Global Trends by Martin Khor

Monday 13 March 2006

Challenges on road to US-Malaysia FTA

With the announcement last week of an intention to have a US-Malaysia free trade agreement, negotiations will start soon.  The experience of other countries show that the road to an FTA is lined with challenges, with many issues (including trade, services, intellectual property, investment and government procurement) to be sorted out.  Can the dangers be avoided and the benefits emerge?


Last week in Washington, Malaysia and the United States announced their intention to start negotiating a bilateral free trade agreement (FTA). 

The event was attended by senior US officials including the US Trade Representative Rob Portman and several US members of Congress.  Malaysia’s delegation was led by  Trade and Industry Minister Datuk Seri Rafidah Aziz.

Now that the intention to have a FTA is announced, there will be high pressure negotiations in the next few months, as the aim is to complete the deal by the end of the year, to take advantage of the US President’s “fast track authority” that ends in mid-2007.

The experience of some other countries show that the road to an FTA with the US can be bumpy and many challenges lie ahead.  

The last round of negotiations in the US-Thai FTA held in Chiangmai in January ended in some disarray as thousands of people stormed the venue, protesting against US demands on patents that would restrict the right of Thailand to provide cheap medicines.  Farmers also voiced concern that they would face competition from cheap imports and restrictions on their right to save and re-use seeds. 

Some of the key negotiators resigned, and the talks have been suspended until after the Thai general elections.

Talks between the US and South American countries to establish a Free Trade Area of the Americas have also been stalled for many months due to disagreements on many issues.  Similarly the talks between the US and Southern African countries for a FTA have hit an impasse.

It can generally be predicted what a FTA with the US will be like, since the US requests some key common features in all their FTAs.

Trade forms only a part of an FTA with the US.  Other aspects include services liberalization, intellectual property (IP), investment, government procurement and competition, as well as labour and environment.

We can expect that the FTA would significantly open up of the Malaysian economy in these areas to US goods, services and investment.  Also, some domestic laws (for example on IP or competition) will have to change, and these will affect products and relations with all countries and not only the US.

In its fact sheets on the FTA, the US Trade Representative (USTR) office expects the US to do better on trade because Malaysia’s industrial goods tariffs (average 9.1%) exceed those of the US (average 3.7%).  It expects US manufacturing exports to Malaysia could more than double to US$22 billion by 2010.

In addition, the US hopes to expand its agricultural exports (fruit, vegetables, nuts, processed horticultural and food products) beyond its present US$400 million a year.

Malaysia on its side will also expect to increase its exports to the US. Under a typical FTA, tariffs on both sides are expected to go down to zero, although there may be some exceptions. 

Most Malaysian products and services already enter the US duty-free, says the USTR fact sheet, so “an FTA will level the playing field.”   In other words, because Malaysian tariffs are higher than the US levels, eliminating tariffs on both sides (leveling the field) would benefit the US. 

The FTA will also require both sides to liberalise their services.  As the US market is already quite open, the main obstacle for Malaysian companies is not market access but the extent of capacity to enter and compete in the US market.

Malaysia on the other hand has restrictions on foreign equity and participation in many services sectors, to enable local enterprises the space to develop.  The US will seek to break down those barriers in as many sectors as possible. 

Its fact sheet mentions financial services, telecommunications, energy, distribution, high-tech and computer, healthcare and audio-visual services as areas where market access in Malaysia is limited and US companies are highly competitive. 

The US will of course ask Malaysia to make concessions to it in the FTA beyond what it has been prepared to do on services at the World Trade Organisation.

An American trade bulletin has predicted that financial services will be a difficult issue to resolve as Malaysia has limitations on foreign ownership in financial institutions and the number of branches of foreign banks, and many US institutions will press for more market openings during the FTA talks.

Malaysian service enterprises in the whole range of sectors will now have to watch out for what the US will be demanding on behalf of their companies, and how this will affect them.

Intellectual property has been one of the most controversial aspects of FTAs.  The US has asked its FTA partners to grant higher patent and copyright protection to its firms and institutions than what they are obliged to do under the WTO.

This usually means longer periods for patent and copyright protection, restrictions on the grounds for compulsory licenses, and exclusive rights over data (preventing a generic drug from getting safety approval by relying on test data of the original drug company).

The end result: it will be much more difficult (perhaps even impossible, in practical terms) for patients to have access to cheaper generic medicines.  For example, the innovative measures taken by the Health Ministry to obtain much cheaper generic HIV/AIDS medicines would become much more difficult to do in future.

Malaysian AIDS patients, in the Positive Malaysian Treatment Access and Advocacy Group, have written an appeal to the Prime Minister to assure that “public health will always be a top priority and that FTAs with Malaysia will not contain anything that goes against access to affordable medicines…Please do not allow an FTA with the USA or any country that will harm the health of Malaysians.”

Another challenge in the forthcoming FTA talks is the so-called Singapore Issues (investment, government procurement and competition policy), whose entry into the WTO Malaysia (with other countries) successfully opposed in 2003.

FTAs with the US usually contain extreme versions of investment and procurement rules.  These would give rights to US companies to establish in the partner countries with minimal regulation, and to be treated like national companies (“national treatment”).

US companies claiming their property has been “expropriated” can sue the host government in an international court.  Government measures (including on finance, economy, safety and environment) that affect the expected future profits of the companies have in previous FTAs been counted as constituting “expropriation” and thus the government is liable to pay compensation for the losses.

Under procurement, the usual FTA requires that US firms be given rights to bid for government contracts for supply of goods and services as well as for projects on a “national treatment” basis (on terms as favourable as local companies).  This would erode the preferences and advantages that locals enjoyed.

It can be expected that the US will ask for similar rules in the FTA with Malaysia. Of course Malaysians can also take advantage to invest in the US and bid for its procurement business.

But the US market is already relatively open.  The main impediment to companies from developing countries is their lack of capacity to compete in the developed countries, and this supply constraint will remain, even if an FTA increases market access.

There are thus many challenges ahead in the FTA negotiations with the US.  Agreeing to discuss a deal is one thing, and negotiating a good deal where the dangers are overcome and the benefits are evident is another thing.

It would be useful for more information as the talks begin, and for public discussion by all the stakeholders.