US-Malaysia Free Trade Agreement

During the conference on “Preferential Trade Agreements – Local Solutions for Global Free Trade?” on September 12/13 in KL, Malaysia appeared as one thread in the global spaghetti bowl of free trade negotiations.

The conference agenda included presentations by the Head of the European Commission Delegation to Malaysia, by the Economic Counselor of the US Embassy in Malaysia and by the Executive Director of MIER. All presented their respective views on preferential or free trade agreements (FTA).

The EU Ambassador didn’t mince his words when it came to defending the EU’s strategies and priorities in preferential trade agreements. Risks of these agreements are supposed to be minimized by negotiating on a region-to-region basis and by ensuring that the agreements are “deep”, i.e. “focusing not merely on tariffs and quotas but also on technical standards and internal regulations”. The latter include internal competition regulations with the explicit aim of “ensuring effective market access”.

Ambassador Rommel avoided to mention, however, that competition regulations are part of the so-called “Singapore issues”, which have contributed to the stagnation of the international negotiation process. Meanwhile, they have also discredited those campaigning for national anti-monopoly rules as mere propagators of Europe’s corporate interests.

The Economic Counselor of the US Embassy in KL, Colin Helmer, agreed in his presentation on the U.S. approach to FTAs that the agreements must be comprehensive. They must go beyond “tariff only” and include all sorts of services, investments and property rights.

Since the “Enterprise for ASEAN Initiative” of the United States Trade Representative was initiated in October 2002, the United States intends to create a network of bilateral bilateral free trade agreements with ASEAN countries. Any potential FTA partner must be a WTO member and have a Trade and Investment Framework Agreement (TIFA) with the United States. The TIFA concluded between the United States and Malaysia in May 2004 can be downloaded from the website of the United States Trade Representative. Its annexed work programme includes the task of “examination and consultations on the elements of a possible free trade agreement”.

However, the process comes with a deadline. The U.S. Congress provided the government in 2001 with a mandate to negotiate trade agreements, but only before 1st July 2007 it has vowed to decide on these agreements without going into details and without recommending tedious, time-consuming and internationally sensitive changes. Prior to that deadline, the Congress still takes time review the government’s proposals and to consider any agreement sent for approval. Effectively, the deal with Malaysia has to be concluded in December 2006.

Time is running out on the U.S. government, which puts its negotiators under pressure. Meanwhile, the Malaysian Ministry of International Trade and Industry comes under domestic pressure for the lack of transparency and disclosure of details of the negotiation process. Minister Datuk Seri Rafidah Aziz has often been heard with harsh comments about these allegations. She requests trust and public confidence in MITI’s negotiation skills.

Others in MITI take a more relaxed opinion and simply state that the deadline is “the U.S.’s problem, not ours”. This, however, cannot be the easy way out. Singapore has signed its FTA with the United States in 2003. Thailand and Malaysia have been negotiating a similar agreement with the US ever since.

According to the Executive Director of MIER Dr. Mohd. Ariff, Malaysia simply couldn’t keep up its resistance to an agreement with the U.S., once Singapore had taken unilateral action. In a discussion following his presentation on Malaysia and Bilateral Free Trade Agreements he pointed out that Malaysia would pay a price for not being part of the above mentioned spaghetti bowl. The opportunity costs, i.e. the costs of not joining the bandwagon, would be higher than the costs of getting involved in a free trade agreement with the U.S.

Two rounds of negotiations between Malaysia and the U.S. have been concluded in Penang and Washington. Three more rounds are yet to come. Malaysia is mostly concerned with U.S. tariff rates for footwear, textiles etc. and with non-tariff barriers, like certifications, customs clearance and the limited mobility of its business persons into the U.S. The U.S., meanwhile, call for the liberalization of professional services in Malaysia, for intellectual property rights for pharmaceuticals and access to government procurement. The latter request has alarmed the Malaysian non-Bumiputras, who have limited access to the government procurement process and might, in the event of an FTA, be worse off than U.S. American firms.

Dr. Ariff concluded that FTAs are a positive-sum game for Malaysia. The consumers at large would benefit, even though a limited number might suffer. The vulnerable service sector might be exposed to international competition, but it has already detected promising niche areas. All in all, Dr. Ariff estimates that FTAs will have a positive net impact on GDP growth and employment in Malaysia.

The conference on “Preferential Trade Agreements – Local Solutions for Global Free Trade?” also served as the annual meeting of the “Economic Freedom Network Asia”. Based on the findings of the Economic Freedom of the World Report published by the Fraser Institute in Vancouver, the Friedrich Naumann Foundation has supported and continuously encouraged the development of the Economic Freedom Network Asia.

The Network facilitates a wider discussion of necessary institutions and policies for poverty eradication and economic growth. Consisting of think tanks and research institutes from more than 20 Asian countries, the network intends to develop and promote the Economic Freedom Index in Asia. It also analyses economic development, as well as the strengths and weaknesses of Asian economies.

Please get more information about the Economic Freedom Network Asia.

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