TWN | 15 May 2013
Malaysia and the TPPA
(Kuala Lumpur, 15 May (Fauwaz Abdul Aziz) The stance that the US has taken on Malaysia’s (and other countries’) laws, regulations and policies vis-à-vis US exports and investments have been its traditional position in relation to market access in manufactured goods, agricultural goods, services in general as well as specific services sectors (such as the financial services, telecommunications, etc), intellectual property rights, investment liberalisation and investor protection, liberalisation of government procurement and competition issues (over business practices, monopolies and government-linked companies). In terms of trade in goods - as Professor Jane Kelsey of New Zealand’s University of Auckland, among others, have shown - the US seeks to remove all remaining market access barriers in its trading partners and to liberalise, streamline and harmonise the rules.[1] For services, it seeks to impose disciplines on governments’ domestic regulation of services[2] in terms of administrative decisions, criteria for regulation and licensing procedures.[3] For intellectual property (IP), the US has promoted the ‘rights-holders’, from pharmaceuticals and their registered patents and those in the digital domain and their copyrights, to those holding ‘trade secrets’ to proprietary formula and ingredients.
In terms of investments, many have shown how the US has generally soughtto establish a set of standards for treatment of foreign investments and investors by host countries, including obligations on the right to entry and establishment, most-favored nation treatment (MFN) and national treatment (NT), fair and equitable treatment and full protection and security, restrictions on performance requirements, freedom to designate senior management and boards of directors, freedom to transfer funds, and protection against direct or indirect expropriation.[4]
Obligations on the right to entry and establishment provide foreign investors the rights to entry and establishment in trade partner countries without (or with minimal) conditions and regulations and to operate in the host countries without most conditions now existing. Investors from other TPP countries are given “pre-establishment” rights, which means that rights are provided to potential investors even before they enter the country, implying that there would be no or minimal regulation on the entry of investments. In contrast, post-establishment rights means that the host country can decide whether or not to accept a potential investor or investment.
Most Favoured Nation and National Treatment principles:MFN treatment means that countries cannot discriminate between their trading partners by granting preferential treatment to one while withholding such treatment from another.NT, meanwhile, means that the foreign investor would be treated no less favourably than local investors (in other words, a foreign investor may be given treatment better than or equal to - but not less than - the local).
Fair and Equitable Treatment: Thishas been interpreted by some international tribunals to be a standstill on regulation, whereby new laws and regulations and policies cannot be introduced for as long as the investor is present, nor can existing laws be amended.
Scope and definition of ‘investment’ to the US is usually very broad, covering FDI, portfolio investments, credit, intellectual property, etc.
A ban on performance requirement would mean that the Malaysian government would be prohibited from imposing many types of performance requirements on the foreign investor or investment (unless it is listed as an agreed exception), such as regulation on limits and conditions on foreign equity, obligations for technology transfer, measures for using local materials and for increasing exports or limiting imports would be prohibited or disciplined.
Rights given for funds transfer obliges governments to allow free mobility of funds into and out of the country, thus prohibiting regulations/controls on funds transfer.
Protection of Investors’ rights against expropriation would mean strict standards of protection for foreign investors’ rights, especially in relation to "expropriation" of property. A wide definition is given to expropriation including “direct” and “indirect” expropriation. Indirect expropriation can include the loss of goodwill and future revenue/profits of a company or an investor, as a result of a government measure or policy.If there is such expropriation, the host state is liable to compensate the investor in full including interest at a commercially reasonable rate.
Investor-State Dispute Settlement
Another aspect of the US position on investments relates to its preference, in the event of a dispute between a foreign investor and a government, for the dispute to be settled by way of international arbitration, in particular, the investor-state dispute settlement (ISDS) mechanism. ISDS is becoming an increasing source of controversy the world over because it allows foreign investors to challenge an action by the host government– even if such action were a law, regulation or court decision done in the public interest, such as over a health or environmental concern – on the premise that such an action had or would affect their investment or profits.
Such legal challenges are made at international arbitration tribunals such as the UN Commission on International Trade Law (UNCITRAL) and the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID), all which effectively allow foreign interests to circumvent the domestic legal and judicial systems of the countries they have invested in. In other words, the ISDS mechanism effectively empowers foreign corporations to ignore and override Malaysia’s domestic judicial, legal and parliamentary systems, for example, as well as its Federal Constitution and the unique and historical federal-state division of powers that Malaysia has developed over the decades. Decisions made at international arbitration tribunals functioning under the ISDS system have often seen foreign investors being granted greater rights than are provided to domestic firms and investors under the national constitutions, laws and court systems of host countries.
According to the latest account by the United Nations Conference on Trade and Development (UNCTAD), by the end of 2012, there have been a total number of 518 known cases (unlike domestic judicial systems, international arbitration are generally secret and closed-door affairs), with the total number of countries that have responded to one or more ISDS claims having increased to 95. The overall number of concluded cases reached 244, out of which approximately 42% were decided in favour of governments and 31% in favour of investors. Approximately 27% of the cases were settled. The year 2012 marked, in fact, a new record when at least 62 new investment arbitration cases were initiated against host countries - the highest number of known treaty-based disputes ever filed in one year.
All the above demands – either explicitly made in the USTR report or implied by their citation in a report on foreign trade barriers – find parallels in what is known or what is assumed to be the US’ agenda for the TPPA (based on a number of ‘leaked’ chapters and texts proposed for the negotiations or on past FTAs that the US has signed or tried to sign with other countries). Whether it relates to market access in manufactured goods, agriculture or services, intellectual property, investment, government procurement or competition issues, the US is seeking a number of legally-binding provisions to realise the reduction or elimination of the trade barriers to them to be included in the TPPA agreement between Malaysia and the other 11 countries. These will affect the lives, interests, welfare and wellbeing and future of Malaysia’s 27 million people and its future generations. Consider, for example, the intellectual property (IP) measures relating to the health sector that ultimately will ensure the greatest returns for US firms that are intellectual property ‘rights-holders’ but at the expense – and long-term welfare of the general public, which include:
– lowering the requirements for the patenting of medicines, so that even minor alterations of already existing medicines can be given additional patent protection status (even if the alteration for which the patent is sought actually offers no therapeutic benefit
– requiring the patenting of diagnostic, therapeutic and surgical methods (so that innovators of patented method would have to be paid their royalties, without which those methods – no matter how urgent or critical to patients – would not be allowed in Malaysia)
– lengthening patents registered by pharmaceutical firms so that generic manufacturers can be kept out of the market and drug prices can be propped up for longer periods of time
– making it harder for generic manufacturers to obtain regulatory approval for drugs based on innovator (patented) drugs
– create additional monopolies for patents based on clinical ‘data exclusivity’
– giving customs officials greater powers to confiscate even legitimate generic medicines based on mere suspicion or even ‘confusion’ with patented medicine
– imposing higher prices on national pharmaceutical reimbursement programs
In short, TPPA countries such as Malaysia are being pressured into agreeing to patenting provisions that will result in the delay in entry of affordable generic medicines into the Malaysian market, wherein pharmacist-recommended generic medicines make up 84.7% of prescriptions requested. If these provisions are agreed to, Malaysians will have to pay higher prices for medicines for a longer time. To illustrate the possible price difference between patented and generic medicines and repercussions of signing onto higher, broader and stricter patent protection provisions, some quarters assert that Malaysians could experience price hikes of between 60% to 80% for certain drugs, while other authorities assert that patented medicines can become 1,044% more expensive than their generic equivalents in Malaysia. The patented version of medicines to treat /HIVAIDS, for example, cost US$15,000 per patient per year, while the generic version only costs US$67 per patient per year.
The regulatory and transparency chapters warrant another discussion altogether in terms of their impact on the government’s ability to make and implement policies and regulations. For now, it suffices to note, as Professor Jane Kelsey from the University of Auckland has pointed, that the regulatory coherence and transparency chapters focus on process, evidence, documentation and participation by industry players, with the former adding a general presumption in favour of light-handed regulation. When read in conjunction with rules, presumptions, processes and arrangements in other chapters that are also designed to constrain domestic regulatory decisions, the meaning of the TPPA reaching further ‘behind the border’ than any previous agreement becomes clearer.
Conclusion
If we put the USTR Report on foreign trade barriers, together with discussions surrounding the ‘leaked’ TPPA chapters and texts on investment, intellectual property, regulatory coherence and transparency, among others, we get a clearer picture of what’s at stake, what changes are being planned to our laws, regulations and policies, and who are the stakeholders who stand to benefit the most from those changes. Undoubtedly, these are monumental issues, and there is no question that there is a heavy obligations on Malaysia and its state and privates enterprises to reform themselves as well as the way they have been doing things.It is beneficial, for example, for Malaysia’s government agencies, GLCs and private companies to be more efficient, transparent and accountable. However this should be a nationally-initiated and nationally-based process, should be based on nationally-developed criteria that suit Malaysia’s current level of development and in accordance with a nationally-set timeline that suits Malaysia’s national goals. Although in an ideal situation, all Malaysian companies – bumiputera and non-bumiputera firms – would be able to withstand and thrive in a totally free global environment, in reality the time for this is not yet ripe, as Malaysian companies – particularly bumiputera companies – are too small and not yet advanced in technology, management andmarketing that can take on the full might of multinational corporation from large TPPA countries such as the US. Reform should be a national exercise with the aim of benefiting consumers, the public welfare as well as the companies themselves. As it is, the TPPA negotiations are plagued with secrecy and an utter lack of transparency. All TPPA governments have signed confidentiality agreements that prevent public disclosure of the negotiating texts until four years after the TPPA has been signed. Most of the Malaysian private sector (save for perhaps a few privileged firms and economic associations) and all of its civil society organisations are only allowed to raise concerns regarding what they think – since no TPPA government will confirm or deny the contents of the leaked texts – will be in the TPPA, without the actual texts being divulged to confirm or deny the feared or suspected reforms at hand.
On 28 February last year, more than 100 eminent economists wrote an open letter stating that if US proposals are accepted in the TPPA, the agreement will unduly limit the authority of participating parties to prevent and mitigate financial crises. This is because they suspect the TPPA will restrict the ability of governments to deploy controls on the flow of capital, as part of a broader menu of policy options to prevent and mitigate financial crises, which can affect whole economies and the lives and livelihoods of millions of people. International financial institutions such as the International Monetary Fund have come to agree that Malaysia was right in the late 1990s to use capital controls to stem dangerous asset bubbles and currency appreciation. They have come to agree that Malaysia was right in using its monetary policy to protect its economy from the dangers of abrupt capital flight. But nearly all US-led FTAs and investment provisions such as those in the TPPA prevent countries from using capital controls – even during times of financial crises and economic crises, even though capital controls was what helped Malaysia survive the 1997 Asian financial crisis. What has Malaysia proposed to ensure that it will be allowed under the TPPA to deploy capital controls without being subject to investor lawsuits, as part of a broader menu of policy options to prevent and mitigate financial crises.
It is clear that the changes and reforms pushed by proponents of the TPPA have immense implications for Malaysians as a whole. It would be a mistake to dive into such reforms without our eyes wide open as to the bigger, longer-term costs and benefits – and actual beneficiaries – of the legally-binding agreements we intend to sign onto. What distinguishes the liberalisation exercises that have taken place within the country and the demands placed on the latter from outside that have been tabled for negotiations at the TPPA is that the latter, when fulfilled, are legally-binding and can only been reneged at the costs of considerable international legal suits, settlements and further negotiations. Let us not rush into the latter, and later regret the fait accompli without having scrutinised, debated and deliberated on their costs and benefits. As they say, only fools rush in.
Part I, Malaysia and the USTR Report, can be found here.
Endnotes
[1]‘Trans-Pacific Partnership (TPP) Trade Ministers’ Report to Leaders, Endorsed by TPP Leaders, 12 November 2011 (http://www.ustr.gov/about-us/press-office/press-releases/2011/november/trans-pacific-partnership-tpp-trade-ministers%E2%80%99-re), cited by Jane Kelsey in “The Trans-Pacific Partnership Agreement –
A Gold-Plated Gift to the Global Tobacco Industry?” paper to the AJLM 2013 Symposium, Boston, US, January 2013.
[2]WTO, Working Party on Domestic Regulation, Disciplines on Domestic Regulation Pursuant to GATS Article VI:4 , Informal Note by the Chairman, Room Document, 20 March 2009, cited in cited in Kelsey, “The Trans-Pacific Partnership Agreement – A Gold-Plated Gift to the Global Tobacco Industry?”
[3] Article VI of the GATS, cited in Kelsey, “The Trans-Pacific Partnership Agreement – A Gold-Plated Gift to the Global Tobacco Industry?”
[4] David A. Gantz, “The Evolution of FTA Investment Provisions: From NAFTA to the United States - Chile Free Trade Agreement”, American University International Law Review, (19:679) 2004.