and increasing equity limits for investment in the field of services. The most important concession secured from Malaysia is in the field of banking, Islamic Banking, insurance and Takaful. Under the treaty, Malaysia has also allowed 100 per cent equity to Pakistan in these sub-sectors.