One of the most important decisions the Pakatan Harapan government has to make is whether Malaysia will ratify the trade agreement known as the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership).
That’s because ratifying and implementing it would mean having to change many existing policies, with wide social, economic and political implications.
It is believed the Cabinet is now considering its position on this agreement.
The CPTPP’s predecessor, the TPP, was very controversial and attracted public protests. The Pakatan Harapan parties and lawmakers, then in the Opposition, had also been against the TPP when it was put to Parliament.
The main difference between the TPP and the CPTPP is that the latter is without the United States after president Donald Trump pulled his country out of the TPP in January 2017. This was a big blow, as the CPTPP is now without the main attraction – preferential access to the vast US market.
The remaining 11 countries in TPP carried on and signed the new CPTPP in March this year. Of the over 1,000 provisions in the TPP, 22 were “suspended” in the hope that the US would return, in which case the 22 clauses would be put back.
The CPTPP has much less potential benefit as there is no additional access to the US market. Malaysia already has trade agreements with most of the other 10 countries, so the extra preferential market is to Canada, Mexico and Peru, which are not our significant trading partners.
Therefore the claimed benefits of the TPP, in terms of extra exports or extra income, do not hold. Claims that the CPTPP would benefit Malaysia’s trade and income usually rely on studies on the TPP, which are outdated.
In fact, several studies showed the original TPP would have negative net effect on the country’s trade balance (that is, imports would go up more than exports).
Some studies that claim there would be more economic growth have been criticised because of the flaws in the models used for the predictions, their unrealistic assumptions and that much of the gains would come from non-tariff measures and investment flows, which are very hard to predict.
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On the other hand, the CPTPP obliges Malaysia to abide by many new rules that are not about trade, and would intrude into the freedom and space of the country to formulate and implement policies, laws and regulations.
Among these new rules are those on investment policy. The firms and individuals of other TPP countries must be allowed to enter and invest not only in foreign direct investment but also in equities, loans, contracts, deposits, and tangible and intangible property.
Conditions that are sometimes imposed on investments, such as technology transfer and use of local materials, are disallowed or restricted. The foreign investor must be treated at least equally as locals.
The foreign investors can also sue the government in an international tribunal (usually the International Centre for Settlement of Investment Disputes in Washington DC) if they feel they are not given fair treatment.
This covers claims that they would lose future revenue and profits if government policies are changed or if contracts are re-negotiated, or if the investor claims his bid for government projects is unfairly treated or his business opportunity is affected by policies favouring citizens.
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There are other intrusive rules. For example, there will be a shift in government procurement (purchase of goods and services and awards of contracts and construction projects). The CPTPP obliges the governments to allow companies from CPTPP countries to bid on equal terms with locals for the supply of goods and services and for obtaining government projects.
Because of the advantages of awarding this government business to locals (such as building local firms’ capacity and market share, and generating multiplier effects for the economy), governments often give preferences or set aside a portion of the procurement to local firms. But this freedom to set procurement policies would be severely restricted under the CPTPP.
State-owned enterprises (SOEs) cannot receive assistance or favourable treatment (in equity, credit, subsidies, etc) from government. Nor can they themselves give preferences to locals in their own procurement of goods and services.
While our government-linked companies need reforms, they should be undertaken by the country itself in line with nationally-determined principles, and not according to inappropriate rules set by a treaty.
The intellectual property chapter has suspended some of the agreement’s worst clauses, but several bad provisions remain that affect access to medicines. It also obliges Malaysia to join a treaty that would result in farmers having to spend more when purchasing seeds.
There are concessions and exceptions provided to these rules. However, many of them do not provide real benefits, while others are inadequate to protect “policy space”.
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Overall, these exceptions do not provide comfort that the country will avoid adverse effects on the freedom to choose our own policies. It would thus be very risky for Malaysia to implement the CPTPP.
There are very limited benefits in terms of market access. The non-trade issues involve heavy costs in seriously constraining Malaysia’s policy space in many areas as well as compromising national sovereignty.
Many policies currently being contemplated by the new government may be constrained by agreements such as the CPTPP. These include the renegotiating of unfair contracts for projects, closure of projects that have adverse effects on the environment and health, boosting local production and reducing imports of food to enhance food security.
Moreover, Malaysia has social and political-economy structures that are very sensitive, given the multi-ethnic nature of the society. There are imbalances in wealth and income among classes and ethnic communities, and among different states.
Bridging these gaps and addressing imbalances and inequalities require government to have a wide range of policy tools. Among them are policies on investments, procurement and state-owned enterprises, as well as trade in goods and flexibilities in intellectual property rules.
Should the CPTPP come into effect, it would be difficult or even impossible to make use of many of the policy options.
Malaysia has signed the CPTPP but has not yet ratified it. Government leaders and parliamentarians have to think long and hard whether to ratify or not.
Martin Khor is adviser of the Third World Network.
This article is featured on the Institute for the Future Economy with The Star’s consent. It was originally published here.
Disclaimer: All opinions expressed in this article are the author’s own.