TWN Info Service on Free Trade Agreements

01 April 2007


CAP's Response to FMM on How FTA Offers Limited Gains with High Costs

The Star has published an edited version of the response from the Consumer's Association of Penang on 2 April 2007 to the letter by the Federation of Malaysian Manufacturers dated 25 March 2006 on how there will be limited gains but overwhelming cost for Malaysia should an FTA with the United States is signed. Below is the full text of the response by CAP.
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Letter to the Editor

29 March 2007

Gains are limited, costs overwhelming from FTA

CAP’s reponse to FMM letter in the Star

The Consumers Association of Penang would like to respond to the letter of the Federation of Malaysian Manufacturers (The Star, March 25), also in the spirit of engendering discussion on the pros and cons of an FTA.

The FMM letter suggests there is much to gain from the Malaysian-U.S Free Trade Agreement (MUFTA), while minimizing or not recognizing that there are serious costs. CAP agrees there may be some gains, but these are limited, and the costs are overwhelming.


Trade surplus

FMM admits that Singapore suffered a worsening of its trade deficit with the USA after its FTA with the US, but argues that what is important is not the trade surplus or deficit but the overall increase in trade volume and value.

We do not agree that overall trade volume or value is the only important item. If imports grow much faster than exports, there is a negative effect on trade balance and balance of payments. More significantly, a higher influx of imports can displace local products, with negative effects on incomes and livelihoods of local farmers and firms affected, which would not be fully offset since export earnings do not grow as fast.

FMM also expects increases in exports of textiles, rubber products and furniture under the FTA. There may indeed be some gains, but how much these are depends on many factors such as the rules of origin and yarn forward rule (in the case of textiles) and the time frame for the US to eliminate the tariffs (on textiles, the US has not agreed on immediate elimination). We also feel that with the exception of textiles (where competition is tougher after the WTO’s removal of the previous) quota system, Malaysian exporters can make progress even without the FTA.

On the other hand, Malaysian manufacturers and farmers will also have to anticipate loss of business when the tariffs protecting them are eliminated. For example, the national motor vehicles would be affected if the tariffs are eliminated and if imported and local vehicles are subjected to the same excise duty (as is demanded by US business). Since Malaysia’s applied industrial tariffs are three times higher than those of the US on average, we can expect more problems than gains overall for Malaysian firms.

In agriculture, the biggest area of gains to Malaysia would have been removal of US subsidies. But this is off the agenda for the US. And heavily subsidized American long-grain rice can compete with local rice if allowed to be imported tariff-free by Bernas.

Thus on trade in goods alone it is by no means clear that Malaysia will gain on balance and legitimate concerns that even here there will not be a net benefit. And this is the best area of possible benefit. In so many other areas – services, investment, competition, government procurement, intellectual property, food safety and standards, “expropriation” and dispute settlement – Malaysia is bound to suffer very substantial costs and the loss of policy space (the ability to determine our own policies).

It is quite inconceivable that Malaysia would agree to suffer such severe costs in all these areas and give up valuable policy space, just on the expectation of gain in a few industrial sectors.

A piecemeal approach in highlighting presumed gains in some sectors only is not prudent. There has to be an overall and comprehensive cost and benefit exercise which not only analyses the manufacturing sector in toto as well as agriculture, and also takes stock of the impact of all the other non-trade issues of the FTA on the national economy and on society.


Investment

FMM makes the point that the FTA will not give overwhelming rights to investors as asserted by CAP. It says Malaysia has already signed Investment Guarantee Agreements (IGAs) and would not give up anything (on investment) in an FTA.

It must be noted that the IGAs are very limited in scope (the investments covered) and treatment (the obligations to Malaysia) as compared to the FTA.

The IGAs only cover foreign investments in projects which are approved by the government. Further, the IGAs apply after the investment is screened, accepted and conditions are put in place. The IGAs are limited to treatment of investors after entry.

The government still has the policy space to decide which investments should be under the IGAs on a project to project basis. The sovereign right to screen and control entry of FDIs is still preserved, and this is necessary to align investment inflows with national development objectives. For example, Malaysia’s policies during the 1997-1999 financial crisis were possible under the IGAs but many measures would not be under the FTA.

A typical FTA with the US has the following investment provisions:

-- A very broad coverage of investment (including not only direct investment but also portfolio investment, contracts, credit, intellectual property, etc). Pre-establishment rights are conferred to investors (i.e. potential investors already have rights even before entry), which would severely erode the government’s space to screen and control investment inflows.

-- National treatment would be accorded to foreign investors (i.e. treatment equal to or better than that given to local investors).

-- A ban on performance requirements such as technology transfer, use of local materials and services, restrictions on equity holdings, obligation to form joint ventures, etc.

-- A blanket ban on restrictions on freedom of transfer of funds in and out of the country.

-- Prohibition on expropriation including indirect expropriation (which includes policy measures that can affect a foreign company’s future profits), a definition that goes beyond that in IGAs.

-- An extreme dispute settlement system in which foreign investors (with investors being broadly defined) can directly sue the government in international court for expropriation (which includes indirect expropriation), with the government liable to pay financial compensation. Under the US-Canada-Mexico FTA, over a hundred cases on “indirect expropriation” have been taken up, with governments asked to pay many millions of dollars.

These FTA provisions go far beyond Malaysia’s obligations under the IGAs, and it is misleading for the FMM to imply that an FTA with the US would not oblige Malaysia to undertake any heavier commitments. While initially Malaysia would be able to list certain exceptions in certain sectors (which would have to be negotiated with the US), an iron framework would have been set up in which the default position would be total rights to US investors and little regulatory authority to the government, and would put Malaysia at a grave disadvantage in any present or future negotiations.

It should be remembered that Malaysia took a leading role in successfully opposing an investment agreement in the WTO. The proposed WTO investment agreement had far less obligations than the one now being put forward in the FTA with the USA (for example the WTO agreement did not include pre-establishment rights, covered only direct investment and direct expropriation, and did not allow investor-to-state dispute cases).

Malaysia also chaired the informal group on “Singapore issues” in the WTO that opposed not only the inclusion of investment but also of competition policy and government procurement in WTO rules. This group in July 2004 successfully caused the exit of these three issues from the WTO’s Doha negotiations. Malaysia rightly took credit for its leadership for this.

Yet the three issues have come back through the “side door” of the FTAs, and the provisions on all these three issues in the proposed FTA with the US are far more aggressive than what was ever proposed at the WTO.

An FTA of the type that the US asks of its partners would entail severe costs to Malaysian consumers, industries, service providers and farmers. Heavier even would be the cost to the government and the rakyat in terms of the loss of policy space to fashion our own economy and society.

Thus, the FMM should try to look at the overall picture and not just anticipate the gains that some export-oriented companies may gain. The gains may still come for many of them without an FTA. But the losses to Malaysian society overall with an FTA would be incalculable. The US is of course entitled to seek such an FTA, but it does not mean that Malaysia would have to agree if this model is found to be not appropriate for us.