Free Trade Agreements

Malaysiakini
Q&A: Race to the bottom
Fauwaz Abdul Aziz
Jan 8, 07 1:55pm

Economist Charles Santiago delves into the political and economic implications of the proposed free trade agreement between the US and Malaysia and the failure of Malaysians to come to grips with these.

Malaysiakini: What is the FTA about? What issues should our government keep in mind in negotiations with the US?

Charles Santiago: A FTA is a preferential trade agreement between countries to enable market access and trade privileges. The first thing to note about US FTAs is they are not about promoting trade, but about controlling trade. These are two conceptually different ideas.

Why are the Europeans, Japanese and Americans interested? It's because talks on the Doha Development Agenda broke down last year. Of course, there is some attempt to restart the discussions, but I think the Americans feel that it has gone on for too long. Developed countries are going one-on-one with developing countries to get bilateral agreements - it's a far easier way of ensuring that their dictates are followed.

The US tells Malaysia that if we don't sign, we will lose out on foreign direct investments (FDI), that Malaysia is no longer investor-friendly, and that the FTA is crucial to regaining confidence.

Countries like Singapore have already signed on. If we don't do this with the US, will we lose out?

That is the government’s argument, but let's take it further. In 1990, a report by the United Nations Centre for Trade and Development said Malaysia was the 4th most attractive country for FDI - today, it is ranked 62. You have to bend over backwards to bring investors back. US investors, in particular, are saying that the FTA is a pre-requirement. Given their substantial investment, Malaysia's hands are tied. Premier Abdullah Ahmad Badawi will argue that if we do not sign up, we will lose investments and jobs.

The government feels that Malaysia would lose its competitive edge if it does not follow Singapore and other Asean countries in signing FTAs with the US, and that it would be left behind in terms of leveraging the US market.

But is it true that the FTA will promote trade? Consider that 43.9 percent of our manufactured exports are to the US - electrical goods, machineries, and audio and television products - and that we import 57.3 percent of identical items from the US. It's mainly intra- and inter-company trade, a point made in the 2005 UN ‘World Investment Report’.

An interesting note is that companies from countries that do not have FTAs with the US are doing better. Singapore's trade deficit with the US increased by 200 percent in the first year of the FTA signed in 2004.


i only hope some Sg economists could shed some light on this!


But the point is this: trade is already taking place. We are exporting producer items to the US, there are value-added processes taking place there, and we have got this wonderful label that says 'Made in the US' or 'Made in Malaysia'. Why do you need a FTA?

This is not about trade, but about ensuring that investors' rights are protected and that they have legal recourse to take the government to court for compensation. There will be no arbitrary change of policies in those areas - that would constitute a safe haven for investors.

Ten years ago, we offered cheap labour, political stability. But now that is not enough. Now they want the government to sign over its rights and so they can say, 'We have control over your policies'. Now they want the government to be subordinate to them.

In the FTAs, developed countries are trying to bring back competition policy and investment, government procurement and trade facilitation - issues (thrown out by the WTO in) 1996 (on grounds that these could stifle) the developing countries' policy space.

Competition policy and investment, for example, tells you that you have to treat a foreign company on equal or no less favourable terms as a local company. Can you imagine General Motors or General Electric being given the same support as Proton?

It's like giving foreign nationals the same rights as citizens. The government will scoff at the idea, but it will become a reality if the FTA is put in place. They would not do it for migrant workers from Indonesia, for example, but they would do it for foreign companies that bring in the money.


With or without FTAs, Sg govt has been giving foreigners the same rights as its citizens.


In terms of intellectual property rights, those with patents will control products and processes. FTAs are seeking to extend the 20-year period accorded to countries in the Doha Round. The UN Human Development Report 2000 revealed that advanced countries such as the US hold 97 percent of all patents, and multi-national companies (MNCs) hold 90 percent of all technology and product patents.

On that note, how would the FTA lead to higher cost of medicines?

Once it signs up, Malaysia will retrospectively change its laws to accommodate the terms of the FTA. One of the things the US will push for is extension of the minimum patent protection period. It may move towards 25 or 30 years. It will restrain local generic production, which means local producers of (cheaper) medicine will be affected.

The US only promotes competition in sectors and markets where its MNCs want to increase investment opportunities. They are now ensuring through FTAs that economic partners face higher and more stringent requirements on intellectual property rights.

We will have to reduce tariffs, remove non-tariff barriers and technical barriers to trade, as well as harmonise standards, procedures, and regulations between trading partners. For example, Malaysian standards and customs, licensing, and import-export procedures will have to follow American or European standards.

So what can developing countries do about this?

The discourse has changed to where the market and MNCs will reign supreme. That is what happened in Thailand with the attack on the baht and reversal of capital controls imposition.

We are at the mercy of the markets, and governments are now pandering to investors. In the case of Thailand, it was Japanese and American money – to whom are these people accountable? Nobody. They're only accountable to their own profits and loss accounts. They can ravage economies, they can destroy millions of jobs, which they have done.

We have not reined them in, and this is what we have to do. That's exactly what we see in the FTAs, where governments' hands are increasingly being tied - today, finance rules. This is the context in which we should see FTAs.

The US is also really interested in the financial sector, in banks, telecommunications, government-linked companies (GLCs). On this point, we know that in the case of Malaysia, GLCs have a socio-economic role to play, but now, the US is saying, 'No, take it out, this is entirely on a commercial basis'. This has happened with GLCs in Singapore.

In Thailand and other countries, there have been huge protests against the FTA. Why don't we see similar outrage here?

Malaysians generally are the least politically aware people in the region. But I also know that a lot of non-Malays actually welcome the FTA, especially the non-Malay business community. They feel this is the only way to get the government to stop supporting its pro-bumiputera policy and the National Economic Policy. They can't do it through the ballot box and the democratic process. So if the Americans can do Malaysians a favour, hey, why not - this is their approach.



Singaporens are even worst, we have been brainwashed to treat FTAs as trophies to aim for!


I've talked to some Chinese Malaysian businessmen and business groups. After discussing the problems they face with the government, the bottom line is: ‘We want the government to stop helping the Malays’. I think what they're saying is wrong, because even non-Malays are going to get hit badly by the FTA. They don't realise this.

As a grocer, for example, your customers will no longer come to you (but will go to foreign-owned hypermarkets). You either close shop or you agree. So the issue is not whether you are Malay, Chinese, Indian or Kadazan...Malaysians are going to be unemployed and they are going to be in trouble. It's going to hit everybody.

The market is shrinking. The number of people in the market place are no longer following the competitive process where there are thousands of suppliers influencing prices, and so on.

The Chinese community and non-Malays generally support the FTA and think that it's time to rein in the government and Malays, but in the long run it's going to hurt all Malaysians. The single marker, rightly or wrongly, is to discipline the government in the way that it supports the Malays.

I think it's very sad...(to think that) somebody else is the problem. After 50 years, we have to wonder whether we are a nation or not. It has come to such a point where it has become difficult to organise around the FTA which is clearly is of concern (to all).


Yes, it is also very sad for Singaporeans. After 40 years, we're being treated as 2nd class citizens in our own country.



It's also the government’s failure not to have developed genuine bumiputera companies. We should stop supporting the big conglomerates and focus on Malay small and medium industries, which really need support. I think that's where the focus of investments and funding should go. It's (this sector which is) trying to eke out an existence but is unable to fight in the market place.

If you want to be competitive, you have to put your money into the development of new products and processes, and in the education system. Not the one we have right now, which is horrible, but a system that can produce creative and critical thinking people, support small and medium industries, develop infrastructure that lowers the cost of production and allows for faster movement of goods and services.

We have screwed things up royally. If we want to be competitive, we have to be serious and look at the areas of competition which we should improve. We need to re-examine ourselves and the way we run the economy.

Given the concerns, wouldn't the government have consulted civil society and private bodies? The international trade and industry ministry (Miti) said in a statement to the People's Anti US-Malaysia FTA Coalition that it had conducted a cost-benefits analysis and the necessary consultations.

If they have done a cost-benefit analysis, they should make it available for public scrutiny and for public discussion so that others can also comment on this. Miti called us for discussions a week before the first round of FTA discussions with the US. We questioned why they left it so late.

The Trade Investment Framework Agreement (Tifa) is actually a preparatory process you conduct before you go into FTA negotiations. It's where you sit and brainstorm whether you want to go into an agreement or not, and what should go into an agreement. From the American point of view, therefore, there is an implicit understanding that Malaysia is entering into formal negotiations.

It's also the degree and quality of consultation that took place. There must be an open consultation involving seminars, discussions, exchange of views, work by local as well as foreign experts in the area...

So before Malaysia conducted a proper Tifa process, it painted itself into a corner by going straight into negotiations?

After Tifa, they could have still said it’s too much for Malaysia and that citizens will cry foul. But, the government is now in a corner.

The process is already showing that it's a race to the bottom for workers. Last week, Human Resources Minister Fong Chan Onn said we have to change our laws so that companies can hire and fire workers more easily because this is what investors want.


Was there any coincidence that several PAP MPs were co-opted into our largest trade union, NTUC, recently? to prevent any unrest when workers are fired by investors wantonly?


(On Dec 21, the New Straits Times reported that the ministry is considering the proposal submitted by employers. A committee is to be set up to look into this and related issues, including a safety net for workers.)