Saturday, July 24

Weighing the pros and cons of the TPPA

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TA01696The main objective of trade agreements are to liberalise the flow of goods and services between nations, and the Trans Pacific Partnership Agreement (TPPA) is the cornerstone US economic policy in the Asia Pacific.

According to some, this is the most substantial trade agreement in the Asia-Pacific region involving 12 countries including Malaysia, Mexico, Japan, and the US, and representing almost 40 per cent of global output and 25 per cent of global exports.

The TPPA is a proposed trade agreement among twelve Pacific Rim countries concerning a variety of matters of economic policy which agreement was reached on October 5, 2015 after seven years of negotiations.

The agreement contains measures to lower trade barriers and establish an investor-state dispute settlement mechanism.

The US government has considered the TPPA as the companion agreement to the Transatlantic Trade and Investment Partnership (TTIP), a broadly similar agreement between the US and the European Union.

Historically, the TPPA is an expansion of the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP or P4), which was signed by Brunei, Chile, New Zealand, and Singapore in 2005.

Beginning in 2008, additional countries joined the discussion for a broader agreement: Australia, Canada, Japan, Malaysia, Mexico, Peru, the US, and Vietnam, bringing the total number of participating countries in the negotiations to twelve.

Participating nations aimed at completing negotiations in 2012, but contentious issues such as agriculture, intellectual property, and services and investments caused negotiations to continue. Implementing the TPPA has been one of the trade agenda goals of the Obama administration in the US.

RHB Research Institute Sdn Bhd (RHB Research) noted that the agreement has 29 chapters, more encompassing and covers issues that are beyond agreements (FTAs).

“The concessions that are negotiated will determine not only the trade barriers among TPPA but also approach issues on competition, labour, environment, government procurement, and intellectual property TPPA negotiators want to distinguish the deal from previous FTAs in terms of tackling the tough non-tariff issues, standards in the area of services investment, e-commerce, intellectual property, labour, and environment,” said RHB Research.

While most Asia-Pacific countries seek an ambitious agreement, and are firmly committed to making strong progress in the negotiations with the hope of a timely conclusion, the devil is now in the details as each country tries to see that its major concerns are addressed.

A number of global health professionals, internet freedom activists, environmentalists, organized labor, advocacy groups, and elected officials have criticized and protested against the treaty, in large part because of the secrecy of negotiations, the agreement’s expansive scope, and controversial clauses in drafts leaked to the public.

 

What does this mean for Malaysia?

Malaysia, being an export-oriented economy, where exports of goods and services account for more 80 per cent of GDP, also stands to see substantial gains from improved access to a large and diversified market.

RHB Research explained that exports to TPPA signatory countries made up 41 per cent of total exports and 34 per cent of imports for 2015. However, the amount of trade and investment to be boosted should not be overstated as the traditional tariff barriers in international trade have already been reduced to relatively low levels over time via the signing of numerous FTAs.

“Indeed, the main boost to trade and investment for Malaysia would be in the TPPA-covered markets that are not encompassed under the country’s existing FTAs and these are the US, Canada, Mexico, and Peru,” said the research house.

According to a study by Peterson Institute for International Economics, Malaysia could see a 6.1 per cent boost to GDP and 12.4 per cent to exports by 2025, second only to Vietnam’s 13.6 per cent boost to GDP and 37.3 per cent to exports. Singapore is likely to be a relatively smaller beneficiary, partly because it has an existing free trade agreement with the US unlike the former two countries.

Also, the preferential access the agreement given to Malaysian exporters by other nations that are part of the bloc provides Malaysian businesses in a wide range of industries a competitive advantage over rivals from countries which are not part of the TPPA.

The Malaysian International Chamber of Commerce and Industry (MICCI) believe that the TPPA is an important initiative for Malaysia to expand its market access opportunities and enhance its competitive advantage.

It serves to build investor confidence and attract foreign investment into the country as well as build capacity through free-trade agreements (FTA) which plays a key role in regional integration.

“To ensure that Malaysia continues to gain market access internationally and remain an attractive location for foreign investment, the country needs to pursue bilateral and regional trading arrangements,” said MICCI president, Datuk Wira Jalilah Baba, in a statement.

In the long run, the TPPA is anticipated to bring benefits of lower cost of goods and more efficient production by taking advantage of the competition and economies of scale.

“With the TPPA, Malaysia will be able to go on the offensive and take advantage of new international markets.

“We will also continue to be an integral part of the deepening economic integration taking place within the Asia Pacific region, and engage more tangibly with important trade partners such as the US, Canada, Mexico and Peru, with whom we currently do not have any structured framework or trade agreements,” she added.

With TPPA and the removal of trade barriers, Malaysia’s GDP would likely be 5.6 per cent higher and its exports 11.9 per cent higher in 2025, according to some estimates.

Adding to that, participation in TPPA will allow Malaysia to continue to build on its strength as the third largest recipient of Foreign Direct Investment (FDI) in ASEAN.

Malaysia also stands to benefit through increased investment from multinational companies in the areas of R&D and clinical trials, potentially helping to build a local industrial base, and encourage the entry of more innovative products to the domestic market.

With discussions ongoing, stakeholders should work to balance the provision of patent protections with the ability of developing countries to access needed medicines.

 

What makes the TPPA different from other trade agreements?

Being a member of the World Trade Organization (WTP), Malaysia has signed free trade agreements with many countries and trade blocs, including TPPA members Japan, New Zealand and Australia. However, these free trade agreements are usually limited to agreements between countries to lower their tariffs for certain goods and services.

Alexander Chia, RHB Research Institute Sdn Bhd’s head of research noted that, the TPPA is an actual trade agreement amongst 12 member nations with chapters covering issues that are beyond most free trade agreements at the same time attempts amongst other things to bring down trade barriers.

Theoretically this gives businesses greater access to other global markets and conversely, foreign companies also have equal opportunities to access markets in Malaysia.

The new rules that are negotiated will determine how TPPA member countries approach competition, labour, environment, government procurement and intellectual property rights.

Textile and exporters to benefit

Apparel makers and port operators could stand to benefit from the improved market access and increased trade volume.

Domestic auto parts manufacturers and pharmaceutical companies may be adversely affected from the agreement.

This positivity was also echoed by Rashmi Banga of Unit of Economic Corporation and Integration among Developing Countries (ECIDC) UNCTAD, Geneva as he predicted that Malaysia’s balance of trade would improve remarkably in textiles and clothing, apart from rubber articles, wood pulp, wood articles and miscellaneous chemicals.

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On textiles and clothing negotiations however, the US is insisting on the inclusion of a ‘yarn forward’ rule of origin, might make this vision almost impossible.

It was explained in a media report that the yarn-forward may seem to reserve the benefits for the signatories of the TPPA but its narrow interpretation and its effect of imposing documentation imposes administrative burden for companies to document to prove their compliance to the rule.

As a result, apparel companies might avoid trading under free trade agreements or preferential arrangements that contain such restrictions.

TPPA countries like Malaysia can only use yarn from other TPPA countries when producing textiles and apparel, which in turn will lead to increased cost of production. Without the yarn-forward rule, the US textile industry is concerned that China would be able to export apparel more cheaply by routing its textile products through Vietnam.

However, should Malaysia be able to negotiate for an exemption to this, the local textile industry is set to benefit largely.

Exporters are touted to benefit largely due to wider reach. On the surface, this will likely benefit sectors such as palm oil, rubber, wood, textile, which are subject to Malaysia’s export licensing system, along with export duties in some instances. Other beneficiaries include electrical & electronic (E&E) products, automotive parts & components and chemical products. Once the trade pact goes into effect, the aforementioned sectors are able to reach the US and other TPPA member countries on duty-free terms.

However, potential losers could be the domestic based sectors such as construction, equipment, agricultural, mineral and manufacture of motor vehicles as they are subjected to non-automatic import licensing designed to protect import sensitive or strategic industries and may lose out due to increased competition.

“That said, Malaysian exporters still need to buck up itself to face this from other countries under the TPPA. Without improving their competitiveness, the TPPA itself will not be useful but could be detrimental to their growth. But based on experience from the ASEAN FTA (AFTA), we believe Malaysia exporters should be able to take advantage of the situation and gain from the TPPA,” RHB Research said.

A boon to investment and e-commerce

The easier access to more markets will also make Malaysia more attractive to investment and create jobs.

This is important as Malaysia’s private investment, though is improving under the ETP projects, has yet to reach a satisfactory level, especially in plant & machinery investment.

“Indeed, the share of investment in Machinery & Equipment fell from 48.3 per cent of total investment in 4Q09 to a low 34.3 per cent in 2Q15, pointing to weakening industrial activities in the country that will not be good to strengthen Malaysia’s future economic growth,” said the research house.

American Malaysian Chamber of Commerce (Amcham) noted that E-commerce provisions may not have received much publicity in the TPPA discussions thus far, but they remain critical to Malaysia’s vision of becoming an e-commerce and high-tech hub and will boost the efforts of Malaysian SMEs to better participate in the global marketplace.

One of the most important provisions is the removal of impediments to digital trade. Based on details from the USTR’s recently released ‘Digital Dozen’, these reforms will have the potential to significantly improve e-commerce for large and small companies alike, including the promotion of a free and open internet and securing the ability to engage in unimpeded cross border data flows.

Together with the removal of digital customs duties, localization barriers and forced technology transfers, TPPA will rewrite the rules of the road for e-commerce and help spur substantial innovation in Malaysia. Malaysia has broad strengths in technology and e-commerce today, and as TPPA member countries commit to these advancements, Malaysia will have access to more markets and the ability to develop new business models that enlarge trade and create additional jobs.

Financial services and sovereignty

Amcham noted in a local media report that a TPPA agreement with strong commitments in the financial sector would benefit Malaysian companies and the Malaysian economy as permitting foreign financial institutions to choose their corporate form of choice, introducing clarity and certainty into the licensing approval process and easing limitations on participation in government-linked fundraisings will increase the availability of credit, stimulate capital formation and help attract foreign investment to the benefit of Malaysian and foreign multinationals operating in Malaysia.

It states that by permitting foreign firms to integrate and utilize the systems of their parent companies will enhance risk management and contribute to the stability of the banking system overall. Likewise, easing of limitations on foreign firms’ participation in the financial sector will open opportunities for Malaysian banks in TPPA markets as they expand and seek opportunities in the region and beyond.

On the issue of sovereignty, there are concerns that passage of the TPPA will give foreign companies the ability to overturn Malaysian laws in the event of disputes. However, for TPPA partners to facilitate foreign investment in member countries, a transparent and predictable investment regime is required.

With the Investor State Dispute Settlement (ISDS) mechanism, investors are given assurance that in the event of a dispute, the parties have recourse to international arbitration in addition to domestic courts.

State Owned Enterprises will face a level playing field

With the new TPPA, Malaysia may encounter resistance to its policy of giving preferential treatment to ethnic Malays in activities such as government procurement and reserving ownership stakes in listed companies.

“I informed them that we have several sensitive areas which are close to our internal policies.

“Top among them is the Bumiputera agenda and government-owned companies. We want the 12 countries in the TPPA to allow flexibility for Malaysia’s request to be considered,” said Najib in a media report.

But the ability to access government procurement for all companies, regardless of origin, on federal and state contracts will allow Malaysian companies a wide array of global public procurement opportunities. According to the WTO, government procurement accounts for some 15 per cent to 20 per cent of GDP on average in TPPA-related countries.

On the flipside, RHB Research noted that state-owned enterprises, particularly in Malaysia, would face stiffer competition to vie for government procurement once equal access is granted for the private sectors. However, International Trade and Industry Minister Datuk Seri Mustapa Mohamed said that Malaysia had won some concessions in this area.

As a result, Malaysia would be accorded longer transition periods and differential treatment particularly with regard to government procurement, state- owned enterprises and Bumiputera interests.

The International Trade and Industry Minister said that in the beginning, Malaysia wanted a total carve-out for SOEs, which means SOEs will not be subjected to TPPA disciplines like transparency, competition and subsidies. However, Malaysia had made some compromise and the Minister assumes that the SOEs can embrace some TPPA disciplines.

“The issue is what are some of the disciplines and we have not been able to find the landing zone yet”, according to the Minister. As a result, the Government will seek approval from the SOEs on the concessions Malaysia has won in the TPPA.

Chia added to this stating that, “ Competition scares some businesses as it rips them out of the cozy cocoon they may have been operating in. The secret negotiations have also made many suspicious.”

With the acknowledgment of Malaysia’s preferences for the Bumiputra community and SMEs taken into account, there is still a need for TPPA partner countries to come to mutual agreement through a holistic approach. Such agreement would result in expanded trade and development of production and supply chains among TPPA partners.

Patents and medicine

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RHB Research noted that for patents and biological medicine, the deal gives biologics, cutting edge drugs derived from living organisms up to eight years of protection, raising the argument that blocking rivals from making copies of the drugs will drive up the prices of these drugs and makes them more expensive for people in poorer countries.

The prices of generic drugs, in contrast, could come down (other things remaining equal) and tougher competition and cheaper imports from other TPPA countries could make Malaysia’s pharmaceutical firms less competitive under the patent.

The longer period of patent protection could also strain national healthcare budgets and increases medicine cost as pharmaceutical firms’ privilege rights on newly developed medicines are guaranteed up to the predetermined periods.

“Nevertheless, all is not lost. The enhanced protection for patents could strengthen Malaysia’s appeal as a destination for high-tech manufacturing, drive foreign investment, and create jobs.

“The calls for a high level of protection on design, trademarks and patents across geographical boundaries could also encourage Malaysian companies to embark on further research and development.

“This promotes an environment that recognises the societal benefit of innovation,” it added.

 

Further arguments

“UNDER TPPA, you cannot discriminate, so if there is a tender process, it has to be opened to everyone.

“Malaysian companies are not as strong as foreign companies and if a foreign company suffer losses here, it can still make profit from other places whereas this is not the case for Malaysian companies,” a local media quoted former prime minister Tun Mahathir Mohamad.

“So we can’t compete and our policies to uplift our industries will be affected.

“TPPA is a very bad agreement.”

Adding to the medicine and patent dilemma, a June 2015 article in the New England Journal of Medicine summarised concerns about TPPA’s impact on healthcare in developed and less developed countries including potentially increased prices of medical drugs due to patent extensions, which it claimed, could threaten millions of lives.

Extending ‘data exclusivity’ provisions would ‘prevent drug regulatory agencies such as the Food and Drug Administration from registering a generic version of a drug for a certain number of years.’

International tribunals that have been a part of the proposed agreement could theoretically require corporations be paid compensation for any lost profits found to result from a nation’s regulations.

That in turn might interfere with domestic health policy.

Nobel Memorial prize-winning economist Joseph Stiglitz warned that based on leaked drafts of the TPPA, it presented grave risks and serves the interests of the wealthiest.

Organized labor in the US argued that the trade deal would largely benefit corporations at the expense of workers in the manufacturing and service industries. The Economic Policy Institute and the Center for Economic and Policy Research argued that the TPPA could result in further job losses and declining wages.

Malaysian protesters dressed as zombies outside a shopping mall in Kuala Lumpur on February 21, 2014 to protest the impact of the TPPA on the price of medicines, including treatment drugs for HIV. The protest group consisted of students, members of the Malaysian AIDS Council and HIV-positive patients―one patient explained that, in Malaysian ringgit, he spent between RM500 and RM600 each month on treatment drugs, but this cost would increase to around RM3,000.

The government have also done a cost benefit analysts report.

According to local newswire Bernama, the TPPA cost-benefit analysis report is not going out yet as the draft text of the agreement is not finalised, says Minister of International Trade and Industry Datuk Seri Mustapa Mohamed.

“You can’t have the report when some of the deals are not yet achieved. The government has been doing the work and we expect it to be finalised soon.

“We will take about two weeks to study the report (once the text is completed) before we can share it with the public,” he told a media conference on the second day of the 11th World Islamic Economic Forum (WIEF).

Mustapa said the government has been working on the text for a couple of years and the template was already there waiting to put the final touches.

“This is a dynamic kind of work, although the ministers have concluded the discussions.

“There are a few technical issues and outstanding. Once all the matters are resolved it will be in the public domain and of course everyone will have access to this agreement,” he said.

He said Malaysia was going to have a lot of time to deliberate on the TPPA.

“Three months are a long time. There have been cases where important issues have been debated in a few days but in this case it’s going to be in the public domain for three months.

“Therefore there is enough time for Malaysians to give their comments. So transparency will not be an issue,” he said.

Its minister Datuk Seri Mustapa Mohamed said members of the public would be able to access the documents from the portal.

“The text is voluminous, contains 30 chapters. Several members of Parliament have requested for the contents (of the TPPA) to be made public.

“We have nothing to hide, we will inform all” he said in the winding up debate on the Supply Bill 2016 in the Dewan Rakyat.

Mustapa said the cost benefit analysis on the trade agreement was currently being carried out by PricewaterhouseCoopers and the Institute Of Strategic and International Studies and is expected to be completed within two to three weeks.

“As promised by the government, the text will be deliberated and debated in detail and decided in Parliament.

“We have yet to officially discuss with the Speaker, maybe in January or February next year, subject to approval of the Speaker,” said Mustapa.

What does this mean for Malaysia? At the moment, we can only speculate.