Get realistic with USFTA

FEDERATION of Malaysian Manufacturers (FMM) president Datuk Yong Poh Kon claims that Malaysia has more to gain than lose from signing a free trade agreement (FTA) with the US (The Star, March 17).
While claiming that a balance in views is necessary, it appears that his letter does not appear to be realistic about the possible gains for Malaysia under a USFTA.
Trade in Goods
He notes the high tariffs currently imposed on some Malaysian products, such as textiles, when they enter the US. In textiles and garments, it is not sure if the US will eliminate its tariffs immediately or over many years.
In some FTAs, the US did not agree to go to zero tariffs immediately but phased this over many years. Moreover, Malaysia is asked to accept the so-called ‘yard forward rule’ (that requires the thread to be bought from Malaysia or the US to qualify for any lower tariffs) and to have strict rules of origin. These conditions offset the possible gains of reduced tariffs.
Singapore’s FTA with the US contains a chapter on textiles, with the yard forward rule and rules of origin. Singapore textile exports to the US actually fell after the FTA came into force on Jan 1, 2004.
According to US Government statistics, the year before the Singapore-USFTA started, Singapore was exporting US$233mil of knitted apparel and US$37mil of non-knitted apparel to the US. In 2006, exports fell to US$139mil (knit) and US$6.3mil (non-knitted).
In terms of overall trade balance, data from the US government showed that Singapore had a trade deficit with the US of US$1.4bil in 2003. This worsened after the FTA to US$4.3bil in 2004, US$5.5bil in 2005 and US$6.9bil in 2006.
Further, in manufacturing, the US tariff is much lower than Malaysia's (3.7% against 14.5%). Thus, Malaysia will have to make much higher concessions when both sides go to zero.
Datuk Yong also fails to point out that without a USFTA, Malaysia currently has a US$23bil trade surplus with the US that is rapidly rising according to US government statistics. This shows that the US needs an FTA with Malaysia to try and decrease Malaysia’s trade surplus. Malaysia is doing fine without a USFTA.
Investments
In relation to investments, Datuk Yong makes a general claim that investments tend to increase after an FTA. What he does not however point out is how the US template of an FTA grants overwhelming rights to the foreign investor at the expense of the local.
For instance, the US wants to give its investors the right to enter and establish business with minimum hindrance or screening; to own 100% shares in its companies in Malaysia; be treated equal to or better than locals; transfer funds freely into and out of the country; allow its investors to sue the Malaysian Government in an international court for direct and indirect expropriation, that includes any policies or regulations that the Government makes which reduces the company’s future profits. If the US, and later other countries get 70% or 100% of the shares, then locals will have to share only 30% or less among themselves.
Padi farmers
Datuk Yong says that our rice farmers will not suffer, as US prices for long-grained rice are much higher than that of their competitors like Vietnam and Thailand.
He further suggests that it is better to import cheaper rice rather than being self-sufficient.
Primarily, because our farmers are not able to compete with cheaper rice of our neighbours, a tariff of 40% is currently in place. If this were reduced to zero, US rice would be competitive as local rice retails at around RM1.70 to RM2 a kg while US long-grain rice is around RM1.43.
Drugs
Datuk Yong’s claim that drugs, which are already off patent, can continue to be produced generically and be available once a USFTA is signed is wrong, because data exclusivity (i.e. generic companies cannot make use of safety data of the original products) can apply even to non-patented medicines.
Colombia carried out a study using the World Health Organisation’s model of the economic impact of the stronger intellectual property provisions of its USFTA.
Data exclusivity alone was found to require Colombia to spend an additional US$675mil per year by 2020 and US$989mil per year by 2030. Data exclusivity by itself was predicted to cause the Colombian medicine manufacturers to lose 47% of their market share by 2020.
Government procurement
Datuk Yong refers to the need for transparency in government procurement but misses the fundamental point about the US wanting market access in the business of government procurement.
The US is not asking merely for transparency. It wants Malaysia’s government procurement to be opened to its companies, as it is a large business (worth RM94bil in 2004).
Under the FTA, US companies which lose the bids can complain against the government in court and this will severely affect government projects.
Hence, Malaysia will lose the most important policy tool for helping local businesses and for macro-economic management. Affirmative action policies will be gravely undermined.
Competition policy
The Malaysian Government is still formulating a competition law and policy for the country, which aims to induce more competition and less monopoly.
But it has to balance this with the risk of introducing a law that prevents local companies from growing as this reduces their ability to compete with big foreign companies.
The result of this would be that local companies would be at a great disadvantage, as foreign firms that are already huge can easily take over the share of local business and take over local firms.
Services sector
FMM advocates a more vibrant and competitive domestic services sector. This is difficult to achieve through an FTA. The US wants its companies to have total access to the services sector. It wants a “negative list” approach where everything is deemed to have liberalised unless exceptions are listed.
Malaysia may want to develop certain sectors in future that have not been listed. This will not be possible under the negative list.
Removal of mandatory GM labelling
Datuk Yong has omitted to mention that the USFTA will require the removal of mandatory labelling of foods which are genetically modified, which is presently required under two laws proposed by the Government.
Mandatory labelling of GMOs is required in over 40 countries, including most of Europe, China, Japan and Australia. Mandatory labelling should be a consumer right for reasons of health, and dietary restrictions for religious reasons. The US wants this right taken away.
Time pressure
FMM is concerned about the time pressure as dictated by the situation in the US. The future of our country and its citizens should not be shaped under such pressure.
There is need for a much deeper assessment, given the details of the FTA and what is demanded. While the tangible benefits are still unclear, the traps and dangers are clearer.
Many countries that started FTA negotiations with the US also came to the conclusion that it is better not to proceed. This includes Switzerland, SADC countries including South Africa and Botswana, Free Trade of the Americas countries (including Brazil, Argentina and Caribbean countries), Thailand etc. It will be prudent for Malaysia to do the same.
S.M. MOHAMED IDRIS,
President,
Consumers Association of Penang