A Bad Free Trade Agreement Is Worse than Nothing
By Jomo Kwame Sundaram and Nazran Zhafri Ahmad Johari
25 June 2019
Kuala Lumpur, Malaysia (IPS) - With growing economic conflicts triggered by US President Donald Trump’s novel neo-mercantilist approach to overcoming his nation’s economic malaises, many voices now argue that bad free trade agreements are better than nothing.
After US withdrawal following Trump’s inauguration in early 2017, there is considerable pressure on signatory governments to quickly ratify the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), the successor to the TPP.
To ratify or not to ratify
Undoubtedly, freer trade is attractive, especially to consumers desiring lower import prices. Yet, it is now generally acknowledged that no country has ever developed without policy interventions, typically involving trade, to develop new economic capacities and capabilities.
Thus far, the CPTPP has been ratified by 7 of the original 11 signatory countries, with Brunei, Chile, Malaysia and Peru holding out so far. Ratification advocates claim that the CPTPP would boost economic growth by greatly increasing exports.
They cite disputed Peterson Institute of International Economics (PIIE) and World Bank studies, both by the same authors, using a dubious methodology even rejected by the US government’s International Trade Council in mid-2016, i.e., under Obama. The reports highlight increased export prospects, but are conveniently silent about the far greater increase in imports.
Dubious gains from trade
United Nations Conference on Trade and Development (UNCTAD) economist Rashmi Banga’s study of its likely economic impact on Malaysia suggests much need for caution. The original TPP promised Malaysia more exports, mainly to the USA, with such claims grossly exaggerated by the PIIE. Without the USA, export prospects have diminished greatly.
While exports to CPTPP countries will rise by 0.2%, imports will grow by 6.0%, setting Malaysia’s annual merchandise trade balance back by US$2.4 billion, worsening its balance of payments as its services trade balance has always been in deficit.
As Malaysia already has free trade agreements (FTAs) with other major trading partners in the CPTPP, participation has little to offer. Malaysian FTAs with Singapore, Japan and Australia affect 82% of its CPTPP exports and 84% of imports.
Hence, Malaysia will not lose much to trade diversion by not ratifying, i.e., about 0.09% of current exports to other CPTPP countries. On the other hand, it will retain revenue from its relatively higher import tariffs.
The two largest imported items are automobiles and plastic materials. Banga estimates that imports of vehicles, mainly from Japan, will rise by 36% if customs duties come down to zero. This is likely to wreak havoc on Malaysia’s already fragile automotive industry.
Over a quarter century ago, then World Bank vice-president Larry Summers infamously suggested that toxic waste might be dumped in poor countries in Africa owing to the lower opportunity costs involved.
On the cusp of becoming a high-income nation, the last Malaysian administration belatedly took his advice by licensing ostensible plastic waste recycling plants. The CPTPP will enable much more imports of plastic materials, including waste and scrap, by around 35%.
21st century gold standard?
Advocates also claim that the CPTPP represents a ‘cutting edge’, ‘state of the art’, ‘gold standard’, ‘21st century FTA’. In fact, it will mainly benefit transnational firms at the expense of consumers, workers and the public in participating economies.
With the investor-state dispute settlement (ISDS) provisions, for example, foreign investors will be able to sue the government for loss of revenue and profits if government policies are changed, or if contracts are renegotiated, even if in the public interest, e.g., by banning toxic or carcinogenic chemicals.
ISDS involves binding ‘private’ arbitration bypassing national judicial systems, significantly strengthening foreign investors at the expense of governments with typically more modest means to litigate cases, thus exercising a ‘chilling effect’ on governments to comply with foreign corporate demands. Government ability to improve public policy will thus be restricted.
Ironically, the Trump administration is now opposed to ISDS. TransCanada sued the US government, under North American Free Trade Area (NAFTA) ISDS provisions, for US$15 billion after the Obama administration cancelled its Keystone XL pipeline project. The case was dropped after Trump revived the project.
CPTPP proponents insist that strengthening intellectual property (IP) laws will benefit everyone as it will incentivize research and innovation, a claim for which there is no evidence. The TPP agreement would have lengthened monopolies on patented medicines, kept cheaper generics off the market and allowed natural biological materials and processes to be patented.
The Third World Network has long highlighted many such CPTPP dangers, for instance, citing the Malaysian government’s procurement of an Egyptian generic treatment of Hepatitis C for RM1300, instead of the patented US treatment costing almost RM300,000.
The TPP was originally a minor plurilateral regional trade agreement involving four countries. The Obama administration decided to use it to check China’s growing economic influence.
With the recent escalation of tensions between China and the USA, many in East Asia are understandably concerned about how the growing economic conflict will affect economic prospects. Ratifying the CPTPP is likely to be seen as taking sides, even without the USA in it.
To secure broad public support in the face of growing scepticism about the benefits of trade liberalization associated with globalization, the Obama administration involved over 700 advisers, mainly representing corporate interests, to be involved in drafting the 6350-page TPP.
Ironically, the USA is no longer party to an agreement largely drafted by US corporate interests. A few of the most onerous clauses of the TPP have been suspended in the CPTPP, but if Japan, Australia and Singapore succeed in bringing the USA back in, the White House will insist on their re-inclusion.
Withdrawing from the CPTPP would send a clear message that a government is determined to put the needs of its people over the interests of powerful transnational corporations or geopolitical considerations. In any case, there is no requirement, obligation or deadline for any signatory government to ratify.
Other governments will need to carefully consider their navigation options in the difficult times ahead as countries seek to recover and sustain economic progress. Bad FTAs are not better than no FTAs, and as the map of the world economy has changed, options are different.
Jomo Kwame Sundaram is Senior Adviser at Khazanah Research Institute (KRI) in Malaysia. Nazran Zhafri Ahmad Johari has a law degree and is currently with the KRI.