Malaysia-Japan FTA boosts exports, narrow trade deficit

In a press conference to announce the country's 2006 trade performance, Rafidah said that since the Economic Partnership Agreement, as the FTA is officially known, came into effect last July, there have been ''positive effects'' on Malaysia's export performance to Japan.

Exports utilizing the preferential ''Certificate of Origin'' accorded under the agreement for the second half of 2006 were valued at 3.06 billion ringgit.

The main products exported under the preferential access included palm oil, articles of ethylene and veneered panels.

Other products that have gained better access into Japan were tropical fruit such as pineapples and watermelons, which increased fourfold during the six-month period after the implementation of the FTA, Rafidah said.

Electrical and electronic products remained Malaysia's number one export to Japan, totaling 16.47 billion ringgit, but that was 1.5 percent lower than in 2005 as Japan turned to cheaper sources such as China and Taiwan.

Liquefied natural gas was the second largest export from Malaysia with a value at 13.2 billion ringgit.

Exports of wood products, including veneer, plywood and particle board, accounted for half the increase in exports. Exports of wood products were valued at 4.81 billion ringgit last year.

Overall, as Prime Minister Abdullah Ahmad Badawi had announced late Thursday, Malaysia's total trade breached the 1 trillion ringgit mark for the first time last year at 1.069 trillion ringgit, 10.5 percent higher than the preceding year.

Exports rose 10.3 percent to 588.95 billion ringgit while imports rose 10.7 percent to 480.49 billion ringgit in 2006.

Rafidah is optimistic the growth momentum will continue in 2007 despite concern the rising ringgit will crimp exports.

The currency is now trading near a nine-year high at around 3.50 to the dollar.

''One factor that will support the (export) growth is the forecast stronger expansion of the Southeast Asian economies, from 5.2 percent in 2006 to 5.6 percent in 2007. ASEAN accounted for 26.1 percent of Malaysia's exports in 2006,'' she said.

Demand for Malaysia's electrical and electronic products that account for more than 45 percent of total exports, is also expected to remain robust as the U.S.-based Semiconductor Industry Association has forecast global semiconductor sales will expand 10 percent this year to $273.8 billion.

What to do about the gas 'crisis': maybe nothing

DESPITE what you may have heard, oil and gasoline prices have yet to reach record levels--once we adjust for inflation. Even so, the gasoline price spike that began in the fall of 2002 is the second most dramatic in American economic history--steeper than those in 1973, 1990, and 2000, and nearly as great as that experienced between 1979 and 1981. A back-of-the-envelope calculation finds that the average household today spends between $63 and $79 a month more for gasoline than it did just three years ago.

Perhaps the absence of an identifiable villain has dampened political outrage. Oil companies are making record profits, but there's no evidence that they're holding anything back from the market. Likewise, neither terrorists nor Iraqi insurgents have had any significant impact on OPEC production. Global oil production was 66.8 million barrels a day in 2002, 69.2 million in 2003, 72.5 million in 2004, and is at record levels in 2005.

Regardless, gasoline prices aren't particularly consequential in the grand scheme of things. Sure, we're approaching the record prices paid for gasoline in 1981--about $2.42 a gallon in today's dollars--but on average we're a bit more than half again as wealthy today as we were then. If we consider gasoline prices in relation to per capita disposable income, they are only 58 percent of what they were in 1981, 44 percent of what they were in 1955, and about 90 percent of what they were in 1972. That probably explains why gas-guzzlers are still selling as well as ever and politicians are hearing little outrage from constituents.

What's driving the oil market is demand--not primarily from American SUVs, mind you, but from the awakening economic giant that is China. U.S. consumption grew by about 700,000 barrels a day between 2002 and 2004, but Chinese consumption grew more than twice as fast: by 1.47 million barrels a day. But, even accounting for China, global oil consumption has increased by only 5.3 percent since 2002. How could that have resulted in a near doubling of world oil prices? There are two reasons.

First, the excess production capacity that characterized the world oil market since the price collapse of 1986 had finally all but disappeared by 2002. Accordingly, the recent surge in demand caught the market short. The only way to increase supply substantially is for producers to spend billions of dollars on new production capacity that won't come online for several years hence. Producers, however, fear another boom-and-bust cycle of over-investment followed by a price collapse. That explains why the recent surge in oil prices has not led to a corresponding surge of new supply for the market.

Second, consumers have been slow to adjust their behavior in response to rising prices. Trading in SUVs for Dodge Neons, moving closer to work, and rearranging commute routines to take advantage of mass transit and car-pooling can be costly in time and money. Motorists aren't about to pay those costs without evidence that the price hikes are here to stay. Even then, consumers may not respond as robustly as they have in the past, given that those increased gas prices are less of an annoyance thanks to higher incomes.

With both supply and demand relatively inelastic in the short run--meaning that neither responds very much to price signals--small changes in either will lead to very large price movements. That's because it takes a big price spike to get producers to cough up even a little more product and to get consumers to moderate their demand for oil.

How long will the current spike last? That depends on a couple of things. If the recent increase in demand is for consumption in the here-and-now, only two events will reverse the tide. The first is new supply--which could be several years into the future given the lag time between investment and production. The second is a break in demand, which could occur if China's economy cools off, if the global economy slides into a new recession, or if persistently high prices begin to encourage conservation and fuel switching.

However, if the oil demand we've witnessed is partially driven by inventory buildup, prices may fall when inventories are full or when investors become convinced that possible profits tomorrow are worse bets than sure profits today. Oil would then flow out of inventories, demand for oil would decline with speculators out of the market, and prices could come crashing down.

The majority view among market analysts is that the former story is more likely to be the case than the latter. Yet oil inventories have been growing steadily over the past year and storage capacity is dwindling. Accordingly, a price collapse cannot be ruled out--which further explains why producers are leery of spending billions for new production capacity.

Things could get worse before they get better. In a tight market with inelastic supply and demand, anything that interrupts supply--political unrest in Venezuela, Nigeria, or Iran, terrorist attacks in Saudi Arabia, increased insurgent activity in Iraq, hurricanes in the Caribbean, industrial accidents in refineries or along oil pipelines--could increase prices dramatically. Similarly, surges in demand from continued economic growth, unseasonable weather, or even currency revaluation in China could feed the spiral.