With the finalizing of FTA negotiations with Japan, Malaysia has become the third country after Singapore and Thailand in ASEAN, to join the bilateral FTA bandwagon, and has thus signaled a clear shift in its trade policy agenda. The Japan- Malaysia Economic Partnership Agreement (JMEPA) will be Malaysia's first bilateral FTA outside ASEAN, and is likely to be signed this coming December when Japan's Prime Minister Junichiro Koizumi attends the East Asia Summit in Kuala Lumpur. (The JMEPA would be the fourth FTA for Japan, which already has signed FTAs with Singapore, Mexico and the Philippines.)

Negotiations on the JMEPA - which includes an FTA - began a little over two years ago. This FTA is expected to be realized in 10 years and covers a comprehensive agenda from goods, services, investment and economic cooperation.

Besides the JMEPA, Malaysia is also pursuing bilateral FTAs with Australia, New Zealand, India and Korea. This signals a new direction in Malaysia's trade policy towards bilateralism, which it had strongly opposed to a few years back when similar moves were being initiated by Singapore. This policy shift has been mainly prompted by the need to avoid discriminatory treatment by its major trading partners, which are already negotiating similar bilateral deals. This is particularly so as the Singapore has already enforced its bilateral FTA with Japan, and Thailand is engaged in negotiations with it. The thinking behind this new direction appears to be "if you can't beat them, join them".

Furthermore, as a trade-dependent economy, Malaysia is seeking the bilateral route to allow it to explore alternative paths to trade and investment liberalization and forge closer economic linkages with major trading partners, while concomitantly pursuing multilateral trade liberalization through the WTO.

Malaysia thus expects that the JMEPA would able to expand its market access into the Japanese market, and remain an attractive destination for Japanese FDI, which has fuelled its economic growth in the past.

One of the most significant outcomes of the JMEPA negotiations is that Malaysia has agreed to eliminate tariffs on knocked down auto parts for Japanese carmakers in Malaysia, and to completely eliminate tariffs on Japanese finished cars by 2015, starting first with the high-end larger car market segment. (Tariffs on imported Japanese cars above 2,000 cc are expected to be eliminated by 2010.)

Since the domestic car market has long been protected by Malaysia, this can be seen as a positive step in liberalizing this sector. The JMEPA will allow Japanese carmakers direct entry into one of ASEAN's largest car market. Proton and Perodua - Malaysia's two local carmakers - may have some breathing space as they mainly manufacture cars below 2,000 cc. Nevertheless, it does look like their days are numbered unless Proton and Perodua can find a way to stay competitive.

Although the JMEPA is comprehensive in scope, whether this agreement would turn out to be trade creating for Malaysia, and be welfare enhancing for its consumers is likely to depend upon the way the final agreement takes shape, especially with respect to the rules of origin, coverage of sectors and depth of liberalization commitments. Its success will also depend on the extent to which Malaysian businesses perceive it as being relatively easy to comply with, for doing business with Japan.

Two important concerns do stem from the above developments. First, although the JMEPA could be used as a means to enhance competitiveness and economic growth, Malaysia should nevertheless take a judicious approach to FTAs. Malaysia is still a developing country with sensitive socio-economic issues to consider, and will probably gain more significantly from unilateral than bilateral trade and investment liberalization. If it agrees too quickly or makes too many compromises to make a quick deal bilaterally, it may have negative welfare implications for the economy. Thus, even if the FTA route is preferred, the focus should be on high quality comprehensive FTAs, with minimum exclusions possible. Further, Malaysia should also be careful in embarking on too many regional and bilateral FTAs since it would put a strain on valuable and limited negotiating resources, which probably could be put to better use at the multilateral level.

Second, it is not yet clear as to how individual bilateral deals of ASEAN members with Japan will be consistent with those of negotiations for a regional ASEAN-Japan Comprehensive Economic Partnership (CEP) Agreement, which is also expected to be completed in 10 years time. Since the Japan-Singapore agreement and the JMEPA are unlikely to be similar in terms of their negotiating framework (and so would be proposed the Japan-Thailand FTA), the important question is whether bilateral deals will take precedence over the regional agreement or vice-versa, once all these deals are enforced.

However, notwithstanding the above concerns, it is now an accepted fact that bilateralism is here to stay not just in Malaysia, but in other ASEAN countries as well, and perhaps the time has become to find means of "multilateralising" these FTAs in ASEAN. This would imply that all ASEAN countries should agree on signing only those regional and bilateral FTAs that are WTO-consistent, have a comprehensive agenda of liberalization and economic cooperation (with minimum exclusions), as well as also allow for inclusion of newer members as parties to the FTA on similar terms and conditions. One good example in the latter case would be the inclusion of Brunei in the recently concluded Trans-Pacific Strategic Economic Partnership (SEP) Agreement, which earlier involved only Singapore, New Zealand and Chile as negotiating parties to the FTA.

It is hoped that the JMEPA agreement, in its final form, will also have such features of a high-quality FTA that is eligible for "multilateralisation". This is the only way Malaysia will ensure that its FTAs end up being a building block, and not a stumbling block to global free trade