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The areas covered by the TWN’s recently released analysis of the US-Malaysia FTA include market access, services, investment, telecommunications, financial services, government procurement, competition polices, environment, biosafety and intellectual property rights.

The paper is available online at: http://www.ftamalaysia.org/article.php?aid=156

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The Federation of Malaysian Manufacturers (FMM) issued a statement in support of the FTA. The statement in full as well as a reply to this statement by the Consumers Association of Penang (CAP) are included below.

FMM Statement
OVER the last few weeks there have been many negative comments expressed about what a Free Trade Agreement (FTA) with the United States could mean for Malaysia.

It’s important, therefore, that there should be balance in the views expressed and to understand that we have so much to gain than to lose in signing this FTA with our largest trade partner.

The average tariff of our two countries is generally low, and with or without an FTA trade will continue to grow.

However there are products from Malaysia that attract high duties when entering the US like textiles (up to 14.7% duty); apparel (up to 28%); shoes (up to 48%); and ceramic tableware (up to 25%).

Expand RM1 trillion trade threshold and employment

In addition, Malaysian products currently cannot enter their government procurement programmes, as Malaysia is not a signatory to the WTO Government Procurement Agreement nor do we have an FTA with the US.

This means that even in products that we are competitive in, such as electronic products, wooden furniture and rubber gloves, we are excluded from the US$250bil (RM877bil) government procurement market. An FTA will allow us to participate in this market.

Furthermore, our textile and garment industries are currently exporting RM3bil a year to the US.

With an FTA, duty free access is expected to double to RM6bil and in doing so, will create an estimated 20,000 new jobs.

If other competitive products are included, Malaysia would be creating more jobs and expanding national economic activities, exports and incomes.

FTA will give Malaysia regional advantage in investments

The export expansion and job creation will not end here. Many other textiles and garments manufacturers from other countries may wish to relocate to Malaysia to take advantage of this zero duty, leading to further employment opportunities.

Over time it will not only be factory workers, but executives, managers and even fashion designers from local institutions of higher learning, who will benefit from the growth of this sector.

In terms of Foreign Direct Investments (FDI), an FTA will certainly prompt additional US factories to relocate here to take advantage of our lower costs to re-export products back to the US free of duty, or for export to Asean countries and other countries with which we have signed FTAs, like China and Japan.

For an American company that is looking at re-locating its operations in Asia, the first port of call will be a country where there is an FTA, as it provides certainty in terms of tariff, as well as in the rules and security of investments.

Generally, foreign trade and investments tend to increase after an FTA is signed.

This has been Malaysia’s experience with the signing of the Economic Partnership Agreement with Japan in 2006, as already evident in the five-fold jump in FDI in the last six months of 2006.

In tandem with higher investment, employment and other economic opportunities will increase.

So a successful conclusion of an FTA would lead to faster growth in trade and investments for Malaysia and provide the nation a three to five year lead-time ahead of our neighbours with respect to free market access into the US.

FTA will not hurt Malaysian padi farmers

Some fears have been expressed that an FTA would lead to cheap subsidised US rice entering the country, which would hurt our padi farmers. The reality is the US prices for long grained rice are much higher than that of their competitors like Thailand and Vietnam.

In any case, we are already an importer of rice to supplement our own production.

Malaysia is not self sufficient in rice, and there is no clear advantages in being self sufficient if we can buy cheaper rice from other countries.

An FTA will not stop production of generic drugs

There was also an expressed fear that generic drugs will no longer be available after the signing of the FTA.

Drugs, which are already off patent, can continue to be produced generically and be available.

One area of contention is the Data Exclusivity (DE) period that can extend beyond the patent term. Proprietary drug companies have contested the use of their clinical data in the marketing approval of generic drugs by local regulatory authorities.

Our position is that originators of intellectual properties know that there is a time limit of 20 years for them to be the sole beneficiaries of their inventions.

This period was deemed appropriate for innovators to recoup the cost of R&D. In the determination and protection of public health, the country should have recourse to compulsory licence and government use order, with or without an FTA.

Malaysians want greater transparency

Another issue that has been raised by NGOs and others is the alleged loss of national “sovereignty” if we were to accede to the US request for greater transparency in our government procurement.

We should be prepared to be transparent about the way we conduct business and not be hesitant to put it into a trade agreement.

Transparency is not an affront to national sovereignty. If we continue to resist, it is like saying “No transparency please, we’re Malaysian.”

US has margins of preferences like Malaysia

As to government procurement and preferences, the US government itself has a system of preferences for small businesses.

For contracts below a certain level, small businesses are given a margin of preferences of 6% to 12% to assist them in tenders over the larger companies.

Likewise, there are Malaysian Treasury circulars, which also lay out very clearly the margin of preferences which a Bumiputra company can enjoy for different levels of tenders.

A properly negotiated FTA will allow the affirmative action programme to continue in a transparent manner.

Malaysia’s competition principles already in place

Another contentious issue is the request for a Competition Policy to be in place in the free trade agreement and our difficulty in tabling that for negotiation by the ministry concerned.

We have been talking about competition policy for Malaysia for the past 10 years and certain basic principles of competition policy can be tabled.

These principles have already been incorporated through the Malaysia Multimedia & Communications Act 1998 which, among other things, promotes a freer competitive telecommunications industry where no big player can use its dominance in an anti-competitive manner.

It is partly because such rules were enacted that Malaysia is having a more competitive telecommunications sector. It is easy to see how the public is benefiting from all the deals and special programmes that the various telephone companies are offering.

GLCs must be included in competition policy

We understand that one possible reason for the reluctance to table the competition policy could be that the Government may want to exempt GLCs from a competition policy.

This position is not acceptable to the Malaysian private sector as the GLCs are already big companies, a significant part of the corporate sector, and certainly do not merit this concession.

With the transformation of GLCs, they will be in a better position to operate in a competitive environment without any special concessions.

A more competitive and vibrant services sector

There were also comments about how our services sectors will be swamped with an FTA. Those services sectors that have shown resilience were those that opened up earlier, for example, in the accounting profession, the big four in the world are already in Malaysia, staffed and partnered overwhelmingly by Malaysians, some of whom have been posted overseas to high positions where they give world class service.

In addition, other Malaysian accountants have set up links with other accounting firms elsewhere and have also been successful. It may be useful to point out that Malaysia is a signatory to the General Agreement on Trade in Services (GATS).

The same can happen to our other services as the nation begins to find its respective niches in a globalised environment.

A more competitive and vibrant service sector will have spin-off effects for the rest of the economy.

Malaysians will benefit from a more open and efficient services sector given a more competitive service industry.

Adapt and adjust to reap economic benefits together

In a free trade agreement one must be prepared to adapt to some adjustments in the immediate term to reap the benefits for the rest of the economy as a whole.

We are heartened to read from the statement of the secretary of the Bar Council that they are considering opening up the legal services, having found that five years into the FTA with the US the Singapore legal profession has yet to be swamped by US lawyers.

Similarly the lawyers in turn would be able to have access to lower logistics and financial costs as the rest of the services sector becomes more competitive.

The time pressure

The time to act is now. The US Congress, being controlled by the Democrats is less likely to sign an FTA with any country soon. If we miss this window of opportunity, Malaysia would have lost an opportunity to gain access to the biggest economy in the world over other countries.

An interesting viewpoint from the global political platform is that the US looks upon Malaysia as a well-managed and moderate Muslim-majority country, which it is keen to collaborate with.

The Prime Minister has already built a good relationship with the US Government and Malaysia’s standing in the world and among Islamic nations would be further enhanced.

In short, the successful conclusion of the FTA with US will be in line with Malaysia’s national economic policies to further expand the economic cake and create wealth for the country through an increase in FDIs, employment opportunities, tourism and enhanced regional competitiveness.

The successful conclusion of the Malaysia-US FTA would expedite the country’s progress in achieving developed nation status by 2020.

DATUK YONG POH KON,

President,
Federation of Malaysian
Manufacturers (FMM)

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CAP Reply

FEDERATION of Malaysian Manufacturers (FMM) president Datuk Yong Poh Kon claims that Malaysia has more to gain than lose from signing a free trade agreement (FTA) with the US (The Star, March 17).

While claiming that a balance in views is necessary, it appears that his letter does not appear to be realistic about the possible gains for Malaysia under a USFTA.

Trade in Goods

He notes the high tariffs currently imposed on some Malaysian products, such as textiles, when they enter the US. In textiles and garments, it is not sure if the US will eliminate its tariffs immediately or over many years.

In some FTAs, the US did not agree to go to zero tariffs immediately but phased this over many years. Moreover, Malaysia is asked to accept the so-called ‘yard forward rule’ (that requires the thread to be bought from Malaysia or the US to qualify for any lower tariffs) and to have strict rules of origin. These conditions offset the possible gains of reduced tariffs.

Singapore’s FTA with the US contains a chapter on textiles, with the yard forward rule and rules of origin. Singapore textile exports to the US actually fell after the FTA came into force on Jan 1, 2004.

According to US Government statistics, the year before the Singapore-USFTA started, Singapore was exporting US$233mil of knitted apparel and US$37mil of non-knitted apparel to the US. In 2006, exports fell to US$139mil (knit) and US$6.3mil (non-knitted).
In terms of overall trade balance, data from the US government showed that Singapore had a trade deficit with the US of US$1.4bil in 2003. This worsened after the FTA to US$4.3bil in 2004, US$5.5bil in 2005 and US$6.9bil in 2006.

Further, in manufacturing, the US tariff is much lower than Malaysia’s (3.7% against 14.5%). Thus, Malaysia will have to make much higher concessions when both sides go to zero.

Datuk Yong also fails to point out that without a USFTA, Malaysia currently has a US$23bil trade surplus with the US that is rapidly rising according to US government statistics. This shows that the US needs an FTA with Malaysia to try and decrease Malaysia’s trade surplus. Malaysia is doing fine without a USFTA.
Investments

In relation to investments, Datuk Yong makes a general claim that investments tend to increase after an FTA. What he does not however point out is how the US template of an FTA grants overwhelming rights to the foreign investor at the expense of the local.

For instance, the US wants to give its investors the right to enter and establish business with minimum hindrance or screening; to own 100% shares in its companies in Malaysia; be treated equal to or better than locals; transfer funds freely into and out of the country; allow its investors to sue the Malaysian Government in an international court for direct and indirect expropriation, that includes any policies or regulations that the Government makes which reduces the company’s future profits. If the US, and later other countries get 70% or 100% of the shares, then locals will have to share only 30% or less among themselves.

Padi farmers

Datuk Yong says that our rice farmers will not suffer, as US prices for long-grained rice are much higher than that of their competitors like Vietnam and Thailand.
He further suggests that it is better to import cheaper rice rather than being self-sufficient.

Primarily, because our farmers are not able to compete with cheaper rice of our neighbours, a tariff of 40% is currently in place. If this were reduced to zero, US rice would be competitive as local rice retails at around RM1.70 to RM2 a kg while US long-grain rice is around RM1.43.

Drugs

Datuk Yong’s claim that drugs, which are already off patent, can continue to be produced generically and be available once a USFTA is signed is wrong, because data exclusivity (i.e. generic companies cannot make use of safety data of the original products) can apply even to non-patented medicines.

Colombia carried out a study using the World Health Organisation’s model of the economic impact of the stronger intellectual property provisions of its USFTA.
Data exclusivity alone was found to require Colombia to spend an additional US$675mil per year by 2020 and US$989mil per year by 2030. Data exclusivity by itself was predicted to cause the Colombian medicine manufacturers to lose 47% of their market share by 2020.

Government procurement

Datuk Yong refers to the need for transparency in government procurement but misses the fundamental point about the US wanting market access in the business of government procurement.

The US is not asking merely for transparency. It wants Malaysia’s government procurement to be opened to its companies, as it is a large business (worth RM94bil in 2004).

Under the FTA, US companies which lose the bids can complain against the government in court and this will severely affect government projects.

Hence, Malaysia will lose the most important policy tool for helping local businesses and for macro-economic management. Affirmative action policies will be gravely undermined.

Competition policy

The Malaysian Government is still formulating a competition law and policy for the country, which aims to induce more competition and less monopoly.
But it has to balance this with the risk of introducing a law that prevents local companies from growing as this reduces their ability to compete with big foreign companies.

The result of this would be that local companies would be at a great disadvantage, as foreign firms that are already huge can easily take over the share of local business and take over local firms.

Services sector

FMM advocates a more vibrant and competitive domestic services sector. This is difficult to achieve through an FTA. The US wants its companies to have total access to the services sector. It wants a “negative list” approach where everything is deemed to have liberalised unless exceptions are listed.

Malaysia may want to develop certain sectors in future that have not been listed. This will not be possible under the negative list.

Removal of mandatory GM labelling

Datuk Yong has omitted to mention that the USFTA will require the removal of mandatory labelling of foods which are genetically modified, which is presently required under two laws proposed by the Government.

Mandatory labelling of GMOs is required in over 40 countries, including most of Europe, China, Japan and Australia. Mandatory labelling should be a consumer right for reasons of health, and dietary restrictions for religious reasons. The US wants this right taken away.

Time pressure

FMM is concerned about the time pressure as dictated by the situation in the US. The future of our country and its citizens should not be shaped under such pressure.

There is need for a much deeper assessment, given the details of the FTA and what is demanded. While the tangible benefits are still unclear, the traps and dangers are clearer.

Many countries that started FTA negotiations with the US also came to the conclusion that it is better not to proceed. This includes Switzerland, SADC countries including South Africa and Botswana, Free Trade of the Americas countries (including Brazil, Argentina and Caribbean countries), Thailand etc. It will be prudent for Malaysia to do the same.

S.M. MOHAMED IDRIS,
President,
Consumers Association of Penang