My wife asked me yesterday whether I had read the Letter To The Editor which the FMM President had released to the newspapers. So I went to the Federation of Malaysian Manufacturer’s website and saw that it was already in the public domain. Moreover, as newspapers such as The Star have already carried it, I would want to reproduce it here too. It makes an interesting and compelling case for Malaysia to sign and conclude the Free Trade Agreement with the United States as soon as possible – something that has been dragging on for months and bogged down by continued protectionism policies. Here is FMM President Dato Yong Poh Kon’s interesting Letter To The Editor.
Dear News Editor
Why an FTA with the USA is Good for Malaysia
Over the last few weeks there have been many negative comments expressed about what a Free Trade Agreement with the US could mean for Malaysia.
It is important therefore that there should be balance in the views expressed and to understand that we have so much to gain than to lose in signing this FTA with our largest trade partner, the USA.
he average tariff of our two countries is generally low and therefore with or without an FTA, trade will continue to grow.
Whilst this is true, however there are products from Malaysia which attract high duties when entering the US like textiles(up to 14.7% duty) and apparel( up to 28% ), shoes (up to 48%) and ceramic tableware (up to 25%).
Expand RM1 trillion trade threshold and employment
In addition, Malaysian products currently cannot enter their government procurement programmes as Malaysia is not a signatory to the WTO government Procurement Agreement nor do we have an FTA with the US. This means that even in products that we are competitive in, such as electronic products, wooden furniture and rubber gloves; we are excluded from the US$250 billion government procurement market. An FTA will allow us to participate in this market.
Furthermore, our textile & garment industries are currently exporting RM3 billion a year to the US. With an FTA, duty free access is expected to double to RM6 billion and in doing so, will create an estimated 20,000 new jobs. If other competitive products are included, Malaysia would be creating more jobs and expanding national economic activities, exports and incomes.
FTA will give Malaysia regional advantage in investments
The export expansion and job creation will not end here. Many other textiles and garments manufacturers from other countries may wish to re-locate to Malaysia to take advantage of this zero duty, leading to further employment opportunities.
In the whole of Asia, the only country having an FTA with US is Singapore whose industrial structure is very different from ours. Over time it will not only be factory workers, but executives, managers and even fashion designers from our local institutions of higher learning, who will benefit from the growth of just this one sector.
In addition, in terms of Foreign Direct Investments (F.D.I), an FTA will certainly prompt additional US factories to re-locate here to take advantage of our lower costs to re-export products back to the US free of duty, or for export to ASEAN countries and other countries with which we have signed FTAs like China & Japan.
For an American company that is looking at re-locating its operations in Asia, the first port of call will be a country where there is a Free Trade Agreement as it provides certainty in terms of tariff, as well as certainty in the rules and security of investments.
Generally, foreign trade and investments tend to increase after an FTA is signed. This has been Malaysia’s experience with the signing of the Economic Partnership Agreement with Japan in 2006, as already evident in the five-fold jump in FDI in the last six months of 2006. In tandem with higher investment, employment and other economic opportunities will increase.
So a successful conclusion of an FTA would lead to faster growth in trade and investments for Malaysia and provide the nation a three to five year lead-time ahead of our neighbours with respect to free market access into the US.
FTA will not hurt Malaysian padi farmers
Some fears have been expressed that an FTA would lead to cheap subsidised US rice entering the country which would hurt our padi farmers. The reality is the US prices for long grained rice are much higher than that of their competitors like Thailand and Vietnam. In any case, we are already an importer of rice to supplement our own production.
Malaysia is not self sufficient in rice and there no clear advantages in being self-sufficient if we can buy cheaper rice from other countries. In fact, our production of rice has fallen from 88% of requirements in 1980 to the present 60-65% as more competitive suppliers are available. The general population benefits from cheaper imported rice and current rice imports have not adversely affected our farmers.
Malaysian negotiators have considerable expertise and would be able to ensure that the interests of our farming community are taken care of; having handled similar negotiations on other trade agreements, including with China, Japan, AFTA, and the WTO.
An FTA will not stop production of generic drugs
There was also an expressed fear that generic drugs will no longer be available after the signing of the FTA. Drugs, which are already off patent, can continue to be produced generically and be available. One area of contention is the Data Exclusivity (DE) period which can extend beyond the patent term. Proprietary drug companies have contested the use of their clinical data in the marketing approval of generic drugs by local regulatory authorities.
Our FMM position is that originators of intellectual properties know that there is a time limit of 20 years for them to be the sole beneficiaries of their inventions. This period was deemed appropriate for innovators to recoup the cost of R&D. In the determination and protection of public health, the country should have recourse to compulsory license and government use order, with or without an FTA.
However, it is a negotiating point as to whether and how much time should be allowed for the delay in registration for marketing approval, and whether modifications of the drug would be sufficient to trigger an extension of the patent as a result of DE. An extension of patents would basically mean that we may have to live with existing prices for a slightly longer period of time.
Malaysians want Greater Transparency
Another issue which has been raised by NGOs and others is the alleged loss of national “sovereignty” if we were to accede to the US request for greater transparency in our government procurement. It is rather surprising that NGOs should take this position whereas all this while many NGOs and members of the public have been asking for more transparency as demonstrated in the recent public pressure for details of the Malaysian water privatisation contracts and expressway toll agreements. We should be prepared to be transparent about the way we conduct business and not be hesitant to put it into a trade agreement.
Transparency is NOT an affront to national sovereignty. If we continue to resist, it is like saying “No transparency please, we’re Malaysian”. For the long term good of the country, Malaysia should adopt public policies which promote accepted standards of transparency in the way the government calls for tenders and awards contracts, with or without an FTA. YAB Prime Minister himself had advocated for a more competitive bidding process for government procurement.
US has Margins of Preferences like Malaysia
As to government procurement and preferences, the US government itself has a system of preferences for small businesses. For contracts below a certain level, small businesses are given a margin of preferences of 6% to 12% to assist them in tenders over the larger companies.
Likewise, there are Malaysian Treasury Circulars, which also lay out very clearly the margin of preferences, which a Bumiputra company can enjoy for different levels of tenders. The US negotiators have stated that they are prepared to work within a framework of preferences for the Bumiputra community. However, this subject has not been negotiated because of strong misinformation that the FTA is a tool for US to dismantle the Bumiputra preferences in its entirety. A properly negotiated FTA will allow the affirmative action programme to continue in a transparent manner.
It is FMM’s hope that there will be a move to table our existing margins of preferences for the US to consider rather than not to table anything at all.
Malaysia’s competition principles already in place
Another contentious issue is the request for a Competition Policy to be in place in the free trade agreement and our difficulty in tabling that for negotiation by the Ministry concerned. We have been talking about competition policy for Malaysia for the past 10 years and certain basic principles of competition policy can be tabled.
These principles have already been incorporated through the Malaysia Multimedia & Communications Act 1998 which amongst other things promotes a freer competitive telecommunication industry and where no big player can use its dominance in an anti competitive manner. It is partly because such rules were enacted that Malaysia is having a more competitive telecommunications sector. It is easy to see how the public is benefiting from all the hot deals and special programmes that the various telephone companies are offering. This is an example that competition is good for the public and like transparency, we should welcome it.
GLCs must be included in competition policy
We understand that one possible reason for the reluctance to table the competition policy could be that the Government may want to exempt GLCs from a competition policy. This position is not acceptable to the Malaysian private sector as the GLCs are already big companies, a significant part of the corporate sector and certainly do not merit this concession.
GLCs have implemented various transformation plans to improve their performance, profitability and efficiency and many are public companies which are already subject to listing and corporate governance requirements. Greater transparency, competition and better procurement policies will enhance not only their standings but also their performance and profitability. With the transformation of GLCs, they will be in a better position to operate in a competitive environment without any special concessions.
A more competitive and vibrant services sector
There were also comments about how our services sectors will be swamped with an FTA. Those services sectors that have shown resilience are those which opened up earlier, for example in the accounting profession, the big four in the world are already in Malaysia. Staffed and partnered overwhelmingly by Malaysians some of whom has been posted overseas to high positions they give world class service. In addition, other Malaysian accountants have set up links with other accounting firm elsewhere and have also been successful. It may be useful to point out that Malaysia is a signatory to the General Agreement on Trade in Services (GATS).
The same can happen to our other services as the nation begins to find its respective niches in a globalised environment. A more competitive and vibrant service sector will have spin-off effects for the rest of the economy. It is not possible to completely insulate the services sector from competition forever. Just as the manufacturing sector had to contend with duty free imports, the services sector has to compete with the world to give a competitive edge to the rest of economy. In addition, Malaysians will benefit from a more open and efficient services sector given a more competitive service industry.
Adapt and adjust to reap economic benefits together
I would like to relate a story in the late 90’s where MIDA approached FMM to explore whether Malaysian industries could bring forward the starting date of the ASEAN Free Trade Area (AFTA) by three years to 2000.
When we asked individual industry groups then, their answer was “No, we needed longer protection”. I suggested therefore to the then MIDA officer in charge, Datuk Jegathesan that we call a meeting of all the industry groups together.
When the question was asked whether we should bring forward AFTA, the Cement Manufacturers Association immediately stood up and said “No. We need longer protection because if we have a free trade area in ASEAN the Thai cement producers who are four times bigger than us will be more competitive and will wipe us out”.
On hearing this the Concrete Products Association which uses cement as raw materials stood up to say “No. We should quickly open up the free trade area so that we would be able to buy our cement from anywhere at the cheapest price for us to be competitive against imports as well as for our exports”.
Then it was the turn of the paper producers who stood up and said “We have just invested in a new plant to make paper and we need further protection because we cannot compete with the Indonesians who have a large and cheap supply of pulp and their plants are already depreciated over many years”.
Immediately, the Cement Manufacturers Association who spoke earlier, jumped up to protest “No. We need to open up the paper market because the price of paper bags for cement is very high”.
At that point, everyone burst out in laughter and realised then that the output of one industry is the input of another. In a free trade agreement one must be prepared to adapt to some adjustments in the immediate term to reap the benefits for the rest of the economy as a whole.
Likewise, this awakening will happen in the services sector. We are heartened to read from the statement of the secretary of the Bar Council that they are considering opening up the legal services, having found that five years into the FTA with the US the Singapore legal profession has yet to be swamped by US lawyers. Similarly the lawyers in turn would be able to have access to lower logistics and financial costs as the rest of the services sector becomes more competitive.
The time pressure
The time to act is now. The US Congress, being controlled by the Democrats is less likely to sign an FTA with any country soon. If we miss this window of opportunity, Malaysia would have lost an opportunity to gain access to the biggest economy in the world over other countries.
An interesting view point from the global political platform is that the US looks upon Malaysia as a well-managed and moderate Muslim-majority country, which it is keen to collaborate with. YAB Prime Minister has already built up a good relationship with the US Government and Malaysia’s standing in the world and among Islamic nations would be further enhanced.
In short, the successful conclusion of the FTA with US would be in line with Malaysia’s national economic policies to further expand the economic cake and create wealth for the country through an increase in FDIs, employment opportunities, tourism and enhanced regional competitiveness. The successful conclusion of the Malaysia-US FTA would expedite the country’s progress in achieving developed nation status by 2020.
Datuk Yong Poh Kon
President FMM
March 12, 2007