Pakistan and Malaysia: Trade Relationship

Submitted to:
Ms. Rabayl Manzoor

Submitted by:
Dilaira Mondegarian

Submitted on:
2nd February 2011
Introduction:

Trade liberalization has sown its seeds in Pakistan since the 1980s and it has steadily
progressed from there on. Import taxes have been reduced, the Statutory Regulatory Orders
(SROs) have now been mostly withdrawn and Non-Tariff Barriers (NTBs) have been largely
dismantled. In particular, the average tariff rate has declined sharply from 77 percent in 1985 to
about 17 percent1. Trade has therefore accelerated as a result of the process of greater openness
of the economy, especially over the past 5 years. Many regional and bilateral agreements have
been signed to enhance Pakistan’s trade and one of its close trading partners includes Malaysia.

As a part of the ASEAN region, Malaysia is proving to be an ideal role model for many
developing countries today. Owing to its constant insistence, Pak-ASEAN Sectoral
Partnership was formed in 1996 which has helped enhance trade and investment linkages in
Pakistan ever since. Relations between the two countries have not always been friendly; although
they share a similar background, strong trade relations have been formed much recently. Soon
after the Second World War, both Pakistan and Malaysia emerged with similar features: a
predominately rural and enclave economy and a highly hierarchical and custom-bound
society; both countries also enjoyed rapid rates of economic growth, especially in the 1960s.
Malaysia, however, was able to sustain this in the long term (although it did face problems
during the East Asian financial crisis of 1997), while Pakistan failed to do so.

High-profile visits between the countries were initiated in the early 1960s and laid the
foundations of strong diplomatic and political ties as well as the promotion of trade and
commercial relations. Although Pakistan maintained a neutral role during 1963-66 Malaysian-
Indonesian confrontation, Malaysia failed to reciprocate the gesture during Pakistan’s war with
India in 1965, where it was an active Indian supporter. Consequently, Pakistan severed ties with
Malaysia. However, these ties were restored the following year due to the friendly intervention
of the Shah of Iran.

From 1966 to 1979 there were no high level exchanges. Later, during an official visit by
the Malaysian Prime Minister, Dato Hussein bin Onn, to Pakistan, a “Cultural Agreement”, the
“Avoidance of Double Taxation Agreement”, and the “Economic and Technical Co-operation

1
“Trade liberalization in Pakistan,” Civil Service of Pakistan.
Agreement” were signed, thereby strengthening the economic ties between the countries. During
the 1980s, this relationship matured with a need identified for greater mutual co-operation and
boosting of economic ties, and a Joint Economic Committee was set up. In 1993, when Dr
Mahathir visited Pakistan, he discussed bilateral matters, which included the promotion of trade
and the export of Pakistani manpower to Malaysia. It was at this point that Pakistan expressed an
interest in learning from the Malaysian development experience. More recently, visits between
the two countries have taken a visibly proactive turn, with regular visits from both sides, in
particular since the establishment of the Organization of Islamic Countries (OIC) and the World
Islamic Economic Forum (WIEF). It was at the latter that the free trade agreement was finalized
in November 2006.

Regional co-operation:

Pakistan and Malaysia are bound by several regional organizations, such as the OIC and
ASEAN, and, more recently, have shared a common platform–the WIEF–to co-operate on good
practices for both government ministers and the corporate world. At the annual ASEAN Summit
in 2003, the leaders decided to establish the ASEAN Economic Community (AEC) by 2020.
This entity will function as a single market and production base with free flow of goods,
services, investment, skilled labour, and capital. Pakistan has been a sectoral partner of ASEAN
since 1996, but not a full dialogue partner because economic relations failed to reach required
levels. Interestingly, Pakistan became a member of the Asian Regional Forum (ARF) in 2004
only at India’s insistence.

Bilateral trade with Malaysia:

The two countries have signed both commercial and economic pacts, in order to simplify
co-operation in many spheres. Such efforts were set in motion when both countries signed a trade
agreement in 1987. In 1995, treaties were signed to protect investment, technical, scientific, and
cultural agreements. Earlier than these, an Air Agreement was signed in 1973. Pakistan signed
the Agreement on Promotion and Protection of Investment in 1995 and the Avoidance of Double
Taxation Agreement as early as 1982. This reflects Pakistan’s keenness to nurture its economic
relationship with Malaysia.

(US $ millions)

Total
Year Exports Imports Trade balance
trade volume
2000-2001 50.706 429.220 479.926 (-) 378.514

2001-2002 51.759 456.320 508.079 (-) 404.561

2002-2003 78.457 567.074 645.531 (-) 488.617

2003-2004 83.480 602.525 686.005 (-) 519.045

2004-2005 59.77 621.31 681.093 (-) 561.535

2005-2006 63.977 708.409 772.386 (-) 644.432

2006-2007 72.640 945.304 1017.944 (-) 872.664

2007-2008 94.388 1261.417 1355.805 (-) 1167.029

Source: WTO Trade data base, World Development Indicators, Federal Bureau of Statistic

As it is evident from the above table, Pakistan’s trade balance has steadily deteriorated;
this is mainly due to Pakistan’s dependency on Malaysia for palm oil and for machinery for its
industrial sector. At present, the only alternative for palm oil is Indonesia. As far as edible oils
are concerned, there seems to be no alternative to Malaysia in the near future.

Equally important, Malaysia has a natural advantage in rubber and timber exports over
Pakistan. Pakistan’s exports to Malaysia include rice, surgical goods, leather, and textiles. This is
a limited range of exports and is further worsened by its low level of elasticity. The lower the
level of elasticity, the less the level of exports are unaffected by price changes. To fully reap
benefits from trade, Pakistan needs to broaden and deepen its exports to Malaysia. However, this
is clearly insufficient to match the export capacity of Malaysia and correct the trade balance.
Although the private sectors of the two countries have played a pivotal role in increasing the
level of trade, the trade base is limited and largely confined to commodities listed below.

Major items of Export to Malaysia: • Rice

 • Made-up articles of textile material • Fixed vegetable oil and fats

• Synthetic fabrics • Machinery and parts

• Wheat • Chemical elements and compounds

• Cotton yarn • Animal and vegetable oils and fats

• Fish and fish preparations • Chemical materials and products

• Arms and ammunition • Crude rubber

• Hosiery • Yarn and thread of synthetic fibres

• Sports goods • Cork and wood

• Hides, skins, and fur skins. • Manufactures of non-ferrous metals

• Articles of rubber.

Major items of Import from Malaysia:

Pakistan negotiated an Early Harvest Programme (EHP) with Malaysia, activated on the 1st of
January 2006, which expired on the 31st of March, 2007, the same time as the implementation of
a Free Trade Agreement. Through the EHP, Malaysia reduced tariffs on 114 Pakistani products,
whilst Pakistan reduced tariffs on 125 Malaysian items. Through the EHP, Pakistan sought to
gain a foothold in the ASEAN countries, by opening up a large market; more specifically, it also
sought to realign its trade balance with Malaysia. Under the programme, both countries have cut
down duties to zero level on certain terms, thus boosting bilateral trade.

In late 2006, Pakistan and Malaysia semi-finalized talks over a proposed Free Trade
Agreement (FTA), with most of the draft agreement chapters having been agreed upon. Under
the agreement, Malaysia agreed to provide market access to Pakistan’s traditional items of
export, including mangoes, textile, leather, surgical instruments, and other agricultural and
manufactured goods. Since 1st January 2006, perishables such as oranges, lemons, and potatoes
have been exported to Malaysia at zero duty. A chapter on promotion and protection of
investment is also included in the draft FTA. Through the FTA, Pakistan would gain a strategic
advantage in Malaysia’s growing high-technology, telecommunications, and financial services
sectors. The FTA was the critical link in Pakistan’s supply chain and would enable it to diversify
its product base in Asia and lower its costs to compete effectively. This was the first FTA to be
signed between two members of the OIC and was implemented in early 2007, which also marked
50 years of diplomatic relations between the two countries.

During the same period of time, The News International however reported that the
ongoing dialogue between Malaysia and Pakistan on the free trade agreement had come to a halt
as the main stakeholders in the country have fiercely opposed the proposed 20 per cent cut in
tariff on the import of palm oil demanded by Malaysia. This opposition was especially important
as the Malaysian Prime Minister stated that, should Pakistan not agree to this 20 per cent
reduction in the import duty on palm oil, then no free trade agreement would be possible
between the two countries. Pakistan refused it for two reasons: firstly, such a big reduction
would hurt domestic production of vegetable oil; and secondly, the international price of palm oil
has increased steeply over the years, pushing the rates up in the local market. Later however,
talks did resume and the agreement was finalized.

The trend of bilateral agreements has continued since and on the 8th of November 2007
Y.B. Dato' Seri Rafidah Aziz, Minister of International Trade and Industry Malaysia and Tahir
Mahmood Qazi, High Commissioner of Pakistan to Malaysia, signed the Malaysia-Pakistan
Closer Economic Partnership Agreement (MPCEPA). The MPCEPA encompasses liberalisation
in trade of goods and services, investment, as well as bilateral technical cooperation and capacity
building in areas such as sanitary, intellectual property protection, construction, tourism,
healthcare and telecommunications. The existing Bilateral Trade Agreement, Investment
Guarantee Agreement and the Early Harvest Programme will be effectively replaced by the
coming into force of this more comprehensive and substantive Agreement. However, both
countries agreed to review the MPCEPA every 5 years. The Agreement will further facilitate and
strengthen the two-way trade and investment as well as enhance bilateral economic and
industrial cooperation on a long term basis between Malaysia and Pakistan.

However, Pakistan cannot guarantee a prosperous economic partnership with Malaysia if it

does not incorporate the effects of competition from other countries, in particular of its rival
neighbour India, in its future strategy. The key to success lies in expanding, diversifying, and
deepening its export base. Also, with the countries maintaining warm and brotherly relations and
taking concrete steps in the trade and investment spheres, a prosperous future can be envisaged.
 References

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<http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?
Language=E&Country=Y,PK>

“Pak-Malaysia free trade talks hit snags”, The News International, 19th February 2007.

<http://www.bilaterals.org/spip.php?article7183>

“Malaysia-Pakistan Closer Economic Partnership Agreement (MPCEPA).” Ministry of

International Trade and Industry.

<http://www.miti.gov.my/cms/content.jsp?id=com.tms.cms.section.Section_54a786dc-

c0a8156f-2af82af8-cc529ea7>

“Trade Liberalization in Pakistan.” Civil Service Forum of Pakistan.

<http://www.cssforum.com.pk/css-optional-subjects/group/economics/28937-trade-

liberalization-pakistan.html>

“Pakistan and Malaysia: Economic and Trade Relations.” The Institute of Strategic Studies

Islamabad.

<http://www.issi.org.pk/ss_Detail.php?dataId=417>