1. AFTA & Malaysia agricultural sector The Effects of AFTA In the agricultural sector in Malaysia Prepared by: Ban Sun, Low
2. AFTA & Malaysia agricultural sector 1. What’s AFTA ASEAN Free Trade Area (AFTA) is a trade bloc agreement by the Association of Southeast Asian Nations supporting local manufacturing in all ASEAN countries. First floated in mid-1991 by Thai PM during the ASEAN Economic Ministers (AEM) meeting. When the AFTA agreement was originally signed, ASEAN had six members, namely, Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand. Vietnam joined in 1995, Laos and Myanmar in 1997 and Cambodia in 1999. AFTA now comprises ten countries of ASEAN. All the four latecomers were required to sign the AFTA agreement in order to join ASEAN, but were given longer time frames in which to meet AFTA's tariff reduction obligations 4. AFTA objectives: a. Increase ASEAN's competitive edge as a production base in the world market through the elimination, within ASEAN, of tariffs and non-tariff barriers; and b. Attract more foreign direct investment to ASEAN. 2
3. AFTA & Malaysia agricultural sector 1. What’s AFTA To achieve these goals (4 , above), a mechanism called the Common Effective Preferential Tariff (CEPT) was established with the self-described goal to increase the "region’s competitive advantage as a production base geared for the world market". Subsequently in 1992, AEM signed the tariff reduction scheme- the Common Effective Preferential Tariff (CEPT) Scheme . This result in tariff rates for all relevant products being reduced 0-5% by 2002/ 2003. AEM agreed to create AFTA in ASEAN by 2002/2003 to achieve greater economic resilience for the regional economies to boost the intra-regional trade trend. Aim to reduce intra-regional tariffs on manufactured items and agricultural products as well as remove non tariff barrier over a 15 year period starting from 1993. 3
4. AFTA & Malaysia agricultural sector 2. CEPT Scheme AFTA does not apply a common external tariff on imported goods which sets her apart from other trade bloc, example the EU. 2. In essence, the CEPT scheme allows i. Each ASEAN member may impose tariffs on goods entering from outside ASEAN based on its national schedules. ii. ASEAN members are to apply a tariff rate of 0 to 5 percent on goods originating from ASEAN. The more recent members of Cambodia, Laos, Myanmar and Vietnam were given additional time to implement the reduced tariff rates. 3. ASEAN members have agreed to enact zero tariff rates on virtually all imports by 2010 for the original signatories, and 2015 for the CMLV countries. 4
5. AFTA & Malaysia agricultural sector 2. CEPT Scheme 4. ASEAN members have the option of excluding products from the CEPT in three cases: I. Temporary exclusions (refer to products for which tariffs will ultimately be lowered to 0-5%, but which are being protected temporarily by a delay in tariff reductions. Example; the automobile industry for Malaysia) II. Sensitive agricultural products (Include commodities such as rice. ASEAN members have until 2010 to reduce the tariff levels to 0-5%.) III. General Exceptions (products which an ASEAN member deems necessary for the protection of national security, public morals, the protection of human, animal or plant life and health, and protection of articles of artistic, historic, or archaeological value . Example; petroleum) 5
6. AFTA & Malaysia agricultural sector 3. Some Definitions: For the purposes of CEPT Scheme for AFTA: Tariff Barrier In the forms of tax. Associated with protectionism, the economic policy of restraining trade between nations. Tariffs are usually imposed on imported goods, although they may also be imposed on exported goods. Non Tariff Barriers (NTB) Measures other than tariffs which effectively prohibit or restrict import or export of products within member states. Non-tariff barriers to trade can be: Import bans Product standards Import licenses "Buy national" policy Intellectual property laws (patents, copyrights) Restrictive licenses Seasonal import regimes Corrupt and/or lengthy customs procedures Bribery and corruption 6
7. AFTA & Malaysia agricultural sector 3. Some Definitions: 3. Quantitative restrictions Means prohibitions or restrictions on trade with other member states, whether made effective through quotas, licenses, requirements or other measures with equivalent effect. Example: Import Quota. 4. Foreign exchange restrictions Measures taken by Member states in the form of restrictions and other administrative procedures in foreign exchange which have the effect of restricting trade. 5. Exclusion List A list containing products that are excluded from the extension of tariff preferences under the CEPT Scheme. (usually for protectionisms of national interest) 7
8. AFTA & Malaysia agricultural sector 4. AFTA Benefits In summary, forming a trade bloc of AFTA involves economic benefits , of which among those are: Removal of tariff barriers and NTB resulted less trade diversion effect. Encourage more trading activities within member. Economies of scale that result from specialization and greater dynamic scale of production, and greater exposure to productivity gain. Better competition foster economic investment linkages. Step towards enhancing global trade liberalization. AFTA reduces the barrier between member countries; makes the procedure of investment simpler. For instance, with the implementation of AFTA, laborers are mobile within member countries. As such, this stimulates intra- and extra-sources of foreign networking, thus lowering the cost of production. 8
9. AFTA & Malaysia agricultural sector 5. The effects of AFTA in the agricultural sector in Malaysia Shrinking acreage of land under agriculture a. The agriculture sector competes with other sectors for land when the economy moves toward industrialization. b. The cost of production of agricultural products in the neighboring countries is cheaper, this would affect international demand for local agricultural products. Lower cost of land and labor of the neighboring countries would force Malaysia to intensify on adding value to their product output (better yield outcome). c. Small firms will find it unprofitable to operate after the implementation of AFTA. Thus we see a change from small farming to corporate plantation business activities such as IOI group and Golden Hope. d. NTB on the other hand will lead to surplus products and pressure on the domestic product. e. Thus the government should gradually withdraw subsidies to promote efficiency and prepare for challenges of market globalization. 9
10. AFTA & Malaysia agricultural sector 5. The effects of AFTA in the agricultural sector in Malaysia 2. Poor productivity and quality of agricultural product Slow pace of replanting. Malaysia palms that are more than 25 years will become less productivity and hence increase cost of harvesting. Replanting needs at least 5 years before they can start producing yield. Traditional farming obviously yield lower productivity and quality. Traditional farming still makes up a bulk of our agricultural sector. Remedy / Solution: i. Agricultural programs focus on transforming traditional farming into commercial farming to increase productivity, competitiveness with particular focus on commercialization which includes marketing. ii. Consolidate small farm via group-farming concept and implement Ten Tonnes per Hectares Project to enable the adoption of the Good Agricultural Practices (GAP), adopt good agronomics and increase mechanization. 10
11. AFTA & Malaysia agricultural sector 5. The effects of AFTA in the agricultural sector in Malaysia 3. Stringent competition after implementation of AFTA A. Paddy Globalization affects the rural economy of the country. Cheaper imports has a severe impact on our paddy farmers. Our major concerns are tumbling prices and lower demands for rice as most rice is imported or smuggled into the country. As a result farmers are ruined to excessive paddy supply and low prices. The rice industry is heavily subsidized by the government for food security reasons via various price and fertilizer subsidies. As a result our farmers unable to compete in the open market without the subsidies provided by the government, as the production cost in neighboring countries is much lower. Though the government could ban rice imports as part of the measures to reduce the surplus, this measure is unsustainable once trade liberalization set in. 11
12. AFTA & Malaysia agricultural sector 5. The effects of AFTA in the agricultural sector in Malaysia 3. Stringent competition after implementation of AFTA Palm oil a. Is a well clustered and has encountered strong growth since the 1960s. b. is expected to gain from trade liberalization initiatives. When import tariff is reduced, palm oil importing countries will buy our palm oil at a cheaper price and thus a boost in the demand. c. Though palm oil stand to gain from AFTA, it has raised a new serious issue. Palm oil plantation has severe impact on the environment. Hectares of virgin forest in Sarawak has been cleared to make way for new plantation. Palm oil plantation wipes out natural habitat and livelihood of forest dwellers who depended on the forest for survival. (Please read Natural Geographic, October 2009 issue) 12
13. AFTA & Malaysia agricultural sector 5. The effects of AFTA in the agricultural sector in Malaysia 3. Stringent competition after implementation of AFTA C. Commodity Prices a. Result in greater competition and lower commodity prices in the world market. b. The low price has a severe impact on our viability of the Malaysian commodities unless there is a significant reduction in cost. c. Commodity pricing fluctuate in the world market, hence affect the incomes of a large part of Malaysian rural population. 13
14. AFTA & Malaysia agricultural sector 5. The effects of AFTA in the agricultural sector in Malaysia 4. Market demand for better quality agricultural products Greater consciousness for healthy food and cleaner environment pressures the agricultural sector to produce varieties with better quality. Improved varieties allow the sector to expand utilization of its products in a wider downstream manufacturing activity. Example: a. Canned pine apples b. Pineapple tarts. c. emergence of herbal drinks / supplements – Easy Phamax. 14
15. AFTA & Malaysia agricultural sector 5. The effects of AFTA in the agricultural sector in Malaysia Insufficient research, information and coordination. Producers encounter the problem of inadequate information with respect to the latest high quality hybrids and varieties. Our researchers in R&D institutions such as MPOB, MARDI, RRIM, FRIM are limited to work on a particular problem respective to their institutional mandated crops. Example, no research on grain, soya, maize… c. We do not have a common body to coordinate and facilitate interaction among the institutions, thus limit the sharing resources or duplicate efforts in studying the same problem. 15
16. AFTA & Malaysia agricultural sector 5. The effects of AFTA in the agricultural sector in Malaysia 6. Insufficient Plant Biotechnology a. The issues confronting plant biotechnology are that we need more efficient technique in solving production constraints, where conventional technologies cannot be employed to solve a production problem. Example: How to plant paddy 4 times a year? Plant paddy using lesser land area. More latex yield from a single tree. b. As the nation grew and become more industrialized, it will soon compete with agricultural land. Thus plant biotechnology plays an important role to sustain increasing population needs in the future as well as being profitable and yield higher productivity. 16
17. AFTA & Malaysia agricultural sector 5. The effects of AFTA in the agricultural sector in Malaysia 7. Labor shortage Farming is not a glamorous job in Malaysia and thus would not appeal to the younger generation, who prefers to work in the city. Rural farming are family orientated and “gotong-royong” spirit during the harvesting period, is lacking in the modern age Malaysia. Palm plantation depends heavily on foreign workers at the moment, mostly farmed by Bangladeshis, Sri Lankans and Nepalese. A need to find innovative solutions to reduce dependency on human labor to remain cost effective. Rely more on technological advancement such as hydroponics, aeroponics, multitude farming without increasing usage of land. 17
