Global Trends by Martin Khor

Monday 3 August 2015

Decision must be made this month on signing the TPPA

After years of negotiations and public debate, the time has come for the nation to decide whether it is worthwhile joining the TPPA.


It’s been a very long race, but the finishing line is now fast approaching.  The Trans Pacific Partnership Agreement (TPPA) negotiations are coming to an end, with the Ministers meeting in Hawaii last week to wrap up outstanding issues.

It is unlikely that there is final closure, as not all the contentious issues can be settled in detail.  But the remaining negotiations must be finished very soon, in a matter of days or a few weeks, to meet the tight deadline of the United States’ political process.

Malaysia is one of the countries that have to make the toughest decisions.  We are one of the countries resisting the United States’ push for very strong intellectual property clauses that will affect the prices of and access to medicines.

But we are also the country having serious reservations on two problematic chapters – state owned enterprises and government procurement.

The rules in these chapters will affect some of the core policies of the country as well as its economic and social structure and make up.

In government procurement, Malaysia has always given preferences to local companies when the government buys materials or services or implements construction projects.

Under the TPPA, the other countries’ firms have the right to be treated at least as well as locals when bidding for government projects and contracts.

Thus, local firms cannot be guaranteed their biggest source of business anymore.  This will be a big blow to the affected companies, which now have to compete on equal terms with the bigger foreign companies.

However, in US free trade agreements, small projects are usually exempted if the value of the projects are below about US$200,000 for goods and services and about US$8 million for construction projects.

Malaysia has been requesting for special treatment – a higher threshold for construction projects, many times more than the usual US$8 million. 

According to news reports, the US can consider a higher threshold for Malaysia, but only for a transition period. 

The questions are: how much higher will be the threshold, how long the transition period, will other countries all agree, and whether this will be good enough for Malaysia, since the level of relief may be inadequate and is only temporary.

On the state-owned enterprises (SOEs), Malaysia also faces quite a drastic change in policies if it joins the TPPA, which seeks to break loose the tight connection between the government and its agencies and enterprises.

SOEs (or Government-Linked Companies, in our local jargon) play very important roles in our economy and society.  Major banks, estates, oil and mining companies, and a range of manufacturing, agricultural and service enterprises are state owned or government linked.

They include Petronas, Khazanah Nasional Berhad, Permodalan Nasional Berhad, Proton, Maybank, CIMB, and include government and private hospitals, pharmaceutical drug companies, steel plants, aquaculture projects, Malaysian Airlines, as well as companies in

telecommunications, energy, transport, water supply.

These enterprises are tightly woven into the fabric of the economy and social services.

Last week, a short TPPA document on SOE was made public by Wikileaks.   It contains not the text, but proposals for the chapter’s principles and key issues.

It confirmed some of the concerns about how TPPA disciplines on SOEs would curb the ability of SOEs to operate in the public interest.

True, there are many things wrong with the governance and operations of SOEs in Malaysia, which cry out for radical reform.

However, the countries that are pushing the SOE chapter in the TPPA have something else in mind.  They want to curb existing and future local SOEs, so they can enlarge the market opportunities for their own companies.  They see the SOEs in countries like Malaysia as a stumbling block to their market access.

The proponents of the SOE chapter insist that SOEs be treated in the same way as private companies.    

The government must ensure that SOEs and government-authorised monopolies act on the basis of “commercial considerations” and accord “non-discriminatory treatment in purchases and sales.”

This implies that the SOEs and monopolies are not allowed to subsidise or provide subsidised prices as this is seen to be unfair to the private companies.

This principle also forbids SOEs and government monopolies from giving preference to local companies when they purchase materials and services. 

Opening up the SOEs’ procurement (worth billions of ringgit) to foreign firms may adversely affect the business of thousands of local vendors and threaten many thousands of jobs. 

The government procurement and SOE chapters are also sensitive because they affect the Bumiputra policy.   The concern is that the opportunities now given to Bumiputra firms may be eroded as the market is opened up to the large companies in TPP countries.

The paper also reveals that the TPPA aims to curb the support that the government provides to the local SOEs.

At present, the government give many types of support such as preferring to make use of the SOEs and their products and services, for example in banking; or providing equity, credit, land and loan guarantees.    

It is true there has been misuse of the support to SOEs, and there should be urgent reforms undertaken to curb abuses.

But this is not a good reason to join a binding agreement like the TPPA if it drastically erodes the viability of a whole range of public enterprises and agencies.

The adverse effects could include raising the prices of essential goods and services; making some goods or services unavailable because it is not profitable to produce them; and enabling foreign companies to take over the market share of local companies.

Besides these two issues, other contentious TPPA topics include how giving more rights to foreign companies that own patents will lead to higher prices of medicines, and how the investment chapter with the right given to foreign companies to sue the government in an international tribunal will affect the making of public policy can override national laws and courts.

Malaysia may benefit from having access to markets of other TPPA countries; on the other hand they too have greater access to our market as the tariffs will be eliminated and the local producers face stiff competition.   Since Malaysia’s tariffs are on average higher than those of the US, we could expect to open up relatively more, where the US is concerned; and similarly with regard to Singapore.

The time for making a decision whether to join the TPPA is fast approaching.  It’s now a matter of days, as the TPPA must be now be concluded to suit the US political calendar.

The problems that will emerge have to be assessed against the benefits.  Many of the former are real; while the benefits are potential or general rather than specific.

Dato Sri Mustapa Mohamad, the Minister for International Trade and Industry, last week promised that the decision on joining the TPPA would be made collectively as a nation, with Parliamentarians, NGOs and businesses participating in the process.

Let’s hope that wisdom prevails in this decision on such a complex subject as the TPPA.