Global Trends by Martin Khor

Monday 7 July 2014

When “trade deals” get over-loaded

Trade agreements like the TPPA have become over-loaded with non-trade issues as well as extra conditions that a powerful country and its Congress can demand of partners like Malaysia.


Once upon a time, trade agreements were just about trade.  The negotiator’s principle was:  I’ll allow some of your products to enter my market if you allow some of mine to sell in yours.

Both countries could estimate what the benefits would be for them, and if it’s mutually satisfactory, a good deal is made.

Today, trade deals are not mainly about trade anymore.  The trend started when intellectual property, services and investment measures entered into the system of trade rules when the old GATT (General Agreement on Tariffs and Trade) was transformed into the WTO (World Trade Organisation).

If you do not respect my companies’ patent rights, I can impose an extra tariff on your product and block it from my market to punish you.

This has complicated the rules of trade since non-trade issues invaded the system.   But this complication at the WTO is minor compared to the bilateral free trade agreements (FTAs) involving the United States and the European Union.

Take the Trans-Pacific Partnership Agreement (TPPA) negotiations, involving  Malaysia and 11 other countries, as a prime example.  Under the leadership of the US, the TPPA includes chapters on many non-trade issues including intellectual property (with standards far higher than in the WTO), rules on investment liberalisation, a system where foreign investors can sue the host states in an international tribunal, and opening up of services sectors to foreign ownership.

Then there are the two issues that directly intrude into the way the government operates.  Government procurement, or the rules on how the state decides to award contracts for goods, services and projects, is to be opened to foreigners as if they were locals.

And government-owned enterprises, including private companies in which the state has a share, are to be governed by rules that prevent them from having advantages.  The way they buy and sell goods and services are also to be opened to foreigners as if they are locals.

The “free trade agreement” has gone far beyond the terms of importing and exporting goods, and penetrated deep into the structure of the domestic economy, including how local businesses are allowed or disallowed from benefitting from government policies, and how the government conducts its business.

Then there are also TPPA chapters on labour and environmental standards.  The origins are with the US government attempt to please its Congress members, trade unions and environmental groups that would otherwise oppose the US entering FTAs with other countries.

The FTAs are seen by these groups to have negative effects on American workers (as jobs travel abroad with increased imports and companies investing overseas) and on the environment (due to an increase in imports whose production cause deforestation or pollution).

To offset this, the FTA partners are asked to abide by labour and environmental laws that are of a standard acceptable to the US administration, Congress and constituency groups.

Developing countries do not like the intrusion of an FTA that interferes with their social and environmental policies.  They also fear that increased cost could erode their competitiveness. 

But they have no choice but to accept this, together with the other non-trade issues, if they want to sign a FTA with the US or EU.

However even this is not enough to satisfy the US Congress or the lobby groups. In recent weeks new demands and issues have emerged that will probably become new conditions for countries that want to sign the TPPA.

These issues have significance for Malaysia as it is one of the countries that are especially targeted.

First, a large number of Congress members have made clear that they will not approve the TPPA unless it has an “anti-currency manipulation” chapter.

Countries that “manipulate” their currency to make its level lower than it should be (and thus enable their exports to be sold more cheaply) will be punished by having extra duties imposed on their products to offset their artificial cheapness.

In a paper authored by a chief proponent of this issue, Malaysia is mentioned as one of the two TPPA countries that are practising this currency manipulation.  The criteria used to define that a country is a manipulator can be intellectually challenged; but there is the prospect that the accused country would have to defend itself.                         

Second, several Congress members have recently pointed to Vietnam and Malaysia as countries that have labour standards and practices that are below what is acceptable.  An American journal on trade has reported that the US TPPA negotiators are approaching the two countries to ask them to change their labour regulations so that they can meet the TPPA requirements of the Congress.

Thirdly, the US has produced a report on human trafficking which also includes treatment of migrants.  Thailand and Malaysia have been put in the lowest category of countries, implying their standards are among the worst.

This accusation about Malaysia was even highlighted in a full editorial in the International New York Times.  Though the government has denied the accusations, this may be taken up by the US in the context of TPPA.      

Then there is another peculiarity of the US system that can jam up a country’s ability to enjoy the benefits of the TPPA.

This is the “certification requirement”.  Even after the TPPA is signed by all the parties, the preferences to be given by the US to a partner country will not come into force until it obtains “certification” by Congress that the country has complied with all the provisions of the TPPA.

At this stage, Congress can still demand that the country makes changes to its laws, regulations and practices.  This happened to some of the countries that recently signed a bilateral FTA with the US.

We can expect the US President or more likely the Congress to make additional demands that a country change its economic, social and environmental policies, additional to what it has already agreed in the negotiations.

Juan Pablo Letelier, a leading senator from Chile who accompanied his President, Michelle Bachelet, in their trip to the US last week, is a strong critic of the certification requirement.

The criticism, according to a report in Inside US Trade  (4 July),  is that this gives the U.S. the ultimate authority in determining whether other trading partners' legislation brings them in line with the terms of the agreement – and leverage to demand changes to those laws by withholding entry into force of the TPPA.

Letelier argued that agreeing to the certification mechanism would amount to the Chilean Congress giving up its "legislative sovereignty," which is unacceptable to his constituents.

Letelier has co-drafted a resolution, which he expects the Senate will approve this month, that calls for the Chilean president to evaluate the utility of the country continuing in the TPP negotiations, and also asks for a guarantee that the TPP would not affect the legislative sovereignty of the country.

All the above issues constitute the larger picture and the framework within which the TPPA negotiations take place.

It is important not to miss seeing the forest when negotiating each tree or chapter of the TPPA.  The agreement is over-loaded with all kinds of issues and conditions that raise questions of sovereignty and the restriction on “policy space”, or a country’s ability to formulate and implement policies of its choice and to suit its national priorities.

The TPPA negotiations resume this week in Canada, when many of the outstanding issues will be negotiated, in an attempt to meet the deadline announced by President Barrack Obama that a draft of the entire text be ready by November.