GLOBAL TRENDS BY MARTIN KHOR

With the announcement last week of an intention to have a US-Malaysia free trade agreement, negotiations will start soon. The experience of other countries shows that the road to an FTA is lined with challenges, with many issues (including trade, services, intellectual property, investment and government procurement) to be sorted out. Can the dangers be avoided and the benefits emerge?

LAST week in Washington, Malaysia and the United States announced their intention to start negotiating a bilateral free trade agreement (FTA).

The event was attended by senior US officials including the US Trade Representative Rob Portman and Malaysia’s delegation was led by International Trade and Industry Minister Datuk Seri Rafidah Aziz.

Now, there will be high-pressure negotiations in the next few months.

The experience of some other countries shows that the road to an FTA with the United States can be bumpy and many challenges lie ahead.

The last round of negotiations in the US-Thai FTA in Bangkok in January ended in some disarray as thousands of people stormed the venue, protesting against US demands on patents that would restrict the right of Thailand to provide cheap medicines.

Farmers also voiced concern that they would face competition from cheap imports and restrictions on their right to save and re-use seeds. Some of the key negotiators resigned, and the talks have been suspended until after the Thai general elections.

Talks between the United States and South American countries to establish a Free Trade Area of the Americas have also been stalled for many months due to disagreements on many issues. Similarly the talks between the United States and Southern African countries for an FTA have hit an impasse.

It can generally be predicted what an FTA with the United States will be like, judging by requests for common key features in all their FTAs.

Trade forms only a part of an FTA with the United States. Other aspects include services liberalisation, intellectual property (IP), investment, government procurement and competition, as well as labour and environment.

The FTA would significantly open up of the Malaysian economy in these areas to US goods, services and investment. Also, some domestic laws (for example on IP or competition) will have to change.

In its fact sheets on the FTA, the US Trade Representative (USTR) office expects the United States to do better on trade because Malaysia’s industrial goods tariffs (average 9.1%) exceed those of the US (average 3.7%). It expects US manufacturing exports to Malaysia could more than double to US$22bil (RM81.1bil) by 2010.

In addition, the United States hopes to expand its agricultural exports beyond its present US$400mil (RM1.5bil) a year.

Malaysia on its side will also expect to increase its exports to the United States. Under a typical FTA, tariffs on both sides are expected to go down to zero, although there may be some exceptions.

Most Malaysian products and services already enter the United States duty-free, says the USTR fact sheet, so “an FTA will level the playing field.” In other words, because Malaysian tariffs are higher than the US levels, eliminating tariffs on both sides (levelling the field) would benefit the United States.

The FTA will also require both sides to liberalise their services. As the US market is quite open, the main obstacle for Malaysian firms is not market access but the extent of capacity to enter and compete in the US market.

Malaysia on the other hand has restrictions on foreign equity and participation in many services sectors, to enable local enterprises the space to develop. The United States will seek to break down those barriers.

A US trade bulletin has predicted that financial services will be a difficult issue to resolve as Malaysia has limitations on foreign ownership in financial institutions and the number of branches of foreign banks, and many US institutions will press for more market openings during the FTA talks.

Intellectual property has been one of the most controversial aspects of FTAs. The United States has asked its FTA partners to grant higher patent and copyright protection to its firms and institutions than what they are obliged to do under the WTO.

This usually means longer periods for patent and copyright protection, restrictions on the grounds for compulsory licences, and exclusive rights over data (preventing a generic drug from getting safety approval by relying on test data of the original drug company).

The end result: it will be much more difficult for patients to have access to cheaper generic medicines.

Another challenge in the forthcoming FTA talks is the so-called Singapore Issues (investment, government procurement and competition policy). Its entry into the WTO was successfully opposed by Malaysia (with other countries) in 2003.

FTAs with the United States usually contain extreme versions of investment and procurement rules. These would give rights to US companies to establish in the partner countries with minimal regulation, and to be treated like national companies.

US companies claiming their property has been “expropriated” can sue the host government in an international court. Government measures (including on finance, economy, safety and environment) that affect the expected future profits of the companies have in previous FTAs been counted as constituting “expropriation” and thus the government is liable to pay compensation for the losses.

Under procurement, the usual FTA requires that US firms be given rights to bid for government contracts. This would erode the preferences and advantages that locals enjoy.

It can be expected that the United States will ask for similar rules in the FTA with Malaysia. Of course Malaysians can also take advantage and invest in the United States and bid for its procurement business.

But the US market is already relatively open. The main impediment to companies from developing countries is their lack of capacity to compete in the developed countries.

There are many challenges ahead in the FTA negotiations.

Agreeing to discuss a deal is one thing, and negotiating a good deal where the dangers are overcome and the benefits are evident is another thing.