Eurasia Review | 9 Mar 2015
Why is Malaysia so interested in joining the TPP? – Analysis
By Cassey Lee* for ISEAS
Institute of Southeast Asian Studies
The 2014 public debates and protests against the Trans-Pacific Partnership Agreement (TPP) are unique in Malaysian history for at least three reasons. First, little is known about the actual content of the proposed agreements because the TPP negotiations have been shrouded in secrecy. Second, there has been significant opposition to the TPP outside the government. Third, various parties that often take opposite sides on many economic and political issues are now united in objecting to the TPP.
This leads to the question why the Malaysian government is so committed to signing the TPP despite its lack of popularity amongst various quarters in Malaysian society. Are there potential economic benefits that accrue from the TPP that are not apparent to parties opposed to the TPP? Who are the winners and losers from the TPP?
In this essay, an attempt is made to identify some possible reasons underlying the Malaysian government’s intention to sign the TPP. It explores the economic and political factors underlying the government’s decision as well as the objections coming from outside the government.
MALAYSIA IN TPP – SOME BASIC FACTS
Malaysia’s interest in the TPP is related to the failure to conclude the Malaysia-US FTA on which the country started negotiating in March 2006. A key reason for Malaysia’s interest in this FTA was to reverse the decline in Malaysia-US trade and US foreign direct investment (FDI) coming to the country – a trend that continues until today. Table 1 shows that the US share of Malaysia’s exports has indeed declined – from 11.1 percent in 2009 to 8.1 percent in 2013. Similarly, the US share of FDI into Malaysia has dropped from 24.8 percent in 2005 to 8.6 percent in 2013.
The last round of negotiations for the Malaysia-US FTA took place in July 2008 – this despite the fact that the US Trade Promotion Authority (TPA) had lapsed a year earlier on 30 June 2007. Negotiations were however suspended in January 2009. The US Trade Representative (USTR) subsequently notified Congress in October 2010 that bilateral trade negotiations between the US and Malaysia would be continued within the TPP negotiations (Rinehart 2014).
A number of factors were responsible for the failure to conclude the Malaysia-US FTA. Chief amongst these were obstacles in the form of issues regarded to be “sensitive”, such as government procurement, intellectual property rights protection and market access to the services sector (Rinehart 2014).
In the US, the decision to enter into TPP negotiations was approved by the outgoing Bush administration in September 2008, and Barack Obama officially revived interest in November 2009 after he took office in January that year. In Malaysia, a new prime minister (Najib Razak) took office in April 2009 following a dismal electoral performance by the ruling coalition, and Malaysia’s participation in the TPP negotiations began in October 2010. These political changes are likely to have affected the Malaysia-US FTA negotiations and the subsequent shift to the TPP negotiations. However, there are other reasons for Malaysia’s participation in the Agreement.
HOW THE TPP FITS MALAYSIA’S ECONOMIC STRATEGY
In 2009, the change in Malaysia’s political leadership took place amidst a severe economic contraction caused by the 2008 Global Financial Crisis (GFC). Even though the economy recovered quickly, its annual economic growth has been moderate, at slightly less than six percent per annum. It was within such an economic climate that the Najib administration initiated a set of medium- to long-term policies to spur growth and achieve developed- country status by the year 2020.
The national economic strategy under the Najib administration is encapsulated in three major policy initiatives, namely, (i) 1Malaysia – a broad welfare-oriented development programme; (ii) the Government Transformation Programme (GTP) – a programme aimed at enhancing civil service performance; and (iii) the Economic Transformation Programme (ETP) – a private-sector driven economic growth programme.2
These policies were incorporated into the Tenth Malaysia Plan, the country’s five-year development plan covering the 2011-2015 period and released in June 2010. Even though the ETP is mainly a sector-focused plan and the TPP does not feature prominently in it, trade is an important component of the government’s overall economic strategy. In the Plan, it is explicitly stated that trade will continue to be a key driver for economic growth. More specifically, the government plans to strengthen exports to traditional markets such as the US by pursuing free trade agreements such as the TPP (Tenth Malaysia Plan, p.12 and p.103).
Beyond these broad development policy initiatives, it is useful to analyse how the TPP might impact the Malaysian economy in greater detail. This entails an analysis of the economic benefits and costs from the TPP.
ECONOMIC BENEFITS FROM JOINING TPP
Market access – not just to the US market – is a key economic rationale for Malaysia to join the TPP, as is evident in statements from the Ministry of International Trade and Industry (MITI):
“The Government views the TPP as an important initiative as Malaysia seeks to expand market access opportunities, enhance our competitive advantage, build investor confidence in the country which draws foreign investments, and build capacity through FTAs.” (Ministry of International Trade and Industry, Malaysia 2014, p. 3)
The major beneficiaries of the Agreement would therefore be Malaysian exporters to markets in TPP countries. This effect would be large, given the steady decline that had been taking place in the TPP countries’ share in Malaysia’s trade. In 1990, TPP countries had accounted for 60.2 percent of Malaysia merchandise trade (coverage ratio) but this declined to 38.6 percent in 2013, as illustrated in Figure 1. Currently, Malaysia has signed FTAs with a number of TPP countries such as Australia, Chile, New Zealand and Japan. Taking into account ASEAN countries that are part of the TPP (such as Brunei, Vietnam and Singapore), the FTA coverage ratio with all these countries is 29.8 percent in 2013. This suggests that the marginal coverage ratio for merchandise trade associated with the TPP is 8.8 percent – most of which (8 percent) is accounted for by the US.
The question of whether the Agreement can improve Malaysia’s exports to TPP countries is an important one. A preliminary econometric analysis by the author suggests that the TPP is likely to be associated with a higher level of exports. It should be noted that the quantum of increase in exports is likely to be different for each of Malaysia’s trading partners. The TPP may also increase imports by allowing greater market access to Malaysian markets. The heightened competition from imports would likely result in lower prices in the domestic markets.
Aside from merchandise trade, the TPP could also affect the trade in services. The volume of trade in services is about 20 percent that of merchandise trade. This is not surprising as services are primarily non-tradable. Malaysia’s services trade balance has been relatively healthy in recent years (Figure 2). Data from the USTR indicate that Malaysia had a services trade deficit of US$1.1 billion with the US in 2012.
The sector’s role in the Malaysian economy has been increasing over time, while that of the manufacturing sector has been declining. The services sector’s share of GDP has increased from 50 percent in 2000 to 60 percent in 2013 (Figure 3). This occurred alongside a decline in the manufacturing sector’s share of GDP from 31 percent in 2000 to 24 percent in 2013.
Other reasons for joining the TPP include competitiveness (competitive advantage) and FDI. Historically, FDI has played an important role in the Malaysian economy and continues to do so. FDI’s role has become even more crucial in the post-Asian Financial Crisis (AFC) period because of the decline in domestic investment. Total domestic investment (private and public) as a percentage of GDP has dropped from around 40 percent in the few years prior to AFC to around 22 percent in the post-AFC period (Menon 2014). Domestic investment has recovered slightly, especially in the past three years. Today, about 50 percent of private investment takes place in the services sector while the manufacturing sector’s share is only 25 percent (Figure 4). The importance of services is also reflected in FDI – some 42 percent of FDI inflows during the 2008-2010 period went to the sector (OECD 2013). Thus, in considering the potential impact of the TPP on FDI, the services sector is likely to be important.
Will the TPP significantly increase FDI for Malaysia? At present, TPP countries that are major sources of FDI for Malaysia include Japan and Singapore – Table 3 shows that these countries respectively account for 14.7 percent and 18.1 percent of total FDI in 2013. The US share of FDI in Malaysia at 8.6 percent is much smaller. These three countries alone account for about 40 percent of Malaysia’s FDI. The US share is relatively low, but its share of FDI stock is slightly higher at 11 percent (OECD 2013).
Are the overall economic benefits accrued to Malaysia from joining the TPP large? There appears to be no consensus amongst existing studies on this question. For example, Petri et al. (2011) provides a more optimistic assessment compared to Cheong and Tongzon (2013). One reason for this ambiguity lies in the difficulty of forecasting the long-term impact of the TPP on FDI.
Clearly, there are economic benefits from TPP associated with improved market access and FDI. This optimism is shared by industry associations in Malaysia such as the Federation of Malaysian Manufacturers (FMM). Whether these benefits are sufficient to offset the costs of the TPP is an important question. The political decision to implement the TPP is likely to depend on the cost-benefit calculus and how this varies in society at large. The next section will examine its cost and distributive effects.
COSTS AND DISTRIBUTIVE EFFECTS
Trade liberalization has distributive effects. While the TPP is likely to have some positive benefits via increased trade and FDI, there are costs associated with it. For some parties, these costs can be perceived to be greater than the benefits. It is for this reason that the TPP has been very unpopular amongst various associations, non-governmental organizations (NGOs) and opposition parties in Malaysia. On 14 August 2013, 61 NGOs and 10 coalitions jointly endorsed an open letter of protest against the TPP, called the “Bantah TPPA” (Oppose TPPA) letter. The Bantah TPPA open letter provided a number of key concerns that highlight the expected distributive impacts of the TPP. These include:
– Restriction on the country’s sovereignty and on government policy space such as capital controls and public health (e.g. tobacco control);
– Increased competition from imports following tariff reductions and non-tariff barriers, which would have an especially adverse impact on SMEs;
– Less room for preferential policies in government policies such as procurement, employment and government support for state-owned enterprises (SOEs) and government-linked corporations (GLCs);
– Environmental degradation;
– Ineffective protection of labour rights, lower wages and unemployment, and;
– Reduced access to generic medicines (in terms of availability and prices) and knowledge through intellectual property right protection measures.
The signatories to this protest letter include established and active NGOs such as the Malaysian Trades Union Congress, National Union of Bank Employees, Sahabat Alam Malaysia, and Consumer Association of Penang. A reading of the list of issues and signatories to the Bantah TPPA open letter shows that there are concerns that the TPP may adversely affect the welfare of workers, groups of consumers (health) and specific groups currently benefiting from affirmative action policies (e.g. Bumiputra rights groups). Some of these concerns are not new and were also articulated during the Malaysia-US FTA negotiations.
On the part of the government, perhaps the most difficult items in the TPP negotiations are issues related to government procurement, as well as support for SOEs and GLCs. These issues are related to the interventionist role that the Malaysian state has played in bringing about growth and redistribution. In the area of government procurement, this entails the allocation of contracts to the Bumiputra business community – a practice that dates back to the implementation of the New Economic Policy (NEP, 1970-1990) but has continued to the present day. State involvement in the economy also took the form of regulatory requirements on corporations that are above the designated size thresholds to allocate a given percentage (30 per cent) of their equity and employment to the Bumiputra community (Jesudason 1989). The implementation of NEP also saw the creation of state-owned corporations in the private sector in the late 1960s to 1970s, which served the redistributive goal of NEP through equity holdings (trusteeship, on behalf of the Bumiputra community) and employment. This strategy has evolved further from the 1980s to include corporations established for heavy industrialization (e.g. Proton) and privatized state enterprises (e.g. GLCs such as Tenaga Nasional and Telekom Malaysia). As Tham (2014) has noted, it has become increasingly difficult for Malaysian trade policies to accommodate the dual economic-race paradigm that underpins state intervention in the economy. The difficulties encountered in the TPP negotiations in the area are manifestations of this phenomenon. The Malaysian government has been seeking to deal with these issues through either a carve-out (exclusion), appropriate threshold levels or/and a transition period (delayed application). Thus far, there is no indication whether progress has been made in this area. This also makes it difficult to assess how the government’s Bumiputra policies are likely to change in response to the TPP. What is certain is that some Bumiputra policies are likely to continue, at least for a certain period, even after the TPP is signed.
While the costs of participating in the TPP are usually associated with the issues discussed above, there is also a need to consider the potential costs of not participating in the TPP. These could be the forgone economic benefits discussed earlier. Such forgone benefits could be larger if trade and investment diversionary effects arise from the competing countries that join the TPP.
THE POLITICAL ECONOMY OF TPP
In a democratic country, trade policies are the outcomes of interactions between the policy’s demand side and supply side (Rodrik 1995). The demand for a trade policy like the TPP is derived from the aggregation of the individual preferences in society, as illustrated in Figure 5. The demand-side can be complex, involving various interest groups such as NGOs, political lobbies and trade associations. On the supply side for trade policy, the preferences and goals of policymakers/politicians matter e.g. re-election and rent-seeking. However, politicians are constrained by the institutional set-up for crafting trade policy (e.g. legal rules).
On the demand side, there are clearly some interest groups that are not in favour of the TPP for various reasons discussed earlier. These groups include trade unions, consumer groups, environmental groups and groups representing various ethnic communities. It is not entirely certain that these groups represent consumer interests in Malaysia in a comprehensive manner. On the other hand, business associations representing larger firms are most likely to be in favour of the TPP for the prospects of improved market access.3 The net effect of these various opposing groups is difficult to ascertain.
Following Naoi and Urata (2013), one way to gauge public interest in TPP is to use Google Search Trend data. Applying the search term “TPP” will show that interest in the TPP has fluctuated over time in Malaysia (Figure 6). However, interests in the TPP are relatively low in comparison with that for other topics such as the GST (Goods and Services Tax) being implemented in April. Between September 2011 and December 2014, the volume of search for the term “GST” was 18 times the volume of search for “TPP” in Malaysia. Reflective of this is the observation that even though the TPP negotiations began in October 2010, it was not an issue that was heavily politicised in the 13th General Elections in May 2013.
Two dimensions are important on the supply side of trade policy where the TPP is concerned. First, the TPP was not an issue that affected the re-election possibilities of the ruling coalition, Barisan Nasional, in the 13th General Elections even though economic issues were important. However, as negotiations resumed after the elections, protests against the TPP began to intensify.
The second dimension relates to motivations regarding the diversion of resources to favoured groups. There has been some academic discussion highlighting links between government procurement and rent-seeking (Gomez and Jomo 2007). This would imply that the ruling political coalition would not be interested in pursuing any trade policy that would weaken its ability to divert resources, via government procurement, under the guise of achieving socio- economic objectives.
However, given the importance of economic performance even in the post-election period, the ruling political leaders are likely to be interested in trade policies that may help revitalize the economy. This could be related to internal party survival or longer term political survival (next elections). The potential benefits of trade and FDI could help counter the lethargic domestic sources of growth. This focus on growth strategy can be consistent with resource diversion – in the way that policymakers regard redistributive and growth complementarily.
Finally, another important feature of trade policy supply in Malaysia is how trade agreements such as the TPP do not require parliamentary ratification. Only cabinet-level approval is required. This insulates the ruling coalition party from political opposition to the TPP in the parliament in which it currently lacks the required majority vote. It also implies that politicians have full flexibility in choosing when to ratify the TPP, if at all.
UNCERTAINTIES AND OTHER FACTORS
Two problems complicate any analysis of the political economy of the TPP. The first relates to the uncertainties surrounding the terms being negotiated and the second problem lies in the anticipated difficulties of getting the US Congress to ratify the trade agreement. The complex negotiations involving twelve countries also further complicates the timing of the TPP’s ratification. The uncertainties related to electoral cycles are important since it can affect the ratification of the TPP.
In addition, strategic factors could be another important consideration. Malaysia maintains close cooperation with the US on a number of issues. In the case of the TPP, its strategic value to the US goes beyond the “pivot to Asia” to counterbalancing the rising influence of China (Fergusson et al. 2013). The US sees Malaysia as a moderate and democratic Muslim nation that shares common interests in areas such as counter-terrorism and counter-narcotics. These aside, Malaysia continues to maintain considerable independence in other issues such as the Israel-Palestine conflict and in its diplomatic ties with China. These issues have disrupted the Malaysia-US FTA negotiations in the past. Thus, the negotiations with the US within a broader trade agreement such as the TPP have the effect of neutralizing the impact of the Israel-Palestine conflict on trade agreements involving the US.
THE DYNAMICS OF TPP’S POLITICAL ECONOMY CALCULUS
Based on the above discussions, the narrative underlying the Najib administration’s interest in the TPP can be stated as follows:
(a) 2009 – 2012
The initial impetus for participation in the TPP was likely to have emerged from Malaysia’s interests in the Malaysia-US FTA. The transition from the Malaysia-US FTA that faltered to the TPP was probably facilitated by the fact that Najib Razak became prime minister in April 2009 – 18 months before Malaysia began the TPP negotiations. This meant that the new government did not have to face electoral pressures. The TPP also fitted the new PM’s economic transformation agenda, which is aimed at revitalizing economic growth. The potential benefits from the TPP are not only larger than those from the Malaysia-US FTA but also include the revitalization of FDI in the country, especially in the manufacturing and services sector. It is unclear whether redistributive government policies will be affected. An appropriate threshold (based on size of the Malaysian economy) and a negotiated medium- term transition period will make the TPP more attractive from a political perspective.
As the TPP negotiations progressed, the cost of the TPP in terms of its impact on government policies became more evident – resulting in the mobilization of protests against the Agreement by NGOs and opposition political parties especially after mid-2013.4 This was also the period immediately after the 13th General Elections held in May 2013 during which the ruling coalition performed poorly. The weakening fiscal situation also prompted the government to finally introduce the GST, which is scheduled to be implemented in April 2015. Both the GST and the TPP have become major focal points of protests by NGOs and opposition parties. It is quite understandable that the Najib administration is in no hurry to sign the agreement, given that the benefits of the TPP will only accrue in the medium- and long-term and that its ratification by partner countries is uncertain. A wait-and-see approach is sensible as there is no reason to incur additional political costs in such a situation.
The TPP is undoubtedly one of the most important trade agreements the Malaysian government has ever considered. There are clear economic benefits but their magnitude cannot be determined and will in any case only materialize in the medium- to long-run. The impact on the government’s redistributive policies could be substantial but can be reduced and made more politically palatable if appropriate thresholds and a phased implementation can be incorporated.
The TPP is also more politically acceptable if some room for resource diversions to ruling political elites are maintained. The uncertainty surrounding the TPP’s ratification by major partner countries together with the fact that parliamentary ratification is not required in Malaysia makes it sensible for the Malaysian government to delay ratification of the agreement.
This suggests that the supply side factors of trade policy will dominate in Malaysia.
About the author:
*Cassey Lee is Senior Fellow at ISEAS; e-mail: email@example.com.
This article was published by ISEAS as ISEAS Perspective No. 14, 2015 (PDF)
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1. The author thanks Masahiro Kawai and Sanchita Basu Das for their suggestions and comments on an earlier version of this essay. Additional comments and suggestions from Francis Hutchinson and Ooi Kee Beng are also gratefully acknowledged. The usual caveat applies.
2. The Government Transformation Programme and Economic Transformation Programme are both part of the National Transformation Programme which represents the Malaysian government’s strategy to achieve developed country status.
3. Aside from the statements from the FMM, further evidence comes from findings of the ASEAN Business Outlook Survey 2014 in which 41 percent of the firms interviewed in Malaysia responded in the affirmative (yes) to the question “Will the TPP Impact Where Your Company Plans Future Investments in the Region?”. The sample size is, however, too small to make this finding definitive.
4. There is a stark contrast in terms of political opposition, to the TPP and the Regional Comprehensive Economic Partnership (RCEP). There is almost no political opposition to RCEP in Malaysia. This could be due to several reasons. First, the TPP is often seen as a US-led initiative and earlier opposition to Malaysia-USA FTA could have been “transferred” to it. Second, RCEP is seen as an ASEAN-led initiative – there has been virtually no political objection to any ASEAN-led initiatives. Third, RCEP is regarded as less ambitious than the TPP in scope and depth, thus providing more flexibility and safeguarding of national interests.