On the subject of TPPA, here is an interview that I gave, one and a half years ago in August 2013. Despite developments in the negotiations since 2013, I still hold on to these views.
TRANS-PACIFIC PARTNERSHIP AGREEMENT – a trade initiative led by the US and designed to boost US business interests?
1. TPPA – Background Q. What is the TPPA? Is it another free/preferential trade agreement?
I wouldn’t call the TPPA a normal FTA. This is an FTA++.
Free / Preferential Trade Agreements usually have about 5 to 10 issues that strictly deal with market access and run of the mill trade matters.
The TPPA has 29 chapters; it covers many areas which are not traditionally trade-related matters including policy encroachments. What worries me most are the policy encroachments.
If negotiations are concluded and all substantial American demands are met, the TPPA risks being an instrument to influence and even supplant our industrial and economic policies.
Specifically, if we sign on the TPPA with the standard American terms and demands, we may be nudged into an American economic model of deregulation, small government and free marketism (both economic & social). The TPPA will influence our Asian economic model and work towards replacing it with American style free marketism; profit-driven, independent and innovative (GE, Citibank, Google etc).
On the cards are no more protection for GLCs and no more NEP. It is arguable whether this will prove to be a good thing or not. Politically however this will be a very hot issue in the very near term.
Q. Are there conflicting economic concepts at play?
The East Asian economic model believes in “developmental state”; i.e. govt’s role in guiding and actively building the economy; Zaibatsus (Japan), Chaebols (Korea), SOEs (China) and GLCs (Singapore, Malaysia).
Malaysia practices a kind of developmental state model but has serious systemic issues on corruption, transparency and basic good governance. We can and must improve, but you don’t need an external agreement such as the TPPA to push us to reform.
Many Malaysian Chinese businessmen are tired of race-based policies and also of systemic corruption. However, to look to the TPPA as an external savior is somewhat foolhardy. A policy change can only happen via engagement with the Bumiputera business community and tweaking to improve affirmative action policies. It must be done internally, in good faith and by the electoral process; not by an external trade agreement.
A word of caution in embracing American laissez-faire. Post-2008 Global Financial Crisis, unbridled American free marketism is considered dangerous and destructive. Printing money (quantitative easing vs. budget cuts and restructuring imposed during the Asian Financial Crisis) is destabilizing global values and economies. So when the Americans seek to impose their model via the TPPA, we have to be careful and give the same proper critical and in-depth analysis. More long terms strategic thinking is required.
Since 2008, NGOs and anti-globalization campaigners can no longer be dismissed as fringe pressure groups. Their concerns are real. The free market has invaded our societal values. Prominent economists, like Joseph Stiglitz, have spoken strongly against the TPPA.
From the American perspective, the TPPA’s goal is primarily to help American business interests. There is nothing wrong with that, but if we want to negotiate, we Malaysians too must be equally prepared to defend our positions. We too need an army of good lawyers, academics and policy wonks involved.
What is totally unacceptable is the current approach adopted by MITI and government, that the “Government knows best” and “trust us, we know what we are doing”.
Until very recently, even Members of Parliament are being completely stonewalled. The people need to know what policy issues are at stake. We need to know the cost-benefit computations. We don’t have to see the negotiating texts, that is just a red herring issue. The texts are evolving but these are more or less available online in the form of US FTAs.
Compared to other TPPA negotiating countries, in particular, New Zealand and Australia, public engagement in Malaysia levels has been very poor.
I attended the Kota Kinabalu TPPA event recently and we were given an hour of Q&A with Chief Negotiators from 11 countries. It’s a great public relations coup for MITI but none of the negotiators gave any substantive answers. To be fair, the negotiators are akin to lawyers. They cannot answer substantive matters on behalf of their ultimate clients who are the government policymakers. So this so-called “public engagement” in fact is flawed from the very start. We don’t want to question the lawyers. What we truly want are answers from policymakers. Where is PM Najib on this matter?
Q. Short history. What happened to the WTO?
WTO is stuck at a stalemate due to American intransigence over its massive agricultural subsidies and the resistance of a bloc of developing countries (with big agricultural sectors and rural populations), led by India and Indonesia.
The Americans are clever and industrious. They are bypassing the WTO by offering asymmetric bilateral FTAs with individual countries.
The TPPA is a new model: multilateral and multi-faceted FTAs.
They want an alternative option to the WTO route. The WTO in particular incorporates the principle of helping developing countries catch up with the developed countries. American FTAs do not have this principle in mind; they are primarily driven by corporate lobbyists to promote the exports of American goods and services.
Q. Who is not part of the TPPA?
In the Pacific region, most notably absent are South Korea, Indonesia, Taiwan and China.
These strong Pacific economies represent a long term challenge to American geopolitical interests; especially China and the up and coming technologically savvy Koreans.
China and Indonesia have sizeable populations to feed their internal markets and are therefore less motivated to take part in the TPPA negotiations. TPPA works best for highly trade-dependent countries like Singapore, Malaysia, Australia and New Zealand.
Japan recently joined the TPPA, under the “Abenomics” economic revival push. It could be a right-wing hence geopolitically driven move to check China and South Korea. I don’t know enough to comment more.
2. TPPA – Core issues and considerations
Q. What are the key TPPA issues?
Most NGOs and activists focus on obvious niche issues: pharmaceutical prices and Investor-State Dispute Settlement (ISDS).
My views are slightly different. Having been a corporate lawyer for 20 odd years, I can understand why big pharma wants to extend their IP rights. There are compelling arguments for and against. On ISDS, I take the view that lawsuits are always the final and last option. For any corporation seeking market share, suing a government under ISDS is akin to a kamikaze attack. You hurt the government and get your pound of flesh but you will burn all bridges to develop your market share. Even then, after lawsuits are initiated, a settlement is more likely than not, will occur. As such, I do not see ISDS to be the primary concern.
What worries me are the considerable policy and sovereignty encroachments from the TPPA.
If the TPPA is concluded on substantial American terms, we may see the following policy space restrictions:
Wong Chen on key Policy-Making encroachments by the TPPA:
1. TPPA will curb our ability to impose export taxes
Under TPPA, no country will be allowed use export tax/restrictions as a policy tool to spur downstream industries. See the Peru US FTA Article 12.
Illustration: Under TPPA, a timber company can export round logs directly to America without any export duty/export restrictions.
There will be no more export duty policy to force the local company to pursue downstream activities such as the manufacture of timber flooring and wood furniture.
Most companies will always take the shortcut to profits; i.e. sell round logs rather than process goods.
This will cause some wood-based factories to close, hundreds of thousands of jobs are at stake. Banks financing downstream activities will also suffer.
Key export sectors affected will be Petrochemical, palm oil, rubber and timber.
Malaysia will risk regressing from an industrial to a simple commodity exporter.
2. GLCs and State-Owned Enterprises (SOEs) will no longer be protected.
Currently, GLCs bonds are guaranteed by Malaysian Government, hence getting a good rating of AAA-. RM170 billion of these bonds have been issued to date.
Under TPPA, GLCs must stand on their own two feet and the practice of govt guarantees will stop.
What will happen to our future bond issuance by GLCs and the overall prospects of our bond/sukuk markets?
Other imposition: no more cheap land sales, no more grants, no more tax breaks for GLCs. Principle of “competitive neutrality” will be enforced.
Competitive neutrality is good internally, so to level the playing field for Malaysian companies.
The problem with competitive neutrality is you are also pitting our small companies with American multinationals and telling them to fight fair. In this scenario, David will not even have his slingshot going into battle with Goliath.
The Americans also want to define an SOE as a company with more than 5% govt holding. Our negotiators may be holding out for a higher percentage. Either way our key companies that have Khazanah as a substantial shareholder will be deemed an SOE (i.e CIMB) and as such will have to abide by certain competition policies.
My simple question is this; has CIMB been consulted, do they know all the risks? CIMB should send in at least 5 lawyers to help MITI and Bank Negara to negotiate their concerns.
3. Capital controls will be restricted
Bank Negara’s powers to roll out monetary policies will be reduced.
Under TPPA, hot money can flow in as “investments” and such “investments” must be accorded protection and allowed to flow out freely. With QE1, QE2 and QE3: hot money could cause financial havoc to our economy.
Capital controls are the last policy card that can be used in event of a catastrophic economic crisis. When Singapore negotiated their FTA with US, Singapore requested for capital control as an option. This option was watered down to one year for hot money and 6 months for real investments.
Since we invented “capital controls”, are we willing to let this go?
4. Service and Banking sectors opened up
Local legal, accountancy, professional services will be opened to foreign operators. Impact on local economies must be assessed.
Local banks will be forced to compete with international banks.
More often than not government-controlled banks in Malaysia are used to provide national services; as tools for economic growth. What will happen to this arrangement if our banks fail to compete with the likes of Citibank?
Will foreign banks be allowed to peddle all sorts of dodgy financial instruments, products, derivatives and accumulators? Will TPPA open up the gates for financial weapons of mass destruction?
5. Government procurement policies curtailed
For govt infrastructure projects, a USD7 million limit is being negotiated. Above that sum, foreign TPPA companies can openly compete with locals. No transfer of technology, no local/bumi content, no need of partnerships.
For govt procurement of services: USD200,000 is the negotiated limit.
I personally do not have an issue with open tenders, but how open is an open tender if you have rich multinationals competing against smaller locals?
Most worrying is the following policy impediment. In times of great economic distress, a government will try to pump prime the economy by pursuing infrastructure projects. This is where my main worries are. If foreigners secure the bulk of these infrastructure contracts on competitive open tenders, the pump-priming will have limited impact on the local economy. What is better in times of grave economic crisis, is to have open tenders amongst the local companies, so that we retain 100% of the investments in Malaysia.
6. Floodgate and Loss of Sovereignty
If we sign the TPPA with substantial concessions to American demands, the EU will request and demand the same terms. Then the rest of the world, BRICs will ask the same from us. Our policymaking powers will then be tied to these rules indefinitely.
Dare we risk severing our FTAs and becoming a hermit country? There is no space for “let’s sign first and if we don’t like it, we can pull out”. This kind of attitude makes us look like a banana republic Mickey Mouse country that does not respect the sanctity of contract. Do your homework now, don’t sign until you are absolutely certain but there is no dishonor in not signing.
The most important point I want to stress is this: BN and Pakatan Rakyat may differ in policies but at least we are all Malaysians, elected by the rakyat. If we sign the TPPA, our sovereign right to use economic tools and pursue policies will be supplanted by foreign interests. Why empower foreign multinationals to decide our future?
3. TPPA – what will Malaysia gain?
Q. What will Malaysia gain economically from the TPPA?
According to US think tank the Peterson Institute, Malaysia will increase our exports by USD40 billion a year.
Do the math: if the profit margin is a generous 10%, the profits gained by Malaysian companies are USD4 billion. Note: the 10% margin I used is very generous, bearing in mind most of our exports are making 4% to 6% profit margins.
In terms of government revenue (at a tax rate of 25%) the net gain to Malaysian coffers is a mere USD1 billion.
My question is: what are we willing to forego for this gain of USD1 billion a year? Where is the cost-benefit analysis?
Q. Can Malaysian trade negotiators do a good job?
400 US companies with their lawyers are actively involved in the TPPA; which is based on past US FTAs (and improved upon for US interests, from US business experiences in these other FTAs).
How many Malaysian industries and companies have done their research and impact analysis; are they on board with MITI’s negotiations? Where is our army of lawyers? Where are our economic professors to crunch game theory models?
4. TPPA – must Malaysia sign? Does Malaysia have no choice?
We should by all means, negotiate and take part. By negotiating, we will at least understand the other partners’ positions. Work with Australia on the ISDS terms. Work with Peru on IPR terms. Work with Singapore on Financial Services. Leverage on each other when dealing with the US. However always be aware that other countries have their own interests and motivations. They will cede some clauses to gain on others. No two countries are the same.
The key is not to rush to sign unless we are absolutely certain we will benefit overall. Not merely benefit the businessmen on some short term basis of gaining more market access or joining the international supply chain. It is not all dollars and cents. We must weigh in the social and political concerns too. Labour, human rights, the environment and health issues are equally important. The TPPA studies should essentially be conducted by policy academics and not guided merely by businessmen interested in making more money.
I see some value in being very good in making say a 1% component of an Apple product. Perhaps the TPPA will allow us to do that, to be part of the new manufacturing norm of making highly specialized components. But the long term policy that we must adopt must be a 20-year industrialization policy which will transform us into competitive innovators of products like Apple. Not merely to help Apple, but to replace Apple. This means focusing on transfer of technology and R&D; essentially the Taiwanese SME path. The TPPA does not help the development of these, in fact, there is a real danger that it may impede these.
Judging from other USA FTAs, I am pessimistic that we will be able to gain substantive concessions.
On the balance of things, and unless MITI discloses a proper cost-benefit study which convincingly shows that we will come up tops, I would prefer that Malaysia continue to pursue bilateral FTAs with the normal trade provisions.
So far 63 countries have negotiated with US, only 20 (32%) have signed. Not signing should always be an option. However, blindly singing should never be an option.