The Malaysia-US Free Trade Agreement

23 April 2007
Nearly three years after the original Trade and Investment Framework Agreement was signed between Malaysia and the US, the two sides seem no closer to concluding the flagship Free Trade Agreement (FTA), writes Charles Santiago. There is now no likelihood of meeting the deadline that would enable President George W. Bush to fast-track any deal through the US Congress.
The protracted and often turbulent negotiations between Malaysia and the United States on the future of their trade relations have reached a critical juncture. Nearly three years after the original Trade and Investment Framework Agreement was signed—and after five rounds of talks—the two sides seem no closer to concluding the flagship Free Trade Agreement (FTA). In any event, there is now no likelihood of meeting the deadline that would enable President George W. Bush to fast-track any deal through the US Congress. While politicians talk of fine-tuning various contentious issues arising from negotiations and building consensus, and the Cabinet promises not to be constrained by any fixed timescale, the conditions attached to the proposed FTA are coming under unprecedented critical scrutiny. Protests against the FTA have been held outside the US Embassy and the office of Prime Minster in Putrajaya. The editorial and letters to the editors pages of newspapers have been alive with hostile commentary. None of this should come as a surprise. Around the world there has been a sea change in people’s understanding of international trade issues. The arguments over the benefits or costs of free trade in Malaysia echo those in nearly all developing countries confronted by stark choices over the terms of their accommodation with globalisation. Today international trade is widely recognised as one of the most important and controversial elements of global governance. At the same time, the assumptions and policies that drive trade liberalisation are in a state of crisis. As a result, the debate over its future seems set to run and run. How has this transformation come about? Back in the 1990s trade liberalisation was supposed to usher in a brave new world that would benefit everybody through so-called welfare gains. Its supporters claimed that the establishment of the World Trade Organisation (WTO) would create the appropriate regulatory environment to unleash the benefits of increased trade. Trade would not only be the engine of global economic progress and wealth creation. It would also radically reduce the prevailing levels of inequality and poverty. There is today a huge body of evidence suggesting that these claims are exaggerated at best and a deliberate distortion at worst. The protesters and critics of the Malaysia-US FTA are drawing their own disparaging conclusions from what can only be termed the general crisis of the international trade regime. This crisis has interlocking theoretical, policy and institutional dimensions. Part of the problem lies in the uncritical acceptance by a majority of the world’s policymakers, business leaders and professional economists of theoretical models portraying rapid liberalisation as an unadulterated gain for all. Malaysian policymaking in government circles, business lobbies and think tanks has not been immune from this kind of wishful thinking. But a great deal of careful work by economists demonstrates the fallacy of such claims. For example, a recent paper by Lance Taylor and Rudiger von Arnim, of the New School University in New York, shows clearly that the “gains from trade” that liberalisation is said to generate are based on highly dubious and biased assumptions. In particular, they argue that the way that free trade models conceptualise and measure welfare is fundamentally flawed. They suggest that “despite all the fanfare, the magnitude of the welfare gain produced by the [liberalisation] models is small”. The real facts on the ground bear out this stark conclusion. Half the world—nearly 3 billion people—live on less than $2 a day. This is actually more than in the mid-1980s. And as the Nobel laureate Amartya Sen points out, this kind of material deprivation grossly affects poor people’s ability to lead fulfilling lives: “they lack education, access to land, health and longevity, justice, family and community support, credit and other productive resources, a voice in institutions, and access to opportunity”. Development policy is failing on a global scale. The story is similar if we look at the development gap between countries. For every $1 generated by exports in the international trading system, low-income countries account for only three cents. While some (some) Asian countries have clearly been successful exporters, the situation in the rest of the developing world is much less rosy. Many countries are trapped in low-value-added ghettoes so that export-led growth has had little or no impact on poverty reduction. In short, poor people and poor countries are getting left behind in the international trading system. There is a third reason for the general crisis of the international trade regime. The institutional architecture that governs trade is in a mess. The establishment of the WTO in 1995 was intended to rationalise a rules-based trade system and offer mechanisms for resolving disputes. But the more the WTO has sought to extend its powers—often in concert with the International Monetary Fund and the World Bank—the more it has provoked an outpouring of outrage and opposition. Starting with the mass protests at the WTO Ministerial Conference in Seattle in 1999, supporters of liberalisation have had to come to terms with a bald fact: increasing numbers of people regard the WTO as the propagator of bad trade rules. Central to this critical assault on its legitimacy has been the role non-governmental organisations (NGOs) and groups of developing countries, including Malaysia, who have pressured international organisations to be more transparent, more open, and more accommodating of alternative policy considerations. The rich countries have largely remained unbending. As a result, the so-called Doha Development Round of WTO negotiation, billed as focusing on the needs of developing countries, has ground to a halt amid missed deadlines and bitter recriminations. The irony of the current the Malaysia-US FTA, then, is that it was born out of theoretical, policy and institutional failure. The economic models have consistently omitted to think through the full implications of trade liberalisation. Poor people and poor countries have not benefited. And the institutional centrepiece of the international trade regime, the WTO, has turned into a white elephant. Given the intellectual and practical bankruptcy of free trade it is worth asking just how Malaysia has become embroiled in negotiations that will potentially exacerbate its worst features. Part of the reason lies in the character of US foreign economic policy. While multilateralism may be dead in the water Washington has not hesitated to pursue unilateral policies. As Robert McMahon of the US Council on Foreign Relations puts it: “The Bush administration has pressed ahead with smaller bilateral free trade agreements to secure preferential deals as well as cement ties with strategically important countries”. Since completing its very first FTA with Israel in 1985, the US has operationalised or is negotiating similar agreements with more than thirty countries, mostly in the past five years. The US logic is doing so is impeccable at least in terms of its own interests. Competition for investment opportunities in an expanding Asian market is perceived as critical for maintaining US capital’s leading position in the global market place. This is especially true in light of its rivalry with European, Japanese and (increasingly) Chinese capital. The business lobby collaborates closely with US Trade Representative in pushing for a widening and deepening of trade, services, investment and financial liberalisation, protection of commercial interests, and opening-up of various sectors for US business participation. The US-Malaysia FTA Business Coalition—comprising more than fifty organisations and individual companies—offers the institutional shell for building support in Congress for ratification of the FTA. In short, the leading representatives of the US business community are consulted and updated throughout the negotiation process. From a policy perspective, bilateral and regional trade agreements allow the US to demand higher standards and deeper liberalisation commitments than those negotiated at the WTO. Crucially, FTAs help to “lock in” market-driven reforms at the domestic level. Politically, the US need not deal with the protracted and formidable opposition and counter-proposals of developing country groupings which effectively halted the Doha Round negotiations. Going it alone, then, makes sense for a US administration that clearly does not pay much heed to international rules in any case. It is much more difficult to identify what benefits the proposed FTA holds for Malaysia. Supporters of the deal have trotted out the usual platitudes: accessing the US market for Malaysian firms, inducing foreign direct investment (FDI), stimulating local inventive activities and encouraging the transfer of new technologies into the country. Indeed, the International Trade and Industry Minister, Rafidah Aziz, has consistently asserted that if the FTA were to fall then Malaysia will “lose out” in terms of exports and as a location for investment by US companies. In this Rafidah has been aggressively supported by business lobbies such as the American Malaysian Chamber of Commerce, the Federation of Malaysian Manufacturers and the Malaysian Textile Manufacturers Association. They eagerly rehearse a reassuring story about the potential gains in exports and are actively pressing for an early conclusion to the Agreement. Mohamed Ariff, the executive director of the Malaysian Institute of Economic Research, agrees, and even goes so far as to claim that because the Malaysia’s desire for access to the US market is greater than the value of the Malaysian market to US firms it follows that the US will not adopt a “hardline approach” to negotiations. The logic here flies in the face of the facts. There are other compelling reasons for concern. The optimism of the business lobby appears naïve in the face of hard evidence from other FTAs. According to the international economist Jagdish Bhagwati—hardly an opponent of free trade—the US uses such deals to “bully” smaller states, leveraging them to accept conditions that actually exceed WTO requirements. In a similar vein, Martin Khor of Third World Network argues that since FTAs are negotiated on the basis of reciprocity—ensuring that trading partners accept similar levels of obligation—this “equal treatment of parties that are unequal in capacity is likely to result in unequal outcomes”. It is difficult not to draw the obvious conclusion. If the WTO promotes bad rules for trade then FTA obligations are potentially even worse. These are precisely the kinds of criticisms that have been picked up by those opposed to the US-Malaysia FTA. A new and disparate constellation of forces has emerged over the past year—including economic nationalists, farmers and trade unionists, consumer groups, environmentalists, human rights campaigners and development experts—who are part of the expanding opposition to the current international trade regime found in every part of the world. Unsurprisingly, much of the opposition is driven by anger and resentment of US intimidatory tactics. These are seen as an affront to Malaysia’s economic sovereignty and policy autonomy which, it is contended, will be undermined by rules that fundamentally favour US business interests above all else. Naturally, ministers have fallen over themselves for the past year to reassure their constituencies that the national economy is safe in their hands. But the nationalist argument does seem to have touched a raw nerve. Typically, Rafidah dismisses such fears as reflecting an “inferiority complex”. By contrast, Prime Minister Abdullah Badawi has been more sensitive to local concerns. He was prompted recently to issue the assurance that “the nation’s interest will always be safeguarded and would not be sacrificed in any way”. It will be interesting to see just how these sentiments get translated into the fine print of any deal that is struck. The politics of resentment is one thing but informed and effective resistance to the FTA is another. Part of the problem for serious debate is that the drafts of the negotiations are kept out of the public domain. “Now is not the time” is the constant refrain. While this hardly conforms to the stated aims of “transparency” and “openness” in governance it does allow Rafidah and other supporters of trade liberalisation to airily dismiss opponents of the FTA as failing to “understand” the issues. This is disingenuous. It omits the fact that the US negotiates all its trade deals according to a one-size-fits-all blueprint whose fundamentals are not open to challenge. As a consequence, opponents of the FTA have been able to draw inferences from a careful evaluation of similar US-sponsored FTAs elsewhere and subject their provisions to detailed scrutiny. The list of specific issue areas is sweeping. It includes intellectual property rights, access to affordable medicines, financial services, telecommunications, agricultural products, environment and biosafety, labour rights and government procurement. Two examples serve to illustrate both the politics at play and the potential damage to Malaysia’s economic and human security if the FTA goes ahead: agriculture and intellectual property rights as they apply to medicines. What they demonstrate is just how all-encompassing FTA rules are. They impact equally on “traditional” sectors of the economy sustaining rural livelihoods and the modern, knowledge-driven industries that are said to hold the key to future well-being and competitiveness. For many years the trade liberalisation agenda in agriculture has been set by and for the corporate agribusinesses of the US, the EU and Japan. What this means is that the terms of trade in agricultural production—an area where developing countries should have their strongest comparative advantage, according to free trade theory—are firmly weighed against them. In fact, nowhere are the double standards of so-called free trade more apparent than in the agricultural sector. A major lynchpin of the first Bush administration was the 2002 Farm Bill. This allocated the astronomical sum of $248 billion to US farmers, mainly in the form of subsidies for growing eight crops (including rice) in a number of Midwestern states which form the bedrock of Republican Party support. Smaller farmers have barely benefited at all. Aruradha Mittal of Food First has called this scheme “welfare for corporate agribusiness” and it is difficult not to agree. Discussions on the 2007 Farm Bill are running in parallel to the Malaysia-US FTA negotiations. The consensus is that US farmers may accept a modest reduction in subsidies but only in exchange for greater export opportunities and market access abroad of the kind guaranteed in the FTA. Meanwhile, it is clear that smallholder farmers in Malaysia would suffer untold hardship if tariffs are slashed and their subsidies are cut. Not only would this scenario would devastate rural livelihoods but it would also call into question food sovereignty which was highlighted as a key goal in the recently launched Ninth Malaysia Plan. The second example focuses on the implications of bilateral free trade on access to affordable medicines. Medicines (like other products) can be protected by intellectual property rights (IPRs). These are artificial monopoly rights to intangible goods and services, including copyright, patents, trademarks, industrial designs, integrated circuit designs and “trade secrets”. Major corporations have long pressed for such rights which, they say, encourage innovation and protect their R&D. The adoption of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) at the WTO was fundamentally about transforming IPRs into internationally tradable commodities. The Agreement extended protection for branded drugs and limited parallel imports, impeding the availability of affordable generic medicines. But in partial recognition of the struggle of many developing countries and NGOs against what they saw as “patent hegemony”, the Doha Declaration on the TRIPS Agreement and Public Health does recognise countries’ rights “to protect public health and, in particular, to promote access to medicines for all”. This flawed compromise—agreed in 2001—at least partly addressed the problem of allowing the export of low-cost generics to developing countries that do not have the capacity to produce these medicines themselves. However, the US government has consistently used its FTA negotiations to extract ever higher levels of intellectual property protection than those mandated by the TRIPS Agreement. They include so-called TRIPS-plus standards which, in some instances, even exceed US domestic law. This has hugely important implications for people’s access to medicines and the right to promote public health provision. A recent report by a highly respected umbrella group of NGOs (including Health GAP, Médicins Sans Frontières, Oxfam and Third World Network) concluded that TRIP-plus deals are bad for public health: they expand the scope of pharmaceutical patents to include new indications and new formulations; they limit grounds for issuing compulsory licenses to emergencies, government non-commercial use and competition cases only; they bar parallel trade on non-patent drugs sold more cheaply elsewhere; they extend patent monopolies; they enhance protections for clinical trial data, thereby preventing registration and sale of generics; and, they enforce patent violations and grant drug companies investor rights to sue. The empirical evidence from other US-sponsored FTAs is also pretty damning. According to Jakkrit Kuanpoth, the TRIPS-plus terms of the Thailand-US FTA deepens Thailand’s technological dependence on foreign interests, engenders loss of trade balance in the pharmaceutical sector to the US, and hinders local R&D. He says that “patents will continue to be used by foreign drug companies as a mechanism for overpricing, transfer pricing and insertion of restrictive clauses in technology transfer agreements”. At the same time, the FTA threatens the existence of the Thai generic companies. Exactly the same findings can be found in a similar study of the impact of an FTA on the Colombian generic drug industry. The net effect is that Colombians will have to spend an extra $1.5 billion on medicines every year by 2030. A World Health Organisation review of the implications of bilateral FTAs on access to medicines suggests in no uncertain terms that accepting TRIPS-plus terms “negates the letter and spirit of the Doha Declaration, and will limit the capacity of States to progressively realize the human right to health”. At least some voices in the government appear to acknowledge the gravity of the situation. Last month the Attorney General, Abdul Gani Patail, argued that generic medicines should not be restricted in any manner. It is a view endorsed by the Malaysian Organisation of Pharmaceutical Industries which sees any FTA giving US drug companies a hugely unfair advantage over their local competitors and undermining public health safeguards. Whether these public criticisms will be sufficient to halt the juggernaut that is the US pharmaceutical industry must be open to doubt. The lessons of both case studies—agriculture and the TRIPS-plus provisions as they apply to medicines—are wholly indicative of what a Malaysia-US FTA would look like. There are many more equally controversial issues on the table. To suggest, as some Malaysian politicians have done, that they can simply be laid to one side during the negotiation process is deceitful. Certainly the US government is not under any illusions. Its trade strategy is first and foremost about the pursuit of market access initiatives on the basis of models “that can be used throughout all negotiations”. For the US, then, there are core provisions that are not open to compromise. Rather there are core business interests to protect, with agribusiness and pharmaceuticals to the forefront. Bush himself understands this logic. As he made clear at the opening of negotiations, “a U.S.-Malaysia Free Trade Agreement will advance our commitment to opening markets around the world and expanding opportunities for America’s farmers, ranchers, workers, and businesses”. Can the same be said for Malaysia’s farmers, workers and businesses? Nor is it good enough to summarily dismiss the very real concerns of informed citizens who oppose the deal in principle and in practice. To do so is both bad politics and bad policymaking. One unintended consequence of the government’s premature flirtation with the FTA is that it has provoked some serious and radical rethinking of the terms on which Malaysia should engage with the processes of globalisation. For many years Malaysia had a deserved reputation for successfully pursuing the unorthodox, often in the face of mainstream criricism. The imposition of capital controls as a way of stemming capital flight in the wake of the 1997-98 financial crisis is the best known example. It is deeply ironic, then, that just as the international trade regime, and its attendant free trade manifestation, has come under intense critical attack the government should see fit to tie itself to a deal that locks in the worst excesses of rapid liberalisation. How much more bewildering that it does so in harness with a US administration that provokes widespread outrage because of its unfettered unilateralism. The removal of the US-imposed time constraint should be now used as an opportunity for reflection and a much more frank debate than has hitherto been the case. In fact it is beyond comprehension that such a debate has not yet taken place. If our politicians and public are confused then they require the range and quality of information that might help them make better decisions. A minimum requirement surely would be a thorough evaluation of the FTA’s assumed costs and benefits. Even in its own terms—the claims about creating investment, exports and jobs—the FTA does not bear close examination. Malaysian exporters want market access. But the fact is that the allure of the US market may be grossly overstated. The US has been burdened by years of budget and trade deficits as well as excessive consumption. There are telling signs that these imbalances are chipping away at what is still a phenomenally powerful economy. The American consumer is starting to run out of road. As a result, there is mounting pressure to reduce deficits to sustainable levels. One scenario is a decrease in US imports, perhaps by as much as $300 billion in the next decade, with an attendant surge of US goods and services entering Malaysia. Put this way, the much-vaunted benefits of access to the US market actually look quite marginal. By contrast, the downside costs to Malaysia look daunting. The threats to economic sovereignty and policy autonomy are not the fevered nightmares of those with “inferiority complexes”. The risks are real. Even in a globalising world, economic sovereignty and policy autonomy are the prerequisites of any coherent national development policy. As the Harvard economist, Dani Rodrick, puts it: “The exchange of reduced policy autonomy in the South for improved market access in the North is a bad bargain where development is concerned”. Deeper trade liberalisation—such as that embodied in the FTA—will not deliver poverty reduction, equitable distribution, sustainable development or many of the other goals outlined so recently in the Ninth Malaysia Plan. It will simply compel the disciplines of the global marketplace and the rights of investors. What the past year has demonstrated above all else is that globalisation and trade liberalisation are not taken-for-granted processes. In some senses it is actually very healthy that competing social and economic forces are struggling over who sets the rules of the game. Different national constituencies are pushing for and against different degrees of global integration. For their part, the business communities in both Malaysia and the US are pressing for the short-term gains that an FTA may or may not deliver. But opponents worry for the longer-term developmental sustainability of any deal in its current format. More than this, they appreciate the mismatch between the rights that business actors have acquired through bilateral trade arrangements and the lack of corresponding responsibilities that they are expected to exercise. In this context, the fight over free trade is symptomatic of critical new thinking about how best to control over the forces of globalisation that increasingly structure the country’s development choices. The FTA would leave these choices to the most powerful market actors. But the foundations of a durable development project requires vision, values, leadership, purpose and accountability—the very antithesis of the market ethos. Hard choices will have to be made in the coming months. Those who make these choices must also listen to those voices who offer another vision of the future.
Charles Santiago is a director of Monotoring Sustainabilty of Globalisation (MSN).