There is a clear shift in Malaysia's trade policies signaled by the signing of a Free Trade Agreement (FTA) with Japan. The FTA with Japan titled 'The Japan Malaysia Economic Partnership Agreement' (JMEPA) is Malaysia's first bilateral FTA outside Asean.

The FTA will be realised over a period of 10 years and cover a comprehensive agenda ranging from goods, services, investments and economic co-operation.

Malaysia is also currently actively pursuing bilateral FTAs with various countries. This is indeed a shift from Malaysia's stance on bilateral FTAs which it had strongly opposed most notably when Singapore initiated bilateral FTAs a few years ago.

According to a Ministry of International Trade and Industry (MITI) official, Malaysia's stance changed when other Asean member countries, namely Singapore and Thailand began negotiations on FTAs with Asean's major trade partner, US.

The official noted that the private sector urged the government to negotiate a FTA with Malaysia's major trade partners, namely US and Japan, to avoid Malaysia's exports from being discriminated against those from other FTA partners in Asean.

The table at right illustrates the proliferation of bilateral treaties by Asean member nations. It is significant that most of the FTA negotiations began after 2001 and took off dramatically after 2003.

The shift may have come for the following reasons:

  • The breakdown of the WTO Doha Development Round talks at Cancun in 2003. The inability of the developed and developing countries to meet the targets is obviously a set back for further progress in trade liberalisation especially in favour of developing countries

  • Singapore and Thailand initiating free trade agreements with main Asean trade partners violating the understating for Asean to negotiate as a region

  • The expiration of the US Trade Promotion Authority to the president which essentially means that the USTR will not have power to negotiate any new FTA until the next US election, therefore forcing the Malaysian government to negotiate with US now
  • More importantly, the Badawi regime seems to have a close affinity with US than the Mahathir regime. The Badawi regime is inclined to make Malaysia a location for outsourcing and reliant on FDIs, whereas Mahathir, while relying on FDI, had always maintained that for Malaysia to be a successful sovereign nation, it would have to be in control of its own technology. Mahathir was an economic determinist with nationalistic aspirations while Badawi does not seem to have any specific ideology when it comes to the economic policy of the nation

USMalaysia Trade

Trade between Malaysia and US is very significant. The value of two way trade between Malaysia and US was US$44 million in 2005. The US is Malaysia's largest trade partner, with almost 17 percent of Malaysia's global trade. US export to Malaysia, a country of only 27 million people, is US$10.4 billion, compared with US exports to India of US$8 billion, Thailand (US$7.2 billion), Russia (US$4 billion) and Indonesia (US$3 billion). Therefore, even without a FTA, Malaysia already absorbs a significant amount of US exports.

Malaysian exports to US were worth US$27.7 billion or 19.7 percent of Malaysia's total global exports. The US accounts for 31 percent of Malaysia's exports in electrical machinery exports last year, 25 percent of Malaysian wood products, 28.5 percent of textiles and clothing exports and 31 percent of rubber product exports.

Furthermore, Malaysia is an upper middle income economy of 27 million people, with a GDP of almost US$250 billion in 2005. This represents a significant market for American companies. US is also the largest investor in Malaysia. The country's increasing importance as a regional centre for shared services would make Malaysia an excellent gateway for US companies seeking to access Southeast Asia, a market valued at RM11.4 trillion (US$3 trillion). This may explain Badawi's rationale to make Malaysia an outsourcing hub. Badawi may also not be putting an end to Mahathir's heavy industrialisation policy.

However, the question is, Will the US Malaysia FTA benefit Malaysians in general or will it benefit a select few? The jury is still out. However, judging from the fact that Malaysia, which has recorded an average 6.7 percent growth for the past 15 years, has one of the highest inequalities in Asia, can be an indicator that the latter is probably true.

Bilateral agreements

A bilateral agreement between two developing nations can be mutually beneficial. However, a bilateral agreement between a developing and developed nation clearly does not result in the optimum outcome for the developing nation. This has been one of the main reasons for multilateral agreements, where developing nations can join forces and negotiate collectively for trade benefits from developed nations.

In a negotiation between a developed country and developing country, the developing country with weaker resources (trade negotiators, technical experts, financial resources, experience, etc), weaker economy or weaker political situation cannot hope to out negotiate the more powerful partner.

In the WTO, developing countries (such as Malaysia) are able to negotiate on the basis of non-reciprocity and for non-reciprocal outcomes, in which we are not obliged to open up our markets (or undertake other obligations) to the same degree as developed countries. These principles of special and differential treatment and less than full reciprocity are recognised due to differing levels of development. However, these "development principles" are usually absent in FTAs or they are only reflected in longer implementation periods for the developing country. The FTAs are basically on the basis of reciprocity. This "equal treatment" of parties that are unequal in capacity is likely to result in unequal outcomes;

US FTAs contain many items that are not part of the rules of the WTO. This is a key objective of any US FTA. US FTAs include rules on investment, government procurement and competition law, which have so far been rejected by Malaysia as subjects for WTO negotiations or rules. Malaysia also refused that labour standards and environment standards be subjects of discussion in the WTO for fear of being used as a non-trade barrier against developing countries. However, all these topics are now entering through the FTAs;

US FTAs promotes WTO plus rules even where issues are already the subject of rules in the WTO (e g intellectual property and services). These are attempts by developed countries, including US, to remove existing flexibility in the WTO for developing countries through FTAs. If these attempts succeed, the "policy space" for Malaysia to pursue development and socio-economic goals would be significantly reduced;

Another reason for multilateral agreements against bilateral agreements is that they are administratively efficient. The proliferation of so many agreements puts pressure on personnel and financial resources in developing countries and requires a lot of technical expertise which may be not adequately available, given the large number of agreements and the limited resources.
From an economic standpoint, bilateral agreements also usually leads to something called "trade diversion", in that the partners divert away products that may be more cheaply priced in favour of products from the FTA partner, even if they are not cheaply priced, thus resulting in inefficiency;

Can we survive without an FTA?

While the Malaysian government is pursuing the FTA for defensive reasons (to counter Singapore and Thailand), and to gain an upper hand against other developing nations, US is pursuing the FTA for offensive reasons. Corporations in US will clearly benefit from the FTA as indicated by the US Trade Department, the US Asean Business Council, the American Malaysian Chambers of Commerce and many other US interests. As indicated earlier, Malaysia is an excellent market and location to capture the Asean market.

The chart below provides some of the demands put forward by the US-Asean Business Council.

The possible demands from the US government are reflected by the demands put forward by the US-Asean Business Council.

Agriculture: Important that market access negotiations are based on applied rates. The need for an outcome - for both countries - that result in real, tangible and improved access by addressing tariff, non-tariff and other forms of barriers to the movement of agricultural goods and services between US and Malaysia;

Banking and Financial Services: Allowing greater foreign equity participation in domestic banks and financial services institutions. A "level" and more "liberal" domestic regulatory environment for all financial institutions doing business in the market place.

Automotive Industry: Faster liberalisation of the Approved Permit (AP) import system for Completely Built-Up vehicles (CBUs). Liberalisation of duties and taxes on imported motorcycles. A level playing field for American auto companies in all aspects of Malaysia's domestic auto industry and market;

Media and Broadcasting Services: Eliminating made-in-Malaysia advertising requirements for ads shown in Malaysia. Relaxation of 30 percent cap on foreign equity participation in cable and satellite operations. Allowance of foreign investment in terrestrial broadcast networks equal to US foreign equity limit of 25 percent.

Intellectual Property Rights: Strengthened enforcement provisions addressing Optical Disc Piracy, full adoption of the WIPO Digital Treaties and an extension of Copyright Terms in Malaysia.

Remove currency and capital controls

Should the Malaysian government agree to these demands, it will severely curtail the Malaysian government's space to formulate development policy independently. Ironically, Malaysia's demands for the negotiations are not known. Similarly, the private sector in Malaysia has also not made its intentions clear. Except for the Malaysian government, no other Malaysian whether corporations, institutions or prominent individuals have persuasively argued that a FTA with the US will be beneficial for Malaysia.

International Trade and Industry Minister Rafidah Aziz however believes that a FTA will "strengthen the trade relationship and increase business collaboration."

"A Malaysia-US FTA will mutually benefit both countries," she said, adding "We in Malaysia believe this is a very strategic agreement, there is no opposition."

This statement no doubt misleads the Malaysian public.

Regarding what Malaysia is looking for in the FTA, Rafidah said: "It will be market access in the areas of interest of Malaysia and its people". She however could not identify which areas were of interests to the Malaysian business community.

Rafidah also noted that the government has done a cost/benefit study (CBA) on this agreement.

"We have done our arithmetic and it's very clear the benefits far outweigh the costs that Malaysia and the US will have to face," claimed the minister said.

To date, no information on the CBA is available. Also remaining a mystery, is the tangible benefits Malaysians will purportedly enjoy.

The only other Malaysian who has publicly supported the US Malaysia FTA is Rafidah's deputy.

"Several cost benefit studies have been undertaken before the government decided to proceed with the negotiations," said deputy minister Ng Lip Yong.

He added that the studies, covering the FTAs US signed with Chile, Canada and Mexico, show that those countries experienced an increase in trade after the agreements were implemented.

No prize for guessing that the studies are also not available.

Benefits and ramifications

However, Ng outlined the following as the benefits for Malaysia:

  • Raise the competitiveness of local products in the US market

  • Expand exports

  • Become a competitive destination for investors

  • Cooperation in sectors like health, education, tourism, construction and professional services

  • Programmes to raise national capacity in small and medium scale industries and intellectual property

The deputy minister said he expects, during the negotiations, the removal of non-tariff barriers for Malaysian export products like fresh flowers, rubber gloves, vehicle and electronic parts. The Malaysian goods, including agricultural produce would have better market access in US. Who will benefit and how much will they benefit and who will suffer in return is no doubt a continued mystery.

Malaysia does not have a choice. Malaysia needs the FTA with the US more than it needs one with us. The US market is a major export market for Malaysian corporations. It is obvious that with our neighbours signing a FTA with US, Malaysia needs to act.

A FTA with US has many ramifications. Therefore it must be dealt with utmost care and scrutiny.

To ensure that Malaysians have the best possible FTA with US, the following actions must be taken:

  • All Cost Benefit Studies on the impact on Malaysia must be made public

  • The setting up of a Parliamentary Select Committee to oversee the negotiations

  • The final decision on agreeing to the US- Malaysia FTA be made by Parliament and not the Cabinet

GREG LOPEZ is the coordinator of the Young People for Development, Malaysia. The views are the author's alone and not the organisation's.