SCHOOL OF BUSINESS STUDIES ADVANCE DIPLOMA IN FINANCE AND INVESTMENT (GROUP THREE) ABMF4094 INTERNATIONAL FINANCE ASEAN FREE TRADE AREA (AFTA) AGREEMENT AND ITS IMPACT ON MALAYSIA’S TRADE NAME: YU CHAUR YEU (11WBA10172) TANG RICK KEE (11WBA08456) PANG WAI LOON (11WBA09826) YONG DONG LIM (11WBA12109) YOW YONG LOONG (11WBA10842) LECTURER/TUTOR: PN MAZNAH CRITERIA MAXIMUM MARKS MARKS ALLOCATED REMARKS 1.INTRODUCTION 20 2.BODY-FACTS 40 3.RECOMMENDATION 10 4.CONCLUSION 15 5.PRESENTATION 10 1
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SCHOOL OF BUSINESS STUDIES
ADVANCE DIPLOMA IN FINANCE AND INVESTMENT (GROUP THREE)
ABMF4094 INTERNATIONAL FINANCE
ASEAN FREE TRADE AREA (AFTA) AGREEMENT AND ITS IMPACT ON MALAYSIA’S TRADE
From the table, we can clearly see the impact of average CEPT rates on the trade of Malaysia.
There is a negative relationship between average CEPT rates on the trade of ASEAN and the
exports of ASEAN members to ASEAN countries. The lower the CEPT rate the higher the
export figure of Malaysia.
A factor that causes Malaysia’s export to increase is because through the reduction of tariffs
among ASEAN countries, the consumers of other countries can purchase Malaysia’s products at
a cheaper price as compared to their domestic products. And therefore, they are willing to
purchase more products that imported from Malaysia. Since there are more demand for
Malaysia’s product, therefore Malaysia are willing to export more to their country.
Before the introduction of AFTA, the ASEAN countries need to purchase resources with non
ASEAN countries to seek for a lower price resources, although the resources are cheaper as
compare with ASEAN countries but there are still a high transaction and transportation cost that
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are included in the transaction. The reason why the ASEAN countries do not trade among
themselves is because the price of resources is higher due to the higher tariff charged. This
showed the result of the currency outflow from the ASEAN countries to the non ASEAN
countries. Therefore, AFTA helps the ASEAN countries to trade the resources at a cheaper rate
due to a lower transaction and transportation cost. Malaysia will be benefit from the trade by
importing the resources we need at a lower price.
AFTA provide an opportunity to Malaysia companies to cooperate with ASEAN partners by
using each other’s resources more effectively. This will increase the ability of Malaysia
companies to target in a bigger market. Therefore it increase the trading activities of the
company as a they have bigger opportunities to trade in a multinational business trading
activities. It will increase the growth in economics of Malaysia and our country will become a
well known international trading centre.
AFTA also bring negative impact on the trade to Malaysia. This is because previously
Malaysia charged higher tariffs on the rubber that imported from Thailand to protect that
domestic rubber industrial. After reducing the tariffs on imported rubber, domestic rubber
industrial lose the absolute advantage. The rubber market become more competitive and
therefore the consumer may have more options in buying rubber because domestic rubber is no
longer the best option for them. The export of the rubber of Malaysia will be reduced.
For example, agriculture sector is an important economy sector in Malaysia which contributed
9.5% of GDP in 2004 out of which 62% was contributed by Crude Palm Oil (CPO). Crude Palm
Oil is still the main sources of Malaysia’s export income which was 4% of total export in year
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2004. Besides that, Malaysia stills the largest in the market share of CPO’s exporter which is
50% of market share in year 2004.
Rubber and logs also another 2 important sources of Malaysia’s export from the agriculture
sector. However, rice and rubber crops are mainly owned by poor Bumiputera and heavily
subsidized by the government. These subsidies are meant to alleviate their poverty. So, the
AFTA agreement tries to reduce trade barriers because the import duty of rice is the highest for
Malaysian import tariffs which is 40%.
AFTA also causes some effects to agriculture sector of Malaysia. First of all is shrinking
acreage of land under agriculture means that agriculture sector need to compete with other sector
for land when economy moves toward to industrialization. If the production cost of neighbor
country is cheaper like cost of land and labor. This make Malaysia must modify and adding
value to their product to compete with the other country. So, that has some changes in Malaysia’s
agriculture sector which is from small farming to corporate plantation business activities such as
Genting plantation and IOI group. This will lead to surplus products and pressure on domestic
product due to non tariff barriers.
Apart from that, AFTA also lead to poor productivity and quality of agricultural product of
Malaysia. This is because of slow pace of replanting of Malaysia. Replanting is important
because the productivity of palms that are more than 25 years is reducing and also increases the
cost of harvesting. Government also needs to focus on transforming traditional farming into
commercial farming because our agriculture sector is largely made up by traditional farming.
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Traditional farming lead to our country’s agricultural productivity is lower compare to other
countries.
In additional, AFTA also lead to labor shortage in Malaysia because farming is not an
interesting job in Malaysia. Many younger prefer work at city rather than be a farmer in village.
Nowadays, younger of Malaysia is lacking “gotong royong” spirit that needed in rural farming.
So, many plantations corporate hired many foreign workers to work for them mostly consisted
by Bangladeshis and Sri Lankans. There is a need to find a alternative way to reduce dependence
of labor and rely more on technology advancement for cost effective.
Next, we will talk about the impact of AFTA agreement on Malaysia’s automotive industry.
Malaysia has two national carmakers which are Proton and Perodua. Malaysia government wants
to protect their interest after introducing the AFTA. However, the protection given by Malaysia
in this development could prove to be a temporary reprieve.
After introducing the AFTA, all the parts and components that are needed to the car industry
will be affected including Malaysia's car industry. Non trade barriers like tariffs and custom tax
will be taken once the market is open.
From the research, we can found out that Indonesia and Thailand have already started to
reduce the tariffs for all automobile components. Only Philippines and Malaysia have not made
any move to reduce the tariffs in this sector.
The reason given by Malaysia Government is that the local manufacturers need time to
recover from the economic downturn to compete with other big car manufacturer like Toyota,
Honda and Nissan. The ASEAN countries have accepted the reason given. Currently, Malaysia
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Consumers are actually paying significant higher price for foreign car compare to its original
price which is very unfair for them.
Although protections are given to the national car maker, national cars are still selling at high
price, mainly due to the high production costs and lack of vendor efficientct, the future may see
imported cars gaining market share. Frost & Sullivan expects that imported vehicles like Honda,
Nissan, and Toyota are expected to become 30 to 50 percent cheaper. All these developments will
mean an increase in the number of foreign cars on the road. The impact will be felt in the region's
infrastructure. There will also be a glut of used cars in the market, as people trade in their cars for
cheaper, imported ones. This development could see motorcycle users shifting to using second
hand cars, thus, affecting the prospect of the two-wheeler industry in the region.
AFTA is a threat to local manufactures but it is an opportunity to many new Malaysian car
manufacturers. By introduce the AFTA. It gives them a pressure or maybe a change to improve
themselves by competing with the big manufacturers by making more quality and cheaper cars to
benefit the local consumers. Under protection, they will never improve and stay behind of other
manufacturers.
Overall AFTA for auto will drive the regional manufacturing integration and cost
competitiveness among ASEAN countries. It will be more technology transfer to this region and
more opportunity to the labour. Local companies benefit from the implication by producing part
for car that will be marketable to the ASEAN region.
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RECOMMENDATIONSFrom our research, we recommend that Malaysia should accurately adjust the tariffs on the
imported goods to a fair level that allowed the domestic manufacturer to compete against the
importers. The government should not over protect the domestic manufacturer by setting a higher
tariff for certain sector such as automobile and electronic equipments.
Through reducing the tariff on this sector, there will be more competition among the domestic
and foreign manufacturer. Under this situation, the domestic manufacturer will improve the
quality of the output and reduce their cost of production. For example, if Malaysia reduced the
tariff on the automobile, other ASEAN countries will also reduced their tariff on the imported
automobile from Malaysia. This will lead to an increased in the exported automobile as other
ASEAN consumers can purchase the automobile from Malaysia at a lower price.
In another hand, we recommend that ASEAN can take the European Union as an example in the
form of using the same currency. Therefore the ASEAN countries can eliminate the transaction
cost and currency volatility risk. And there will be a free trade between all the ASEAN countries.
So the ASEAN countries will have a price transparency in all of their goods and this will
increased the trade and reduced the costs to firm.
Based on the theory factor endowments, Malaysia should focus on products that they have
comparative advantage for example palm oil. Malaysia should take advantages of low tariffs of
the AFTA. Malaysia can think of importing those goods that Malaysia are not specialize at the
production of that goods and produce those goods that Malaysia have the absolute advantages on
producing that goods. For example, products related to palm oil and rubber.
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CONCLUSION
When we complete this assignment, we need to thanks to our lecturer and tutor Pn. Maznah. It
was because she let us choose the assignment which related to AFTA. We gain much more
knowledge on the power of AFTA and how it affects the economy of Malaysia and ASEAN
member countries.
Under AFTA, six members of the Association of Southeast Asian Nations (ASEAN) cut tariffs
on nearly 8,000 items. The six countries include Malaysia, Indonesia, Singapore, the Philippines,
Brunei and Thailand. Four of the less developed ASEAN nations including Cambodia, Laos,
Burma and Vietnam will have a further period to phase in the tariff cuts.
AFTA have bring a lot of benefit to the member countries, the main benefits which found out by
our group is consumer gain the most benefit. It was because AFTA has elimination of tariffs
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should result in product price reductions throughout ASEAN. For example, Consumers will
benefit from cheaper prices of goods given lower tariffs on a host of raw materials used by the
region's producers. Some of processing factories are expected to enjoy cheaper imported raw
materials in the face of the tariff elimination which help in cost reduction for increase market
competition.
At the same time, this Agreement help ASEAN countries' products gain access to a regional market
that incorporates many substantial advantages. One of the substantial advantage is it attract more
Foreign Direct Investment (FDI) to the member countries. Lastly, ASEAN will be integrated into a single
market which is an important point because the market will be stronger and larger with a high
population. Therefore, the export and investment sectors will generate higher potential in the long
term.
REFERENCE 1. Chubashini Suntharalinga, the impact of AFTA on Malaysian economy and small scale
producers, viewed 1 march 2012, http://www.seacouncil.org/seacon/images/stories/publications/afta_malaysia.pdf
2. Goh Lim Thye, the impact of AFTA on Malaysian trade flow, viewed 1 march 2012, http://psasir.upm.edu.my/8318/1/FEP_2002_16_A.pdf
3. Azmi Shahrin Bin Abdul Rahim, Globalization, Trade Liberalization and the likely impacts of WTO and AFTA on the agriculture sector in Malaysia, viewed 1 march 2012, http://economics.dstcentre.com/Globalization
4. Tengku Mohd Ariff Tengku Ahmad and Ariffin Tawang, Evaluating the Effects of Trade Liberalization on Malaysian Agriculture with Emphasis on the Palm Oil and Paddy Sub-sectors, viewed 1 march 2012, http://www.asiadhrra.org/downloads/libmats/pdfs/agrinteg/Evaluating_the_Effects_of_Trade%20Liberalization_%20on_Malaysian_Agriculture.pdf
5. Republic of Philipines, THE ASEAN COMMON EFFECTIVE PREFERENTIAL TARIFF
SCHEME FOR THE ASEAN FREE TRADE AREA, viewed 29th Feb 2012, < http://www.tariffcommission.gov.ph/afta-cep.html>
6. Association of SouthEast Asian Nations, 2009, The ASEAN Free Trade Area (AFTA), viewed 1st March 2012, < http://www.asean.org/12021.htm>
7. Ministry of International Trade and Industry, 2008, Developments in the Implementation of the CEPT Scheme for ASEAN Free Trade Area (AFTA), viewed 1st March 2012, < http://www.miti.gov.my/cms/content.jsp?id=com.tms.cms.article.Article_b5ec7532-c0a81573-aba0aba0-af01c157>
8. ASEAN Free Trade Area. View on 29 February 2012. http://en.wikipedia.org/wiki/ASEAN_Free_Trade_Area
9. AFTA. View on 29 February 2012. http://networkmalaysia.com/subtitle/articles_afta.htm
10. ASEAN Free Trade Area. View on 29 February 2012. http://www.worldtradelaw.net/fta/agreements/afta.pdf
11. AFTA. View on 29 February 2012. http://www.miti.gov.my/cms/content.jsp?id=com.tms.cms.section.Section_8de83760-7f000010-72f772f7-f5047602