Saturday March 17, 2007

Why an FTA with the US is good for Malaysia

OVER the last few weeks there have been many negative comments expressed about what a Free Trade Agreement (FTA) with the United States could mean for Malaysia.

It's important, therefore, that there should be balance in the views expressed and to understand that we have so much to gain than to lose in signing this FTA with our largest trade partner.

The average tariff of our two countries is generally low, and with or without an FTA trade will continue to grow.

However there are products from Malaysia that attract high duties when entering the US like textiles (up to 14.7% duty); apparel (up to 28%); shoes (up to 48%); and ceramic tableware (up to 25%).

Expand RM1 trillion trade threshold and employment

In addition, Malaysian products currently cannot enter their government procurement programmes, as Malaysia is not a signatory to the WTO Government Procurement Agreement nor do we have an FTA with the US.

This means that even in products that we are competitive in, such as electronic products, wooden furniture and rubber gloves, we are excluded from the US$250bil (RM877bil) government procurement market. An FTA will allow us to participate in this market.

Furthermore, our textile and garment industries are currently exporting RM3bil a year to the US.

With an FTA, duty free access is expected to double to RM6bil and in doing so, will create an estimated 20,000 new jobs.

If other competitive products are included, Malaysia would be creating more jobs and expanding national economic activities, exports and incomes.

FTA will give Malaysia regional advantage in investments

The export expansion and job creation will not end here. Many other textiles and garments manufacturers from other countries may wish to relocate to Malaysia to take advantage of this zero duty, leading to further employment opportunities.

Over time it will not only be factory workers, but executives, managers and even fashion designers from local institutions of higher learning, who will benefit from the growth of this sector.

In terms of Foreign Direct Investments (FDI), an FTA will certainly prompt additional US factories to relocate here to take advantage of our lower costs to re-export products back to the US free of duty, or for export to Asean countries and other countries with which we have signed FTAs, like China and Japan.

For an American company that is looking at re-locating its operations in Asia, the first port of call will be a country where there is an FTA, as it provides certainty in terms of tariff, as well as in the rules and security of investments.

Generally, foreign trade and investments tend to increase after an FTA is signed.

This has been Malaysia’s experience with the signing of the Economic Partnership Agreement with Japan in 2006, as already evident in the five-fold jump in FDI in the last six months of 2006.

In tandem with higher investment, employment and other economic opportunities will increase.

So a successful conclusion of an FTA would lead to faster growth in trade and investments for Malaysia and provide the nation a three to five year lead-time ahead of our neighbours with respect to free market access into the US.

FTA will not hurt Malaysian padi farmers

Some fears have been expressed that an FTA would lead to cheap subsidised US rice entering the country, which would hurt our padi farmers. The reality is the US prices for long grained rice are much higher than that of their competitors like Thailand and Vietnam.

In any case, we are already an importer of rice to supplement our own production.

Malaysia is not self sufficient in rice, and there is no clear advantages in being self sufficient if we can buy cheaper rice from other countries.

An FTA will not stop production of generic drugs

There was also an expressed fear that generic drugs will no longer be available after the signing of the FTA.

Drugs, which are already off patent, can continue to be produced generically and be available.

One area of contention is the Data Exclusivity (DE) period that can extend beyond the patent term. Proprietary drug companies have contested the use of their clinical data in the marketing approval of generic drugs by local regulatory authorities.

Our position is that originators of intellectual properties know that there is a time limit of 20 years for them to be the sole beneficiaries of their inventions.

This period was deemed appropriate for innovators to recoup the cost of R&D. In the determination and protection of public health, the country should have recourse to compulsory licence and government use order, with or without an FTA.

Malaysians want greater transparency

Another issue that has been raised by NGOs and others is the alleged loss of national “sovereignty” if we were to accede to the US request for greater transparency in our government procurement.

We should be prepared to be transparent about the way we conduct business and not be hesitant to put it into a trade agreement.

Transparency is not an affront to national sovereignty. If we continue to resist, it is like saying “No transparency please, we’re Malaysian.”

US has margins of preferences like Malaysia

As to government procurement and preferences, the US government itself has a system of preferences for small businesses.

For contracts below a certain level, small businesses are given a margin of preferences of 6% to 12% to assist them in tenders over the larger companies.

Likewise, there are Malaysian Treasury circulars, which also lay out very clearly the margin of preferences which a Bumiputra company can enjoy for different levels of tenders.

A properly negotiated FTA will allow the affirmative action programme to continue in a transparent manner.

Malaysia’s competition principles already in place

Another contentious issue is the request for a Competition Policy to be in place in the free trade agreement and our difficulty in tabling that for negotiation by the ministry concerned.

We have been talking about competition policy for Malaysia for the past 10 years and certain basic principles of competition policy can be tabled.

These principles have already been incorporated through the Malaysia Multimedia & Communications Act 1998 which, among other things, promotes a freer competitive telecommunications industry where no big player can use its dominance in an anti-competitive manner.

It is partly because such rules were enacted that Malaysia is having a more competitive telecommunications sector. It is easy to see how the public is benefiting from all the deals and special programmes that the various telephone companies are offering.

GLCs must be included in competition policy

We understand that one possible reason for the reluctance to table the competition policy could be that the Government may want to exempt GLCs from a competition policy.

This position is not acceptable to the Malaysian private sector as the GLCs are already big companies, a significant part of the corporate sector, and certainly do not merit this concession.

With the transformation of GLCs, they will be in a better position to operate in a competitive environment without any special concessions.

A more competitive and vibrant services sector

There were also comments about how our services sectors will be swamped with an FTA. Those services sectors that have shown resilience were those that opened up earlier, for example, in the accounting profession, the big four in the world are already in Malaysia, staffed and partnered overwhelmingly by Malaysians, some of whom have been posted overseas to high positions where they give world class service.

In addition, other Malaysian accountants have set up links with other accounting firms elsewhere and have also been successful. It may be useful to point out that Malaysia is a signatory to the General Agreement on Trade in Services (GATS).

The same can happen to our other services as the nation begins to find its respective niches in a globalised environment.

A more competitive and vibrant service sector will have spin-off effects for the rest of the economy.

Malaysians will benefit from a more open and efficient services sector given a more competitive service industry.

Adapt and adjust to reap economic benefits together

In a free trade agreement one must be prepared to adapt to some adjustments in the immediate term to reap the benefits for the rest of the economy as a whole.

We are heartened to read from the statement of the secretary of the Bar Council that they are considering opening up the legal services, having found that five years into the FTA with the US the Singapore legal profession has yet to be swamped by US lawyers.

Similarly the lawyers in turn would be able to have access to lower logistics and financial costs as the rest of the services sector becomes more competitive.

The time pressure

The time to act is now. The US Congress, being controlled by the Democrats is less likely to sign an FTA with any country soon. If we miss this window of opportunity, Malaysia would have lost an opportunity to gain access to the biggest economy in the world over other countries.

An interesting viewpoint from the global political platform is that the US looks upon Malaysia as a well-managed and moderate Muslim-majority country, which it is keen to collaborate with.

The Prime Minister has already built a good relationship with the US Government and Malaysia’s standing in the world and among Islamic nations would be further enhanced.

In short, the successful conclusion of the FTA with US will be in line with Malaysia’s national economic policies to further expand the economic cake and create wealth for the country through an increase in FDIs, employment opportunities, tourism and enhanced regional competitiveness.

The successful conclusion of the Malaysia-US FTA would expedite the country’s progress in achieving developed nation status by 2020.

DATUK YONG POH KON,

President,

Federation of Malaysian

Manufacturers (FMM)

News

Saturday March 17, 2007

Why an FTA with the US is good for Malaysia