Ratifying the RCEP to Reset Malaysia’s Economy

The recent announcement by Minister of Ministry of International Trade and Industry (MITI), Datuk Seri Mohamed Azmin, that Malaysia is committing to complete the Regional Comprehensive Economic Partnership (RCEP) ratification process by mid-December has been warmly welcomed by the business community as a means for facilitating economic recovery. Almost 60 per cent of Malaysia’s trade involves the other RCEP members and around 56 per cent of Malaysia’s exports go to these countries, indicating the importance of the agreement for the country. The ratification of the RCEP by six ASEAN member states and three ASEAN FTA partners by the year end will set the stage for the entry into force of the agreement by early 2022. To date, Singapore, China, and Japan have ratified the agreement. The Thai Parliament approved the ratification of the RCEP in February 2021, and state agencies are revving up the issuance of RCEP-related regulations before submission to the ASEAN Secretariat by October.

The ratification of RCEP by Malaysia will send an important signal on the much-needed policy certainty and continuity after more than one and a half years of political, economic and health chaos wreaked by changes in administration and the on-going battle with managing the Covid-19 pandemic. The agreement also comes at a time when global Foreign Direct Investment (FDI) flows fell by 35 per cent in 2020, reaching US$1 trillion, from US$1.5 trillion in 2019. Although some FDI recovery is expected for 2021, the recovery may be uneven, being contingent on countries’ management of pandemic relapses and economic recovery. This implies that competition for FDI will intensify in the immediate future.

While Free Trade Agreements (FTAs) are known to contribute towards inflows of FDI among member countries through the reduction in trade and investment barriers, their role in reducing divestment has only been highlighted in a recent OECD study. According to World Bank, increased policy or regulatory uncertainty, such as that encountered in Malaysia’s recent history, can contribute towards divestment. Divestment was also quite common with multinational enterprises (MNEs) divesting one of every five foreign-owned affiliates over the period 2007-2014. A shallow FTA or an FTA with less advanced provisions between the home country of an MNE and the host country of an affiliate, can reduce divestment by about two per cent for non-OECD countries, while a deep FTA or an FTA with an expanded scope of coverage, including a broader set of behind-the-border measures, can reduce divestment by more than eight per cent for the same countries. The RCEP can therefore reduce the risks of divestment from the MNEs of member countries and help in investment retention, especially since Malaysia does not have a bilateral agreement with China, the country’s largest foreign investor in 2020. China, Singapore, Japan, South Korea, and Thailand contributed about 50 per cent of approved investments in 2020.

Trade liberalisation under the RCEP will enable Malaysia to diversify its trade partners, which is especially important during Covid-19 times.

The ratification will also send positive investment signals to domestic investors. According to Malaysian Investment Development Authority (MIDA), RM109.8 billion of investments were approved for the first nine months of 2020. Domestic direct investments (DDI) took up 61.2 per cent or RM67.2 billion of total investments. FDI accounted for the balance, at RM42.6 billion. Domestic investments, which are less capital and technology-intensive, can help to create more jobs, which is much needed, with the increase in retrenchments due to the pandemic.

Domestic investors should also seize the opportunity to utilise National Economic Recovery (PENJANA) grants, including the Smart Automation Grant to Small and Medium Enterprises (SMEs) and Mid-Tier Companies, to invest, upgrade and internationalise their operations to access the increased market opportunities under the RCEP. Tariff reductions, enhanced customs clearance, trade facilitation and provisions on non-tariff measures in the agreement will lower the costs of exporting, thereby increasing the benefits to the business community.

Trade liberalisation under the RCEP will enable Malaysia to diversify its trade partners, which is especially important during Covid-19 times. A survey conducted by the Penang Institute on manufacturing firms shows that firms’ operations were highly dependent on China. China has been Malaysia’s top trade partner since 2010 and it is the largest import partner, as firms import China’s intermediate goods for their export production. A key measure for managing future supply chain shocks is to expand the supply chain base and to have multiple alternative suppliers. RCEP provides the opportunity for greater diversification.

In as much as the RCEP can facilitate economic recovery, the ratification of another important outstanding agreement is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). While Malaysia has expressed a positive response towards China joining the CPTPP, it will do well to settle its own ratification before cheering on other potential members of the pact. Since the CPTPP is a more substantive agreement than the RCEP, ratifying the CPTPP will reduce the divestment impact by more than the RCEP. Although MITI has announced the intention to ratify the CPTPP by year end or the latest by the first quarter of 2022, outstanding amendments of local laws to align with the agreement’s requirements and Cabinet approval show that there is a long way to go. The earlier both agreements are ratified, the better for tapping these agreements to reset Malaysia’s economy.

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