Oct. 26 (Bloomberg) -- Malaysia and New Zealand signed a free trade agreement today after four years of talks, seeking to bolster $1.8 billion in bilateral trade as the global economy recovers from its slump.

Under the agreement, which takes effect next year, Malaysia will progressively eliminate import taxes on 10,293 products from New Zealand, including paper, plastics and automotive components, by 2016. New Zealand will scrap the import levy on all 7,238 products imported from Malaysia by 2016, including cocoa products, carpets and tires.

The trade accord is a “significant milestone” for the two countries’ relations, Malaysia’s Prime Minister Najib Razak told reporters today in Putrajaya, outside Kuala Lumpur.

Malaysia is trying to expand the breadth and depth of its exports to help it recover from its first recession in a decade. The trade pact with New Zealand is the Southeast Asia nation’s third, following bilateral agreements with Japan in 2005 and Pakistan in 2007.

New Zealand, one of the world’s more open economies, joins the European Union and Australia in seeking greater access to Southeast Asia’s markets. Australia and New Zealand’s free-trade agreement with the 10-member Association of Southeast Asian Nations will take effect next year, Australia said Oct. 25.

Malaysia’s agreement with New Zealand, on which talks began in May 2005, excludes 89 products deemed “sensitive” to Malaysia for health, security or moral reasons, the predominantly Muslim Southeast Asian nation said in a statement today. These include rice, tobacco and alcoholic beverages.

Rice, Contracts

“Malaysia has to consider what it offers to New Zealand as it may expected to offer the same to others,” Irvin Seah, an economist at DBS Bank Ltd. in Singapore, said in a telephone interview today. “This should be a benchmark for other free trade agreements.”

The agreement will save New Zealand’s exporters more than NZ$10 million ($7.5 million) a year in taxes when fully implemented, the country said in a statement. Even so, New Zealand would have preferred for alcohol to be included in the agreement, Prime Minister John Key said in an interview today.

“New Zealand has got a very burgeoning wine industry,” he said in Kuala Lumpur. “We are doing very well in that regard, and Malaysia is just starting to buy more wine from New Zealand. That would have been nice to have been part of the agreement.”

Malaysia’s reluctance to open its rice market and increase access to state contracts were among issues that caused negotiators to miss a U.S. deadline to conclude talks on a free trade agreement in 2007.

Education, Tourism

Malaysia also offered commitments to New Zealand in services industries including private education, environment, tourism and veterinary services. New Zealand included services incidental to mining, engineering and mailing. Both countries also agreed to undertake a variety of economic cooperation programs spanning areas from forestry to healthcare.

“As Malaysia becomes a knowledge-based economy, you would expect services to take a more important role,” Seah of DBS said. “There should be more room for further liberalization and competition in the services sector.”

Trade between Malaysia and New Zealand surged 46 percent last year to $1.8 billion, with the Southeast Asian nation exporting $1.1 billion and importing about $800 million, according to the trade ministry.

The Malaysian ministry’s statement made no mention of government procurement, which hampered free-trade negotiations with the U.S. because of preferential treatment given to the country’s so-called Bumiputera, or indigenous, entrepreneurs.

In a press briefing in Putrajaya today, Najib didn’t answer a question on whether the New Zealand pact covered government contracts.

To contact the reporter responsible for this story: Barry Porter in Kuala Lumpur at bporter10@bloomberg.net

Last Updated: October 26, 2009 08:00 EDT