logo logo

MierScope: FTA with the US makes good sense

New Straits Times, Malaysia

MierScope: FTA with the US makes good sense

Shankaran Nambiar

20 March 2004

MALAYSIA’S political relations with the United States have seen
interesting turns and bends in recent years.
There is strong mutual agreement on issues such as the war against
terrorism and equally strong disagreement on how Washington should
address the Palestine question as well as its position with regard to
the war on Iraq.

The economic relationship has been more sedate. There is no disagreement
that trade between the two countries is mutually beneficial.

There is also no doubt that Malaysia benefits from American portfolio
flows. Foreign direct investment (FDI) from the US is, again, most

Viewing the whole picture from the opposite end of the board, it would
not be wrong to say that Malaysia stands to lose if it cannot attract
funds from the US, since it is an important trading partner and investor.

One can underline this phenomenon by observing some figures. US
investment in Malaysia is worth over US$20 billion (RM76 billion).

Bilateral trade was more than US$34 billion in 2002. One must not ignore
the fact that project approvals from the US exceeded US$700 million in

The need for Malaysia to be competitive is real, given the fast changing
global landscape. China and India keep figuring more and more
prominently on the radar screen. Closer home, Thailand promises to be
the manu-facturing hub of Asean.

Indeed, there are various ways in which Malaysia can be more competitive.
Commentators have, for instance, called on the importance of human
resource development and research and development (R&D). They have
stressed that Malaysia cannot compete any longer on the basis of low
wage costs. They point out that more has to be done to sharpen our
technological capacity, and that steps in that direction require more
emphasis on innovation and R&D.

Indeed, these structural issues must be addressed in a more concerted
fashion. They demand more immediate attention than does space research
or an astronaut development programme.

Our success in achieving good outcomes in the space of technological
capabilities, education, and skilled human resources will make us more
competitive than other economies that rely on cheap labour as a source
of competitiveness. It is well recognised that Malaysia has to move up
the value-chain. However, such efforts have a relatively long gestation

So what can be done more immediately? One possibility is to devise
packages that make Malaysia attractive to potential investors. In the
short run, to surf the waves of the rapidly changing investment climate
it is crucial that these packages are tailor-made to suit the needs of
specific countries and investors.

A commendable line of action would be to forge a free trade agreement
with the US. Given strong misgivings within certain sections of society
against the US this might seem a heretical suggestion.

As was mentioned at the outset, one should keep an eye on the important
distinction between economic and political relations. And again, one
could strongly disagree with the political policies of another nation
while maintaining an air of civility. This, one would suppose, is what
diplomacy and the right use of language are all about.

The US has for long been an extremely important trading partner. Some of
America’s top companies have had a long-standing interest in Malaysia.
The recent visit by the USAsean Business Council to Malaysia is a sign
of their continued interest in this country.

The delegation had a fruitful meeting with Prime Minister Datuk Seri
Abdullah Ahmad Badawi. In a subsequent statement, the chairman of the
council’s group for Malaysia, Michael Gadbaw, stressed that they were
impressed with the leadership that was offered and the strong pro-business
focus. They were equally impressed with the Prime Minister’s commitment
to efficient and transparent governance. Most importantly, they saw
tremendous opportunities in Malaysia. A US-Malaysia FTA is one obvious
way of capitalising on the opportunities that are available. It needs no
reminder that Singapore already has an FTA with the US. Thailand and
the US are set on negotiating a USThailand FTA.

A US-Malaysia FTA is not a solution to all woes. Neither is it the best
we can do to make Malaysia more attractive to all foreign investors. But
it is a good instrument to put in place.

It is perhaps a necessary cog, since the US is keen to form bilateral
FTAs with individual Asean countries. While Singapore has already
completed its FTA with the US, others like Indonesia and the Philippines
qualify for an FTA. This is because Indonesia and the Philippines are
members of the World Trade Organisation (WTO) and the Trade and
Investment Framework Agreement (TIFA). Not having an FTA with the US
could put Malaysia at a disadvantage if our neighbours do have the
benefit of such an agreement.

It is estimated that Malaysia’s potential exports to the US could
increase by five to 10 per cent in the event that it enters into an FTA
with the US. Imports are expected to increase by three per cent or so.
US manufacturing FDI will, in all likelihood, increase with an FTA. And
Singapore will not have the edge over Malaysia of being a tariff-free
gateway to the US.

But the road to the conclusion of a US-Malaysia FTA will not be smooth or
without compromise. Judging from the US-Singapore and US-Chile FTAs, it
is clear that there will be several areas on which Malaysia will have
to take hard decisions.

There is no doubt an FTA will be based on such principles as non-discrimination,
mostfavoured nation treatment and market access obligations. In effect,
this will mean that American firms will have as much access to
Malaysian markets as Malaysian firms will have to US markets. The
Malaysian position may be more on edge due to the fear that, in practice,
the Americans will be better equipped to enter Malaysian markets than
the other way round.

The services sector will have to open up and handle competition in a
more mature fashion. In particular, the banking, insurance, and
securities services will be the focus of attention. So will express
delivery and professional services.

While the field of competition will be more intense for Malaysian firms
in the services sector - with the banking sector as a prime example -
consumers in Malaysia can expect to gain from such competition.

Another thorny area may lie in the area of intellectual property rights
(IPR). It is true that Malaysia is making progress in ensuring IPR
protection. The campaign on the sales of pirated VCDs that was conducted
not too long ago is still fresh in our memories. Yet, the US might
expect levels of protection that may run counter to our moral intuition.

Let us take the case of a patented drug that effectively manages, say,
HIV/AIDS. It might be felt appropriate to resort to the import of a
generic drug that is based on the patented version, or not to extend the
patent of an antiAIDS drug when the patent expires.

Other issues that might be pushed before an US-Malaysia FTA is concluded
are competition and Government procurement. Singapore committed itself
to enacting laws proscribing anti-competitive conduct.

A US-Malaysia FTA will demand strong obligations from Malaysia. It will
push us towards greater liberalisation. Complain as we may that such an
FTA will be an instrument of economic imperialism, it will not be
pragmatic to deny it.

At any rate, the US and Malaysia are expected to sign the Trade and
Investment Framework Agreement (Tifa) some time this year. The Tifa is a
precusor to a US-Malaysia FTA. Given the flow of events and
circumstances, globally and regionally, it would be more pragmatic to
debate the issues, engage in tough negotiations and get the best deal
possible than to whine about the ways of the US.

The writer is a Research Fellow with the Malaysian Institute of Economic
Research (MIER).