Out of the cage: FTA must promote fair, not free trade

New Straits Times (Malaysia)

Out of the cage: FTA must promote fair, not free trade

04 Mar 2007

khairy Jamaluddin

THIS year is laced with an unusually large dose of irony. 2007 has been set up as a splendid celebration of half a century of nationhood and sovereignty, with Malaysia emerging as a successful, modern democracy that has succeeded in avoiding any encumbrances by over-dependence on other nations, especially those which wield considerable strategic strength.

But it is also a year when this hard won independence is under jeopardy. Independence is not just freeing ourselves from colonial masters. Independence is also about maintaining our sovereignty and being able to freely pursue policies without having to answer to another country.

Simply put, independence must be safeguarded at all times so we can do what we want to do based on what we think is in our collective interests as Malaysians.

This year, we are confronted with a serious test to our sovereignty. And the most worrying part is that most Malaysians are not aware of what’s going on.

I was travelling in the northern regions recently and casually asked Haji Manaf, a padi farmer and Umno stalwart in his late 50s, if he had heard of the Malaysia-United States Free Trade Agreement (FTA) which is currently being negotiated. He said he had read about it in the Malay newspapers but really didn’t understand what it was all about.

I explained to him that the FTA was a legally binding document between our country and the US which would abolish nearly all tariffs and non-tariff trade barriers, and provide each other preferential access to each other’s market. I was met with a blank expression on his face. He then asked me, "What’s in it for me?"

Good question. I told him that currently we have a 40 per cent tariff on rice imports to protect people like him and to enable us to become almost self-sufficient in rice over the next few years. I explained that was part of the reason why he saw people smuggling rice during his shopping trips to Padang Besar at the Thai border.

He wanted to know what would happen if the US could freely export their rice into Malaysia. I had to tell him that the US and other developed countries had extremely high subsidies on farming and that in some cases it was better to be a cow in Europe than a farmer in sub-Saharan Africa (the average Euro cow gets US$2 - RM7 - a day of subsidy which is more than what half the people in the developing world live on).

His laughter trailed off quickly when I told him that US rice farmers were so heavily subsidised that they are able to sell at 25 per cent below production cost which means that US rice could flood our market and force Haji Manaf and 116,000 other padi farmers out of work.

He said surely the government wasn’t going to commit to such an absurd agreement. I couldn’t give him a reply. Although I knew the government doesn’t want to include rice in the market access list for the FTA, the US was pushing hard for its inclusion. It may well be one of the 58 contentious issues which the Minister of International Trade and Industry alluded to when she was asked recently about the status of the talks without actually saying what they were.

That’s just rice. The litany of concerns surrounding this FTA is considerably long. Apart from rice, the agricultural sector as a whole has cause for worry.

Currently our applied tariff for food items range from 10-40 per cent, all of which will be effectively removed under the FTA. This will have a profound effect on the agricultural sector which is experiencing a new lease of life under the Prime Minister’s green revolution.

After Mexico inked the North American Free Trade Agreement (Nafta) with the US and Canada, at least a third of their farmers were impoverished due to the subsidised US corn that flooded into their market.

The US is notorious for protecting their farmers, and even then not all American farmers benefit since only one per cent of farms (usually the rich, corporate farms) receive almost 25 per cent of subsidies.

And while the whole point of the FTA is reciprocity, in other words what you give me I give you equally, market access for our agricultural products to the US may continue to be stymied notwithstanding the agreement.

Tariffs are not the only way to block imports, and our agro-exporters will continue to confront arbitrary health standards and phyto-sanitary conditions designed to protect the American consumer from disease.

The issue here is that sometimes these technical standards are not the product of scientific evaluation but rather the dictates of the domestic food lobby in the US.

There is also the issue of tariff escalation. We may be hoodwinked into thinking that tariffs for our agricultural produce will be eliminated. This may be true for raw materials that meet US health requirements, but if the food items are processed in Malaysia and the higher-value added items exported, it will be met with higher tariffs. These barriers are designed to preserve higher value-added economic activity within the US and effectively consigning developing countries at the basic (and less lucrative) stage of the supply chain.

In manufacturing, pro-FTA advocates assure us that the agreement will create profits and jobs by opening up the US market for our exports and also by increasing the flow of US direct investment into factories and plants in Malaysia.

As far as our exports to the US are concerned, 80 per cent are currently subjected to zero import duty and a further 15 per cent pay 0-5 per cent, so the scope for further increase based on tariff reduction alone looks limited.

In fact, US exporters will benefit from the FTA since average tariffs for industrial goods are higher in Malaysia. The US position estimates that with an FTA, US exports to Malaysia will double by 2010. It can be safely assumed that a significant portion of that increase will be at the expense of locally produced goods which would directly result in job losses and a downward pressure on wages in the private sector.

Although investments from the US may increase on the back of the FTA, there are many strings attached to this. Top of the list of concerns would be the expropriation clause used in previous US bilateral trade agreements which basically means that investors can take up cases against the host government should a change in government policy result in losses for the company concerned.

This effectively means that formulation of government policy must take into account the bottom line of US companies above the welfare of citizens which directly undermines the sovereignty of any country.

The FTA also promises market access for US firms into our services industry. The principle of reciprocity would suggest that the US market will also be open to our corporations, but in reality it will lead to US companies dominating service sectors like telecommunications, banking and retail in Malaysia.

Our service industry is not export-oriented, so the benefit of opening up would accrue to the US firms that are already global in their reach with more capital and know-how.

In more graphic terms, would it be more likely to see CIMB branches mushroom out all over the US or for Bank of America to exponentially expand its network here? A no-brainer there.

Any US FTA is also demanding on intellectual property protection. This goes beyond the relatively trivial concern of many Malaysians that there will be a shortage of bootlegged Hollywood movies.

In fact, the real danger is that stringent patent protection required by the FTA (which is more onerous than what is stipulated by the World Trade Organisation) will mean that patents for medicine will be secured for a longer period, thereby denying patients cheaper, generic options that can be produced by local companies.

The patent provisions will also mean that US drug companies will be able to establish property ownership on plants indigenous to Malaysia that we have used in alternative medicine. This may eventually mean that our farmers have to pay a US drug firm for even the right to cultivate these plants or the equally disturbing prospect of Mawi promoting Pfizer Ali Cafe proclaiming that the US-owned blend is now "my choice".

As far as government policy is concerned, apart from the expropriation clause and the obvious loss in tariff revenue, the FTA is set to introduce new policies to regulate competition which not only tilt the playing field towards US companies but actually take away the option for the government to direct government-linked companies from undertaking unprofitable but socially responsible investments.

It will also introduce other "Singapore Issues" such as transparency in government procurement which is used as a policy tool to develop local, especially Bumiputera companies, and open this up to US corporations. The FTA will effectively take that policy option away from the government and curtail its ability to develop local businesses.

The concerns listed above are well documented and the ministry tasked with negotiating the FTA has been bombarded with memoranda with similarly expressed arguments against the agreement.

The government has repeatedly stated that any FTA signed will not cede economic sovereignty to the US, including the many points that have been highlighted in this article.

Which naturally then begs the question, if all of these concerns are off the table, what’s there left to discuss? There is no way the US, with other bilateral agreements under its belt, will agree to anything watered down. As far as most trade analysts are concerned, the US will not sign an FTA if it doesn’t get its way on all of these "sensitive" issues.

I hope that the minister with all her experience, wisdom and resolve will stand her ground. Don’t rush in to anything. It doesn’t matter to Malaysians if we cannot conclude an agreement before July to take advantage of US Congressional approval for the president to fast-track an agreement.

What matters more is that any agreement on trade, whether it is a multilateral or bilateral variety, is one that promotes fair trade and not free trade.

In this auspicious year when we celebrate 50 years of nationhood, let us demonstrate that we will not sign away our freedom and dignity.