Global Trends by Martin Khor

Monday 17 February 2014

Crunch time for the TPPA 

As Trade Ministers and negotiators meet this week in Singapore for another round of TPPA talks, it is time for countries including Malaysia to assess the costs and benefits for them.


This week may well be the “crunch time” for the Trans Pacific Partnership Agreement.  Ministers of the 12 countries including Malaysia will meet in Singapore on 22-25 February, preceded by negotiators’ meetings.

The last time they met was in December, also in Singapore.  That was supposed to seal the TPPA deal but instead it revealed a lot of deep differences remaining on many issues.

This week’s meetings aim to revive the lost momentum. But the TPPA is going through turbulence, and a 2014 deal is looking doubtful.  

The first problem is the United States itself.  Although its government is the TPPA’s prime mover, its public and Congress are sceptical or even downright opposed to trade deals like TPPA.

Congress needs to give the President “fast track authority” so that his team can negotiate with confidence that Congress will approve the final results of FTAs like the TPPA.

Last week, Vice President Joe Biden told an in-house Democratic Party retreat that obtaining the fast track authority is not possible now.  That was the Administration admitting an embarrassing situation since the Democrats’ leaders in Senate (Harry Reid) and the House  (Nancy Pelosi) had both renounced the fast track bill.  

There is an American public groundswell against TPPA-type trade deals which they believe take away jobs and damages the environment and public health.

Another problem is Japan, which joined the talks late.  Its Prime Minister promised to remove its agricultural high tariffs, but reality soon caught up and Japan is now seeking exemption for six products, a move rejected by the US and all other countries.  This impasse has jammed up the talks.

Then there are several Asian developing countries who fear the TPP will cause them the loss of policy space. Malaysia leads this category, as it has the most to lose.

The Malaysian public is now familiar that the dominant TPP proposals on state owned enterprises and government procurement will strike against policies that give a boost to local business, including Bumiputera and small-medium enterprises, and that underlie the country’s political economy.

The intellectual property proposals would drastically affect access to medicines as well as tobacco control measures. 

Last week the UNITAID, a UN-related agency providing medicines to developing countries, published a detailed report criticising the TPPA for undermining the patients’ access to cheap generic medicines.

Malaysia announced that tobacco control must be excluded from all TPP rules.  However it recently agreed that this exclusion does not apply to tariffs.        

Trade and Industry Minister Dato Sri Mustapa Mohamed has said the tobacco carve out (though presumably allowing tariff elimination) is a “red line” set by Cabinet, meaning that Malaysia cannot sign on to the TPP unless such a carve-out is agreed to.

The government has other “red lines” pertaining to state owned enterprises, government procurement, intellectual property, according to press reports.

It also has major problems with the TPPA’s investor-state dispute settlement (ISDS) system through which foreign investors can sue the government in an international tribunal even if the government policy or action is in line with national laws, thereby by-passing national legislation and courts.

Given all these problems caused by the TPPA, is it worthwhile to join?  Presumably these negative aspects must be more than offset by positive elements, which could possibly come from higher exports due to the increased market access in goods.

The problem is that Malaysia must also open up its domestic market to imports, as TPP countries have to bring all its tariffs to zero, with the possible exception of one or two products. 

Thus any benefits in increased exports has to be measured against increased imports and the harm caused to domestic industry and agriculture that may be displaced.

Much of Malaysia’s exports are already entering the US at zero or low tariffs, while US exports to Malaysia face higher tariffs;  thus we can expect more losses than gains through the TPPA’s goods chapter.

A study by the Consumers’ Association of Penang released last week shows that in 2012 Malaysian exports to the US (US$26.7 billion) were higher than imports from the US (US$15.9 billion).  So there is a healthy surplus even without the TPPA.

While the USA imposed tariffs worth US$207 million on Malaysian exports to the US in 2012, Malaysia imposed tariffs of US$720 million on US products imported to Malaysia.

So if both sides remove all tariffs in the TPP, the Malaysian government will lose much more revenue than the country’s exporters will save.  In fact, Malaysia would do 3.5 times more liberalisation and lose 3.5 times more tariff revenue than the USA.

Moreover, one of the TPPA demands is a ban on export taxes.  Malaysia is opposing this provision, but it is a usual element in US FTAs.  If there is an outright ban, it will cost Malaysia a lot as export duties fetched RM2.3 billion in 2007.

The aim of export duties is to enable raw materials to be retained in the country so that it can create jobs and earn more by processing and manufacturing based on the materials.

A ban on export duties on crude palm oil may deprive the local refining industry of its raw material, and thus affect both the industry and enhanced export earnings from palm oil.

Thus, loss of export duties could be added to the loss of import duties, with the loss of trade taxes to Malaysia totalling up to US$1-1.4 billion annually.

Malaysian exports face zero or low tariffs to the US, thus the TPP will be of limited benefit in market access.  The main potential beneficiary is the textiles sector, since US textile tariffs are high, but the gains are constrained by the yarn forward rule (to enjoy duty free entry to the US and other TPP countries, the yarn used has to be from TPP countries) and the relative competitiveness of other countries like Vietnam.

US imports to Malaysia with high duties include tobacco (over 300%), alcohol (up to 250%), food preparations and various industrial products (many of them at 20-30 per cent).

It is often argued that Malaysian consumers will benefit by tariff elimination.  But this has to be weighed against loss of jobs or local business if imports displace local products.  And, just as importantly, if it is felt that some import duties should be reduced to improve consumer welfare, this can be done unilaterally without having to join a FTA; thus the negative aspects of the TPPA can be avoided.

The disturbing conclusion is that the trade in goods aspect is required to be so beneficial that it can possibly offset the very high costs associated with the non-trade aspects (IPRs, government procurement, state owned enterprises, ISDS, etc).  But it looks as if the goods aspect may instead add on to the costs.