Why Trade Matters

Launch of
Why Trade Matters
16 November 2015 1

These reports discuss trade issues to raise awareness among our fellow Malaysians on the importance
of international trade and trade policy as enablers integrating the effects of globalisation into the
domestic economy.
Part One of Why Trade Matters discusses how international trade is measured, as well as the
interlinkages between trade and food policy, and trade and regional integration. While some of the
subject areas for the chapter on trade and food policy may be more identifiable, concepts such as
measuring international trade as well as trade and regional integration may be more abstract.
Part Two focuses on people-centred subject areas, with chapters on trade and the healthcare services
sector, trade and the movement of people, and trade and labour.
These reports are the first two in a publication series on international trade and trade policy. We hope
this series will act as thought-starters for the Malaysian public to appreciate the complexity of
international trade and trade policy. We also hope this series will promote greater inclusivity of the
stakeholders’ views in shaping the policy agenda and design as their design will affect our daily lives.
Our future work will include expanding the discussion of the chapters in this report, and highlighting
and discussing the linkages between trade policies and other domestic policies.
2

Contents
3
1 Background on International Trade Agreements
2
Trade and Regional Integration3
Measuring International Trade
4 Trade and Food Policy
5 Trade and the Healthcare Services Sector
6 Trade and the Movement of People
7 Trade and Labour
8 Concluding Remarks

Background on
International Trade
Agreements in
Trade Policy

Most countries have made commitments in the
multilateral trading system
The World Trade Organisation (WTO) is
considered the best platform for trade rules-
setting in view of its large and diverse
membership base. It currently has 161 Members.
Most countries use the WTO agreements as the
basis for their international trade agreements.
Since November 2001, Members have been
engaging in negotiations in the Doha Round to
make improvements and amendments to the
existing WTO agreements. Negotiations are still
ongoing today.
5All sources can be found in the Why Trade Matters reports
Why is this important?
Countries enter into trade agreements with one or more other countries for the purpose of facilitating
trade. In these international trade agreements, participants agree to reduce tariffs, quotas and other
restrictions on trade between them.
These agreements usually incorporate commitments that affect non-trade domestic policies. The
commitments made in these agreements could affect our daily lives in many ways.
Multilateral trade agreements Interactions between trade policy and other
domestic policies

There is an increasing trend of FTAs around the
world
6
Due to the challenges in negotiating at
the WTO, many countries are shifting or
have shifted their focus on negotiating
free trade agreements (FTAs) at other
levels:
• Bilateral FTA – between two
countries, for example the Malaysia-
Australia FTA (MAFTA);
• Regional FTA – between countries in
the same region, for example the
ASEAN FTA (AFTA);
• Plurilateral FTA – between many
countries from different regions, for
example the WTO Government
Procurement Agreement (GPA)
Cumulative number of FTAs in force
All sources can be found in the Why Trade Matters reports

Since Malaysia’s first FTAin 2005, Malaysia has
participated in 18 other FTAs
7
Malaysia’s multiple FTAs with its trading
partner
Malaysia’s FTAs

FTAs are getting more complex and comprehensive
8
FTAs are increasingly used to commit trading partners to what had been traditionally non-trade
matters such as labour, culture, and the environment.
This can be seen in the FTAs negotiated with the developed trading partners, especially the US and
the EU.
Many chapters in an FTA are involved in the discussion of broad policy issues.
These chapters have extensive breadth and depth of commitments.

Case #1: Malaysia’s first FTAwas less complex
Malaysia’s first FTA was
with Japan, which was
signed in December
2005 and entered into
force in July 2006.
Traditional WTO issues
covered in the FTA
include trade in goods,
trade in services, and
intellectual property (IP)
rights.
WTO-plus issues
include provisions on
controlling anti-
competitive activities.
Chapters Contents Articles
1 General provisions 1-15
2 Trade in goods 16-26
3 Rules of origin 27-50
4 Customs procedures 51-58
5 Technical regulations, standards and conformity
assessment procedures
59-67
6 Sanitary and phytosanitary measures 68-72
7 Investment 73-93
8 Trade in services 94-111
9 Intellectual property 112-130
10 Controlling anti-competitive activities 131-133
11 Improvement of business environment 134-138
12 Cooperation 139-144
13 Dispute settlement 145-153
14 Final provisions 154-159
9

Case #2: By comparison, the TPPAis more extensive
10
Chapters Contents
1 Initial Provisions and General Definitions
2 National Treatment and Market Access for Goods
3 Rules of Origin and Origin Procedures
4 Textiles and Apparel
5 Customs Administration and Trade Facilitation
6 Trade Remedies
7 Sanitary and Phytosanitary (SPS) Measures
8 Technical Barriers to Trade (TBT)
9 Investment
10 Cross-Border Trade in Services
11 Financial Services
12 Temporary Entry for Business Persons
13 Telecommunications
14 Electronic Commerce
15 Government Procurement (GP)
16 Competition Policy
17 State-Owned Enterprises (SOEs) and Designated
Monopolies
18 Intellectual Property (IP)
19 Labour
Chapters Contents
20 Environment
21 Cooperation and Capacity Building
22 Competitiveness and Business Facilitation
23 Development
24 Small and Medium-Sized Enterprises (SMEs)
25 Regulatory Coherence
26 Transparency and Anti-Corruption
27 Administrative and Institutional Provisions
28 Dispute Settlement
29 Exceptions and General Provisions
30 Final Provisions
The US has been using the NAFTA model as a
template for its other FTAs. The template is
complex and there may be problems in
implementing the commitments.
Note the WTO-plus issues that are included in
the FTA.

Key Messages
International trade agreements usually incorporate commitments that affect non-trade
domestic policies. The commitments made in these agreements could affect our daily lives
in many ways.
11
Due to the several setbacks seen at the WTO, many countries are shifting or have shifted
their focus on other levels of international trade agreements such as bilateral FTAs,
regional FTAs and plurilateral FTAs.
FTAs are getting increasingly complex and comprehensive. They are no longer just about
trade liberalisation and establishing free trade areas; they are also being used to commit
trading partners to non-trade matters.

Trade is an integral component of the Malaysian
economy
13
Malaysia has always been an
open economy. Malaysia’s
trade, as a percentage of GDP,
has been consistently greater
than 100% since 1988. In 2014,
it was 131%.
With the exception of the
global financial crises years in
early 1980s and 1990s as well
as late 1990s, Malaysia has
always been recording
relatively high net exports as
percentage of GDP. Malaysia’s
net export in 2014 was RM83b
or 8% of GDP.
Malaysia’s total trade in goods (1964-2014)

Trade data tells us a lot about Malaysia’s external
sector
14
Malaysia’s export and import
compositions:
• Malaysia’s main exports are
electrical and electronics
(E&E), petroleum products,
and liquified natural gas
(LNG.)
• Malaysia’s main imports are
E&E, petroleum products,
and chemical products.
Malaysia’s trading partners:
• Malaysia’s main trading
partners are mostly located
in the Asia Pacific.
• The top five export
destinations and import
sources were the same
countries which were: China,
Singapore, Japan, the US,
and Thailand.
Malaysia’s exports in 2014 Malaysia’s imports in 2014
Malaysia’s export
destinations in 2014 Malaysia’s import sources in 2014

However, the emergence of the global value chain (GVC)
necessitates the rethinking of how trade data is reported
15
Today, it is common for a
product to be manufactured
using inputs from many
countries.
A popular example is the
iPhone:
• Credit for manufacturing
iPhone is usually attributed
to China because that is
where the product is
assembled.
• In reality, less than 4% of
the value of an iPhone
actually originated from
China.
The US trade balance in iPhones (USD m)

The GVC model is not used in just the E&E industry
16
Apart from the E&E
industry, the GVC model is
also used in other
industries. The Nutella GVC
is another example.
The production of Nutella
uses ingredients sourced
from all over the world:
palm oil from Malaysia,
cocoa from Nigeria,
hazelnut from Turkey, sugar
from Brazil (and Europe),
and vanillin from China.
International trade
facilitates the production of
Nutella on a global scale,
allowing the manufacturer
to source ingredients from
around the world and locate
factories close to the final
consumer markets.
The Nutella global value chain

The GVC brings up the question: “how much of a
country’s exports actually originated domestically?”
17
The big idea in GVC is that
countries can specialize in tasks
(instead of products) that they are
good at.
The production activities of a
product do not have to take place
entirely within one country.
GVC is also known by other names
such as global supply chain,
international production network,
and offshoring.
This brings up the question of
how much of a country’s export
originated domestically?
Economists have proposed a new
way of measuring trade called
trade in value added (TiVA).
Gross exports versus value added (three-country trade)
The traditional method of measuring trade:
Malaysia’s gross export would be recorded as USD120.
TiVA:
Malaysia’s export in value added would be recorded as
USD20.
USD100 of the USD120 gross export originated from
Japan. The remaining USD20 originated from Malaysia.

Traditional measure of trade vs. TiVA
18
Traditional measure TiVA
What it measures Value of goods each time they cross
the national borders
The economic contribution to the
production
How it is
measured
Using data from the customs
departments
One of the methods is to use the input-
output (IO) tables1
Advantages • Timely • Clearly specifies a country’s economic
contribution to production
Disadvantages • Does not measure trade in
services2
• Does not take into account the
country’s actual contribution
(value added) to the production
• Does not capture ‘unofficial’ trade
activities
• Can be complicated to calculate and
interpret
• The publication of IO tables may not
be timely
• Calculations involve a lot of technical
assumptions
• Does not capture ‘unofficial’ trade
activities
1 IO Table is a table that describes the relationship concerning the production and consumption of commodities and services between
producers and consumers across different sectors in the economy.
2 Date on trade in services is measured under the current account of the balance of payment which is compiled by Bank Negara Malaysia
(BNM).

Key Messages
International trade is an important component of the Malaysian economy and trade data
tells us a lot about our country’s external sector. ‘Traditional’ trade data is usually sourced
from the customs departments. It records the movements of goods in and out of the
country.
19
However, the emergence of GVC forces us to rethink about how trade data is reported.
Traditional measure of trade fails to take into account that the value of a country’s exports
may not entirely originate domestically. Trade economists have proposed a new way to
measure a country’s contribution to productions called TiVA.
Both measures (traditional measure of trade and TiVA) are useful in their own way. It is
important to be aware of what they actually represent and their respective advantages and
disadvantages.

Trade and
Regional
Integration

Malaysia is part of two mega FTAs
Apart from the WTO, Malaysia is part of two mega FTAs – the Trans-Pacific Partnership Agreement
(TPPA) and the Regional Comprehensive Economic Partnership (RCEP). These mega FTAs are seen to
be in competition to become the foundation agreement of an FTA covering all the Asia Pacific
Economic Cooperation (APEC) countries, known as the Free Trade Area of Asia Pacific (FTAAP).
Mega FTAs and Malaysia

What is theAEC?
22
In addition, Malaysia is also part of the Association of Southeast Asian Nations (ASEAN) Economic
Community. In 2007, ASEAN Leaders agreed to the creation of the ASEAN Community by 2015.
Briefly, the ASEAN Community will consist of three pillars:
• The ASEAN Economic Community (AEC), which has the goal of a regional economic integration
by 2015.
• The ASEAN Political-Security Community (APSC), which aims to promote shared responsibility
for a comprehensive regional security.
• The ASEAN Socio-Cultural Community (ASCC), which aims to undertake cooperation on
regional human development, thus, improving the quality of life for the ASEAN population.
Specifically, the AEC aims for ASEAN to become:
• A single market and production base by promoting and enabling free flow of goods, services,
investment and capital as well as labour within the region.
• A highly competitive economic region through the adoption of laws related to competition
policy, consumer protection, IPR, and e-commerce.
• A region of equitable economic development through developing SMEs and other cooperation
initiatives within the region.
• A region fully integrated into the global economy by maintaining the ‘ASEAN centrality’ in
ASEAN’s external economic relations (such as through ASEAN-plus agreements). The AEC also
works towards the enhanced participation of ASEAN businesses in global supply networks .

How do the mega FTAs and theAEC interact with
each other?
The complexity of key FTAs signed or are being negotiated/ considered among the RCEP and
the TPPA countries

ROO is an issue due to the complex mix of FTAs
24
The ability to lower the cost of doing business between the RCEP or between the TPPA countries
could allow for better GVCs for sectors in these countries.
However, the country of origin for the goods is important to indicate whether the good qualifies for
the preferential tariff treatment under the specific FTA – the rules of origin (ROO) could promote or
hinder trade in goods. Each FTA has its own ROO. It can be both complicated and complex for the
businesses when there are many FTAs with different ROOs. Which one of these would apply? A single
ROO that covers a large grouping of countries could potentially solve part of this problem.

The rise of China provides an interesting geopolitical
dimension to the complex mix of FTAs
25
On 7 October 2014, the IMF announced
that China had overtaken the US to
become the world’s largest economy, a
distinction held by the US since 1873.
China overtaking the US in terms of
economic and trade sizes had been a
matter of time. In 2011, the IMF projected
for China’s share of output to the world
total to surpass those of the US and the
EU by 2016.
China also managed to grow its trade a lot
faster than the other two major trading
countries, the US and Japan.
China overtakes the US in terms of economic size
Trade value for the US, Japan and China during
their ‘Golden Periods’ of trade

China’s new aggressive stance in negotiating FTAs
26
Negotiating FTAs to gain market access
China has pursued a multi-track trade policy:
• Multilateral trade agreements: China acceded to the WTO on 11 December 2001, after 15 years
of protracted negotiations.
• Bilateral trade agreements: China’s first FTAs were with Hong Kong and Macau in 2003. Since
then, FTAs include those with ASEAN, Australia, Chile, Costa Rica, Iceland, New Zealand, Pakistan,
Peru, Singapore, South Korea, and Switzerland.
The FTAAP: The US or the Chinese model?
Both China and the US are competing to provide the FTA model for the future FTAAP. They have
different philosophies in negotiating FTAs:
• No one-size-fits-all versus template-based.
• Early harvest versus single undertaking.
• Progressive versus competitive liberalisation.
Currently China is negotiating FTAs with the Gulf Cooperation Council (GCC) countries, Norway, Sri
Lanka, and a trilateral FTA with both Japan and South Korea. China is also currently negotiating the
RCEP. It is also studying the feasibility of negotiating FTAs with India and Colombia.

Key Messages
FTAs are painfully negotiated agreements. Thus, the political will has to be strong and the
economic benefits have to be large to incentivize countries to agree to make binding
commitments, particularly on sensitive issues.
27
The overlaps of trade agreements between countries cannot be ignored – these many
agreements both shape the expectations in future agreements and the usefulness of trade
agreements in general.
We are currently working on a book to highlight the new issues in FTAs and FTAs
negotiations. This includes analysis on the TPPA.

Trade and Food Policy: global food prices and
Malaysia’s vulnerability
29
‘Food security’ is when “people, at all times, have
physical and economic access to sufficient, safe and
nutritious food to meet their dietary needs and food
preferences for an active and healthy life.”
As part of the effort to ensure global food security,
the United Nations Food and Agricultural
Organisation (FAO) keeps track of world food prices
via the Food Price Index. Historical records thus far,
showed price volatility.
Further to this, the Malaysian consumer price index
(CPI) for food has been higher than the overall CPI.
This poses an issue to poor households, especially
since an average Malaysian household spends
RM444 or 20.3% of its total expenditure per month,
on food.
As such, increasing food prices and volatility would
pose a financial burden to both Malaysia and
Malaysians.
FAO – Global food prices,
January 2000-September 2015 (2002-2004=100)
Malaysia – Consumer Price Index vs. Food Price
Index (2010=100)

Food price volatility: domestic responses with global
influences
30
Governments and trade measures
Food affects the overall social, political, and economic landscape of a country.
Non-trade issues such as environmental and socio-economic considerations could impact the
global supply and demand of food. As a consequence, these factors contributed towards price
volatility and fears of food security issues.
To protect the country from global food price volatility, governments globally have implemented
various policies to control both the demand and supply of food.
In general, the pass-through effects of each policy option would need to be studied to determine
the actual impact of specific policies on the domestic economy. Among the range of policy options
available to governments in addressing high food prices, trade policies is one option.
Food Crises and Government responses
Governments for example, may respond to the high food prices by introducing food-related trade
measures.
Unfortunately, these responses, in the form of export restrictions, had played a role in the food
crises along with other trade measures such as tariffs and subsidies.
An example of the range of countries’ trade policy responses to mitigate rising food prices during
the 2007/2008 food crisis are shown in the next table.

31
Country Malaysia Indonesia Thailand Philippines India China
Reduce import duties   
Increase supply using
reserves
  
Build reserves/ stockpiles    
Increase imports/ Relax
restrictions
   
Raise export duties  
Export restrictions   
Price controls/ Consumer
subsidies
     
Minimum
support prices
 
Minimum export prices 
Assistance/ Subsidy to
farmers

Promote self-sufficiency  
Policy responses to the food crisis in selected Asian
countries

32
Food security is viewed as an important domestic and international issue by many countries.
In response to these issues, a government’s trade policies meant to protect its domestic interests,
may very well exert negative consequences.
The FAO has identified four dimensions to food security as well as examples of trade measures that
could impact the dimensions of food security.
Additionally, the relationship between food security policies and trade as a tool for development
should also be considered.
For example:
• A wealthy country may have the resources to provide subsidies to its domestic producers to sell
Product A at a low price.
• A poorer country on the other hand may not be able to provide similar subsidies but still aims to
export its Product A to developed markets.
• However, given that Product A is sold at a low price in the developed country due to the subsidy,
the poor developing country would not be able to compete.
• Thus, the poor developing country’s access to developed countries’ markets could be restricted,
therefore limiting the use of trade to facilitate developmental goals.
Trade Policy and Food Security: possibility for a
counter productive outcome

33
Dimensions of food security as identified by the FAO Examples of trade measures
Physical AVAILABILITY of food:
 Addresses the supply side of food security and is determined by
the level of food production, stock levels and net trade.
 Import and export restrictions could
impact the supply of food available.
 Domestic and export subsidies could
impact the level of food production.
 Price support could induce greater
supply than market forces would
permit.
 The liberalisation of financial services
related to the agriculture and/or the
food sector could impact domestic
producers’ access to finance and thus
impact production.
 Import tariffs could increase the cost of
food within the country.
 General trade measures that impact
employment.
An example of Malaysia’s application of
trade-related measures that is linked to food
security issues is in the rice sector. Malaysia
is seen to provide subsidies on the paddy
rice to farmers, on the consumer price of
rice, and on paddy fertilizers.
Economic and physical ACCESS to food:
 An adequate supply of food at the national or international level
does not automatically guarantee food security at the
household level.
 Concerns over insufficient access to food have led to a greater
policy focus on income, expenditure, markets and prices in
achieving the objectives of food security.
Food UTILISATION:
 Utilisation relates to the way the body makes the most of
various nutrients in the food.
 Sufficient energy and nutrient intake by individuals result from
good care and feeding practices, food preparation, diversity of
the diet and intra-household distribution of food.
 This, in combination with good biological utilisation of food
consumed, determines the nutritional status of individuals.
STABILITY of the other three dimensions over time:
 Even if an individual’s food intake is adequate today, the
individual is still considered to be food insecure if there is
periodic inadequate access to food, thereby risking a
deterioration in nutritional status.
 Adverse weather conditions, political instability or economic
factors (for example, unemployment, rising food prices) may
impact an individual’s food security.
Dimensions of food security and examples of trade
measures

The influence of non-tariff barriers to the food
industry
Sanitary and phytosanitary (SPS) measures
These are measures introduced to protect human,
animal or plant life or health.
However, the enforcement of these measures could
result in being non-tariff barriers at various levels of
the food production.
For example in 2008, seafood products from
Malaysia were banned from entering into the EU
market due to their failure to observe the EU health
standards. This was based on the EU’s observation
that Malaysian producers used contaminated ice
from unhygienic ice factories and dirty landing
jetties to store their seafood products. Fortunately,
the import ban was fully lifted in November 2010, a
month after both the EU and Malaysia agreed to
commence negotiations for a bilateral FTA.
The WTO GATT Article XX ensures that SPS
measures are adhered to, without being
discriminatory to the producing countries.
Halal certifications
Although the Halal standards per se may not
restrict trade, the processes involved in
obtaining the necessary Halal certification
could be seen as a non-tariff barrier.
For example, the inspection fees imposed
and the audit process required to maintain
Halal certification could also be seen to be
unnecessarily costly.
Exporting countries such as the US has
raised this issue where it sees the
implementation of the Halal standard as a
trade barrier. For example, Kuwait requires
both a Halal food certificate and a health
certificate to import meat into the country.
In the case of Qatar, this requirement is
applied for only beef and poultry products.

Strong IP rights to plant breeders via FTAs
35
Intellectual property & FTAs
Intellectual property is another area where
trade policy interacts with food policy.
In some developed countries such as the US,
Australia, Germany, and France, the patenting
of plants is allowed and the relevant legalities
within these countries are well developed.
The US for example, grants 20 years patent
protection to any inventor who has produced
a distinct new variety of plant.
The controversy is that, once patented, the
inventor has the right to prevent farmers from
saving and reusing seeds from a previous
harvesting season. At each crop season, a new
batch of seeds must be bought.
The case of Monsanto lawsuits
Monsanto, a Fortune 500 company based in
the US, has filed at least 145 lawsuits against
farmers who have saved and replanted seeds
obtained which were bought from the
company.
Taking the example above, the US is observed
to grant strong IP rights to plant breeders.
The trade dimension for the issue of patents
on plants is that US FTAs for example, are
known to include the commitment to make
patents available for inventions on plants and
animals.
This means that any country that signs an FTA
with the US may end up allowing for the
patenting of plants and animals in their
national IP laws.

Governments have the political and legal rights to provide for the basic needs of
their population through the implementation of their trade and food policies.
These measures may indeed provide added advantages to their domestic
agriculture and food industries.
36
In each country, these measures are intended to be positive interventions.
However, in some cases, it may have negative implications by becoming non-tariff
barriers to trade.
Governments need to balance between enforcing measures that are necessary for
the country and at the same time, managing their cross-border effects, thereby
avoiding protectionist policies.
Key Messages

Trade and the
Healthcare
Services Sector

The liberalisation of healthcare services is a sensitive
issue worldwide …
38
In general, the liberalisation of healthcare services is a sensitive issue worldwide, and Malaysia is no
exception. Governments tend to be especially cautious when it comes to policies regarding the
healthcare services sector, as it is their responsibility to ensure that all healthcare service providers are
of good quality when practicing in the country.
Liberalisation of the services sector
Liberation of services could happen
via:
• Unilateral liberalisation.
• Commitments in trade
agreements.
The main value of binding services
liberalisation via FTAs is that it is hard
to reverse the liberalisation, once
committed in such agreements.
Total health expenditure for Malaysia 1995-2013

… but countries have been more willing to commit to
the liberalisation of healthcare services in their FTAs
39
Since the signing of the WTO GATS, studies
have shown that countries have been more
willing to commit to the liberalisation of
healthcare services in their FTAs. However, their
level of commitments in this sector remains low
compared to those in other services sectors.
There are four modes of supply for services:
• Mode 1: Cross-border supply. Services are
supplied from the territory of one Member
into the territory of any other Member.
• Mode 2: Consumption abroad. Services
are supplied in the territory of one Member
to the clients of any other Member.
• Mode 3: Commercial presence. Services
are supplied by a service supplier of one
Member, through commercial presence in
the territory of any other Member.
• Mode 4: Presence of natural persons.
Services are supplied by a Member, through
the presence of natural persons of a
Member in the territory of any other
Member.
Commitments on hospital services in trade
agreements (AFAS and MICECA)

FTAs may provide different types of access for the
movement of people
40
FTAs may provide different types of access for
the movement of people:
• Liberalisation of market access – this
refers to the types of professionals allowed
to work in Malaysia. In the case of the
healthcare services sector, this could be the
types of specialisations, for example, where
foreign medical practitioners are allowed to
provide their services.
• Mutual recognition of qualifications – this
refers to the recognition that the
qualifications earned by the foreign workers
are of at least of an equivalent standard as
those of the domestic workers.
To be able to legally practice in Malaysia, all
doctors have to obtain a certificate known as
the Full Registration Certificate issued by the
Malaysian Medical Council (MMC). This
certificate grants a medical practitioner the
ability to fully and independently work as a
doctor in Malaysia.
The number of new fully registered foreign
and domestic medical practitioners in
Malaysia 2008-2013
In the Malaysia-India Comprehensive Economic
Cooperation Agreement (MICECA), Malaysia
committed to allowing doctors from India to
provide medical services in the country on a
temporary basis. Doctors seeking to supply services
in Malaysia temporarily can be categorised as
‘independent professionals’ as they are self-
employed Indian citizens. However, they can only
work in specialised areas of medicine and only in
large private hospitals.

Key Messages
The provision of healthcare services is affected by trade policy via the
commitments undertaken by the government in the various international trade
agreements including the FTAs.
41
Malaysia’s experience is not unusual and indeed, many other WTO Members have
similar commitments, regardless of their level of development.

Trade and the
Movement of
People

The WTO GATS includes commitments on the
movement of people across borders
43
The movement of people (strictly speaking, the movement of natural persons, or MNP) falls under
Mode 4 of the WTO GATS. Commitments made in international trade agreements may affect the
movement of foreign workers across borders.
WTO GATS and MNP
The existing WTO GATS provides a
broad definition, scope, and coverage
of MNP. This has led to challenges in
interpreting Mode 4, such as:
• Mode 4 is limited to the
temporary movement of workers.
However, it does not specify what
‘temporary’ is. Thus, different
Members grant different lengths
of stay.
• Mode 4 theoretically also covers
less skilled and unskilled labour,
not just highly skilled labour.
However, in practice, WTO
Members’ Mode 4 commitments
are markedly biased towards
highly skilled workers.
Malaysia’s general commitments in Mode 4

Some countries are seeking greater Mode 4
liberalisation at the WTO
44
The current Mode 4 commitments by WTO Members are generally focused on two categories:
• Intra-corporate transferees, including employees of a company who have been transferred to work
in the offices (such as a branch) of the company located in a foreign country.
• Business visitors, including employees of a company who travel to a foreign country for the
purpose of conducting business activities, without directly entering into the foreign country’s
labour market.
These two categories also form the basis for MNP commitments in FTAs, as seen in the Malaysia-
Pakistan Closer Economic Partnership (MPCEPA) Agreement, where Malaysia made commitments on
intra-corporate transferees and business visitors, in addition to specialists/experts and professionals.
There have been discussions in the current Doha Round negotiations (and in FTAs) for the scope of
MNP to be expanded to include commitments on the ‘new’ categories such as goods sellers,
installers/servicers, and contractual service suppliers.

Progress for MNP negotiations at the WTO have
been limited
45
Large recipients of remittances in 2014However, negotiations
among the WTO Members
to further liberalise Mode 4
at the ongoing Doha
Round have been slow.
The WTO Secretariat has
described the improved
Mode 4 commitments
offered by the WTO
Members in the current
negotiations to be “rather
disappointing”.
Some developing countries are interested in getting increased access for the movement of their
workers across borders. This may be because the money that its citizens working abroad send back to
their home country could be a source of earnings for their relatives back home.

MNP chapters in FTAs may not provide the full
solution
46
In light of the uncertainties as to the development of the Doha Round, some WTO Members have
refocused their efforts to liberalise MNP through FTAs with like-minded partners. However, FTAs may
not be the optimal solution to improving commitments to liberalise MNP.
The case of the H-1 B-1 visa:
Following the US-Singapore FTA (USSFTA), the US introduced a special class of visa for Singapore, the
H-1 B-1. This visa essentially gives the holder the right to legally remain in the US indefinitely.
Already, foreign workers from other countries are using Singapore as a backdoor to gain employment
in the US.
The US no longer prefers to incorporate such extensive MNP liberalisation commitments in its FTAs.

The movement of people is inter-linked with other
government policies
47
Brain-drain and brain-gain:
• Accessibility on a long term basis
for employment which, added to
the existing attractiveness of the
host country, may further
encourage a ‘brain-drain’
problem in the supplying country.
• ‘Brain-gain’, on the other hand,
may look attractive to a host
country like Malaysia.
• Thus, countries need to be aware
of the possible impact of their
MNP policies to ensure that the
policies do not unintentionally
result in brain-drain when the aim
is for brain-gain.
As illustrated previously, the movement of people interacts closely with international trade activities.
Additionally, it is also inter-linked with other government policies, notably, the immigration and
labour policies.
Immigration policy:
• While Mode 4 refers to the ‘temporary’ movement of
people, the immigration policy mainly addresses the
‘permanent’ movement of people, not just for
delivering services but also for other purposes such as
seeking refugee or asylum status, and citizenship.
• This affects the implementation process including visa
categories and requirements, which could mean stricter
entry criteria, such as the workers’ potential to be
upright and law-abiding citizens, and their willingness
to relocate to the rural areas of the host countries
Labour policy:
• Labour policy attempts to respond to the domestic
market needs.
• This can be seen in the memoranda of understanding
(MOUs) Malaysia has undertaken with selected Asian
countries to respond to the need for low-skilled
workers in the construction and plantation sectors.

Key Messages
Some countries are interested in getting further liberalisation for the movement of their
workers across borders. The existing commitments as per the WTO GATS are generally
limited, as are efforts to negotiate greater MNP commitments in the ongoing Doha Round.
48
In the meantime, some countries are seeking further MNP liberalisation in FTAs. However,
MNP chapters in FTAs may not be the optimal solution to improving MNP commitments,
as seen in the case of the USSFTA.
MNP policies are also inter-linked with other government policies. Thus, the decision to
liberalise the movement of people using the FTA route should be assessed in a holistic
manner.

Why labour is a trade issue: the story of offshoring
50
Trade policy does not just affect the liberalisation of the labour market (which refers to the movement
of foreign workers into the country). It also influences other parts of the labour policy, notably the
rights of the domestic workers (labour rights).
Background on offshoring
The 1980s saw the expansion of the E&E industry in Malaysia.
Many multinational corporations (MNCs) opened their factories in Malaysia partly because of the
relatively good infrastructure and low wages.
Initially the industry had focused mainly on the relatively low-skilled downstream activities such as
assembly.
This was not unique to Malaysia. More recent examples include Apple Inc.’s and Lenovo’s
manufacturing plants in China.
This was part of the GVC phenomenon previously discussed.

51
Lower trade costs (in the form of lower
tariffs as well as transportation and
communication costs) had made it
cheaper to move goods and services
across national borders.
These factors enable firms to offshore
their labour-intensive, low-skilled and
high-volume operations (or parts of the
value chains) to areas with lower labour
costs.
These firms tend to come from
developed economies while the areas
into which the activities were offshored
tend to be developing countries.
In 1985, developed economies’ imports
from the developing countries were just
below 25% of total imports. By 2014, the
number had grown to just above 40%.
Source of developed economies’ imports
The GVC model allowed firms to move their labour-
intensive operations to areas with low labour costs

Offshoring: good newsfor low-incomecountries,but not
entirelywell-receivedin high-incomecountries
52
Arguments against offshoring
The MNCs are taking away jobs from the locals
and giving them to workers in developing
countries who are paid substantially less.
Offshoring is responsible for the transfers of
‘middle-class’ jobs in manufacturing to
developing countries. Unskilled and semi-
skilled workers in developed countries are
unable to compete with, or match, the much
lower wage of their counterparts in developing
countries. This lowers the firms’ demand for
the former which, in turn, drives down the
wage of the unskilled workers in the developed
countries relative to that of their skilled
workers.
Arguments for offshoring
Moving labour-intensive production to
countries with lower labour costs had helped
to lower the overall production costs and
therefore the prices that consumers pay. This
subsequently increases the welfare of
everyone.
Offshoring is just an extension of the
comparative advantage aspect of trade.
Developing countries, with their lower wages,
have advantage in producing labour-intensive
products.

The labour cost in developingcountriesis low becauseof
the lack of labourlawsand their enforcement
53
Examples
In April 2013, a garment factory in Dhaka,
Bangladesh collapsed killing more than
1,100 people. It was estimated that the
number of workers in the building was as
high as 5,000.
In 2008, a local garment factory which
supplied to international brands such as
Nike, was found guilty of forcing migrant
workers to live in “unacceptable housing”,
confiscating their passports, and taking a
cut out of their wages to pay for agent and
work permit fees.
This becomes the basis for developed
countries to address labour issues
through trade policies.
Another argument against offshoring
Apart from the lower wages, another reason
for the lower labour cost in developing
countries is the lack of labour laws and their
enforcement. This allows firms to lower
their production costs by exploiting their
workers in developing countries.

The labour laws of developed countries can affect
developing countries
54
Three examples will be discussed:
• The US Trade Promotion Authority (TPA) legislation
• Initiatives by the US’ Department of Labour: Executive Order 13126 and Trafficking Victims
Protection Reauthorisation Act of 2005 (TVPRA) List
• The US’ and EU’s The Generalised System of Preferences (GSP)

The US Trade PromotionAuthority (TPA) legislation
includes labour-related provisions
55
In 2014, Malaysia was downgraded to Tier 3 after being
on Tier 2 Watch List (one step above step 3) for four
consecutive years.
The 2014 TIP report expounded on the human trafficking
activities happening in Malaysia, which include “practices
indicative of forced labour” subjected towards “many
migrant workers on agricultural plantations, at
construction sites, in textile factories, and in homes as
domestic workers,” and the inadequate efforts by the
Malaysian government to prevent them.
In the latest TIP report, the US Department of State
decided to upgrade Malaysia’s ranking back to Tier 2
Watch List. In the report, it was noted that although “the
Government of Malaysia does not fully comply with the
minimum standards for the elimination of [human]
trafficking, … it is making significant efforts to do so.”
This decision by the US Department of State was met with
criticisms (both in the US and in Malaysia) that the move
was politically motivated to ease the passage of the TPPA
which Malaysia was negotiating with the US and ten other
countries.
Trade Promotion Authority (TPA) legislation
helps the US government speed up the
process of ratifying its trade agreements. This
is done by requiring the US Congress to
either accept or reject the agreements
without any amendments.
This fast-track privilege is not available for
trade agreements with countries which are
classified under Tier 3 of the US Department
of State’s Trafficking in Persons (TIP) report.
Tier 3 refers to (a) countries which do not
comply with minimum standards relating to
the prevention of human trafficking and (b)
countries whose governments are not
making enough efforts to comply with the
said standards.
Consequently, this stipulation may delay the
ratification of US trade agreements with Tier
3 countries.

International trade is affected by initiatives by the US’
Department of Labour
56
Trafficking Victims Protection
Reauthorisation Act of 2005 (TVPRA) List
EO List only covers issues related to forced or
indentured child labour, while the TVPRA List
covers a larger scope of labour issue as it also
addresses “adults in forced labour and
children in exploitative labour that is not
necessarily forced or indentured”.
The US GP process is restricted by the EO List
and not by the TVPRA List.
Malaysia was included under the latest TVPRA
List for practices of forced labour (in the E&E
and garments industries) and both forced
labour and child labour (in the oil palm
industry).
Other countries and products under this list
include Thailand (shrimp), India (soccer balls),
and Myanmar (rice).
Executive Order 13126 (EO13126) on the
Prohibition of Acquisition of Products
Produced by Forced or Indentured Child
Labour
The aim of this executive order is “to ensure
that the US federal agencies do not procure
goods made [by] forced or indentured child
labour.”
Under the EO13126, the US Department of
Labour is required “to publish and maintain
a list of products … which [it has] a
reasonable basis to believe might have been
mined, produced, or manufactured by
forced or indentured child labour.”
This list affects international trade because it
penalises exporters which are suspected of
exploiting child labour. These exporters are
hindered from getting their products
purchased by the US federal agencies.

Some Generalised System of Preferences (GSP)
programmes also include labour provisions
57
The EU’s GSP programme:
To be eligible for additional reduction on
import tariffs under the ‘GSP+’ scheme, the
beneficiary countries must have ratified 27
core international conventions, some of which
are related to labour rights.
Moreover, the beneficiary countries must also
agree to submit the following binding
undertakings:
• “To maintain the ratification of these 27
conventions and to ensure their effective
implementation;
• To accept without reservation reporting
requirements and monitoring imposed by
those conventions; and
• To accept and cooperate with the EU
monitoring procedure.”
The US’ GSP programme:
In 1984, the programme was amended to
require the beneficiary countries to show that
they “have taken or are taking steps to grant
internationally recognised worker rights” which
are:
• “The right of association
• The right to organise and bargain
collectively
• A prohibition on the use of any form of
forced or compulsory labour
• A minimum age for the employment of
children
• Acceptable conditions of work with respect
to minimum wages, hours of work, and
occupational safety and health.”
The GSP is a programme implemented by developed economies to facilitate the growth of low-
income countries by promoting trade. This is done by reducing the import tariffs on certain products.

The International Labour Organisation (ILO) sets out
the basic principles of labour rights
58
The ILO is an agency under the
UN. It formulates the basic
principles of labour rights through
negotiations among its social
partners which include
governments, employers, and
workers.
Some of these basic principles or
labour standards are ILO
recommendations which are non-
binding guidelines.
Others are ILO Conventions which
are only binding if they are
ratified by the Member Countries.
Out of the 189 Conventions
issued by the ILO, there are eight
Fundamental Conventions that
represent the fundamental
principles of labour rights.
Fundamental ILO Conventions

Malaysia has made labour-related commitments in
the ILO
Malaysia has been a
Member of the ILO since
1957 and has ratified 17 ILO
Conventions, 16 of which are
currently in force. Out of the
16, five of them are ILO
Fundamental Conventions.
In 1990, the Malaysian
government denounced one
of the ILO’s eight core
Conventions – Convention
Number 105 on the
abolition of forced labour.
Malaysia’s decision to
denounce it was taken in
response to the continued
criticism on the existence of
compulsory prison labour in
Malaysia.
Fundamental ILO Conventions

Labour standards are increasingly addressed by
FTAs
60
“Promotional elements”
Other trade agreements with labour
provisions are more lenient. Instead of
explicitly requiring Member Countries to
comply with the labour standards, this type of
trade agreements aims to promote
cooperation among the signatories.
Such “promotional elements” can be found in
the remaining 60% of trade agreements that
contain labour provisions. These types of
provisions are common among FTAs signed
by the EU and New Zealand, as well as in
South-South FTAs which refer to trade
agreements between developing countries.
“Conditional elements”
Some FTAs include labour provisions which
require the Member Countries to comply with the
said labour standards in order to receive some
form of economic benefits or to avoid being
penalised.
According to the ILO and International Institute
for Labour Studies (IILS) study, this type of FTAs
are common among those sponsored by the US
and Canada. Moreover, such “conditional
elements” can be found in approximately 40% of
trade agreements that contain labour provisions.
In 1995, only four trade agreements contain labour provisions. By 2013, this figure had risen to 58.
Labour provisions are more commonly found in North-South trade agreements, which refer to trade
agreements between developed countries and less-developed countries.

Currently, labour standards are not subject to WTO
rules
Because the WTO requires the agreement from
all of its Members before any rulings can be
made, labour standards are currently not
subjected to WTO rules and disciplines.
The 1996 WTO’s Singapore Ministerial
Declaration states that the WTO Members
renew their “commitment to the observance of
internationally recognised core labour
standards.” However, the ILO, instead of the
WTO, would be “the competent body to set
and deal with these standards.”
Moreover, the WTO Members “reject the use
of labour standards for protectionist purposes,
and agree that the comparative advantage of
countries, particularly low-wage developing
countries, must in no way be put into
question.”
In 1996, developed countries introduced in
the WTO, a debate on whether the WTO
should establish a committee to examine
the issue. This was later proposed as one of
the agendas under what is known as the
Singapore Ministerial Declaration.
Unsurprisingly, the majority of developing
countries were not agreeable to the
proposal.
They viewed the proposal to include
labour-related issues in the WTO as an
attempt by the developed countries to
introduce protectionist measures by
undermining their comparative advantage
in low-wage, labour-intensive production.

The US includes labour provisions in its FTAs
62
The case of US-Colombia FTA
As part of the US-Colombia FTA, the Colombian
government agreed to the Colombian Action
Plan Related to Labour Rights to address
concerns raised by the US stakeholders
regarding labour issues.
These include “violence against Colombian
labour union members, inadequate efforts to
[prosecute perpetrators of such violence], and
insufficient protection of workers’ rights”.
Colombia also agreed to amend its Criminal
Code to make it a criminal offence, with up to
five years of imprisonment, “for employers that
undermine the [workers’] right to organise and
bargain collectively.”
Thus, through the FTA with the US, both the
Colombian Government and businesses in
Colombia have to comply to new, higher labour
standards.
The US FTA policy
In 2007, the US FTA policy became significantly
stricter on the need to address labour issues as
it required the US trading partners to:
• Adopt and maintain laws and practices that
are in accordance with the 1998 ILO
Declaration on Fundamental Principles and
Rights at Work.
• Agree not to lower their labour standards.
• Agree that a lack of resources or a need to
prioritise other enforcement issues is not a
basis for failure to enforce core labour
standards.
• Agree to apply the dispute settlement
mechanism to labour issues.
The impact of having labour-related provisions
of this nature in the FTAs is that their trading
partners must adhere to the higher labour
standards as demanded by the US.

Key Messages
Trade policy goes beyond regulating the exportations and importations of goods and
services – it also increasingly addresses the rights and the well-being of the workers who
are involved in the production of the said goods and services.
63
At the moment, Malaysia is not part of any FTAs which both contain labour provisions and
have entered into force. However, Malaysia is affected by other externals laws and
standards such as the US’ GP policy (through the EO List), the US’ TVPRA List, and the ILO’s
standards.
The debate of whether or not ‘traditionally non-trade issues’ such as labour standards
should be included in trade policy, remains to be concluded.

Part One of Why Trade Matters discusses how international trade is measured, as well as the
interlinkages between trade and food policy, and trade and regional integration. Part Two focuses on
people-centred subject areas, with chapters on trade and the healthcare services sector, trade and the
movement of people, and trade and labour.
These reports illustrate how commitments made in international trade agreements may affect non-
trade related matters. As such, in assessing the impact of any trade agreement, the breadth and depth
of the issues covered should be taken into consideration.
Our future work will include expanding the discussion of the chapters in this report, and highlighting
and discussing the linkages between trade policies and other domestic policies.
65

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