CPTPP: Implications for Malaysia’s Merchandise Trade Balance

A mega regional Free Trade Agreement like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) has the potential to impact countries which are inside as well as those which are outside the agreement. This paper provides empirical estimates of potential changes in Malaysia’s merchandise balance of trade if it joins the CPTPP and compares it to its trade balance if it does not join this free trade agreement (FTA). A positive balance of merchandise trade is important for Malaysia as it is a net importer of services. However, since 2010, Malaysia’s merchandise imports have been growing much faster than its exports. Using SMART simulations, the estimates show that if Malaysia joins the CPTPP its imports will rise much more than its exports leading to a worsening of its trade balance by around US$2.4 billion per annum. Imports of vehicles from the CPTPP countries will increase including that of plastics and its articles. Exports to the CPTPP partner countries will rise only marginally as Malaysia already has free trade agreements with its top three export markets, i.e., Japan, Singapore and Australia, which together account for 84% of its exports to the CPTPP countries. Remaining out of the CPTPP will also adversely impact Malaysia’s exports to the CPTPP countries but this decline in exports is much smaller compared to the rise in its imports if it joins the CPTPP. The estimated tariff revenue loss to Malaysia of joining the CPTPP is estimated at US$1.6 billion per annum. The paper argues that along with the traditional indicators of trade competitiveness like trade balance developing countries now need to give importance to preserving their policy space in free trade agreements since the fourth digital industrial revolution is changing the ways products are manufactured and exported.