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Workshop on “Malaysia-US Free Trade Agreement: Issues, Implications and Challenges”
– Summary Report
The Workshop on “Malaysia-US Free Trade Agreement: Issues, Implications and
Challenges” was held on 6 September 2006 in Kuala Lumpur. It was jointly organized by
the Third World Network (TWN) and the Consumers’ Association of Penang (CAP). The
workshop was attended by more than 100 participants representing government ministries
and agencies, policy makers, NGOs, civil society groups, academics, local industries,
professional bodies, trade unions, farmers and people living with HIV/AIDS.
The workshop was part of a series of public forums organized by the two organizations to
disseminate information about the Malaysia-US Free Trade Agreement (FTA). It was
particularly timely in light of the fact that negotiations with the United States on the FTA
have begun, with the 3rd round expected to commence on 18 September 2006 in Kuala
The main objective of the workshop was to share information and views about the
Malaysia-US FTA. The workshop was opened by S.M. Mohamed Idris, President of CAP
and Chairman of the TWN. There were two morning sessions, during which presentations
were given by experts, mainly from the TWN, on the key aspects of the FTA (market
access, services, intellectual property rights, investment, government procurement,
competition), following which there were discussions. There were two afternoon
sessions, comprising panel presentations on two main issues: impact of the FTA on the
domestic economy, and social implications of the FTA. Among the several speakers were
the President of the Malaysian Trade Union Congress (MTUC), the President of
PERDASAMA (Persatuan Pedagang dan Pengusaha Melayu Malaysia), a representative
of local generic pharmaceutical manufacturers, a representative of people living with
HIV/AIDS, a representative from the Coalition Against Privatization of Healthcare S!
ervices, a farmers’ representative and the Secretary of Sahabat Alam Malaysia. At the
end, there was a closing session with a summary of conclusions.
This report summarizes the key views and conclusions of the Workshop.
While Malaysia may seek to gain benefits from a US FTA, such as preferential terms of
export for its products, and an improved investment climate for foreign investment, it is
important to recognize that bilateral agreements, especially between a developing and a
developed country, may have significant drawbacks compared to multilateral negotiations
and agreements. The latter is preferable as developing countries have greater bargaining
power via coalitions at the multilateral level, and it is trade creating, rather than diverting
trade from other countries that are cheaper sources. The consequences of US FTAs,
which usually require the developing country to undertake more burdensome obligations
than required under the WTO (commonly called “WTO-plus obligations”), are further
compounded by disparity in negotiating strength between the countries. In addition,
differing capacities and resources may mean that the US, for example, would be better
placed to take advantage of the ! FTA opportunities that are also available to Malaysia,
such as in services, investment, government procurement and intellectual property.
The Malaysia-US FTA is one of a new breed of bilateral agreements, which are not
merely about trade per se, but are much broader in scope and encompass a range of
economic and social issues. The US Government obtains its authority to negotiate FTAs
from the Bipartisan Trade Promotion Authority Act of 2002, which also sets certain
parameters for what the US Government can offer in negotiations. Furthermore, US
FTAs follow a template where the chapters and main provisions are very similar and
many parts are not negotiable. Therefore, it is largely possible to predict the content of a
future Malaysia-US FTA on the basis of existing US FTAs.
Before entering into the Malaysia-US FTA, it is essential that a comprehensive costbenefit analysis be conducted, in terms of its various components, as well as the overall
balance. There may be possible benefits in terms of gaining some market access in some
goods to the US. However, this needs to be weighed against the possible costs, for
example in increased US exports to Malaysia, opening up of services, increased
obligations on intellectual property rights (IPRs) beyond the requirements of the WTO
provisions related to investment, government procurement and competition policy.
Malaysia is likely to suffer costs in terms of having to give up policy space (space to be
able to institute policies for national development) and use of policy instruments, with
ensuing socio-economic and political implications. Such a cost-benefit analysis would be
very useful to create public discussion on the iss! ue, for which transparency and public
participation are important, given the possible far-reaching effects on society.
In 2005, Malaysia had an annual US$23 billion trade surplus with the US. It may be
possible for Malaysia to obtain some extra market access in the US, but this may be
constrained by structural, legal and political impediments that limit the offers that the US
Trade Representative can make. For example, restrictive “rules of origin” such as the
“yarn forward rule” would make it difficult for Malaysia to export more textiles to the
US, even if US tariffs are significantly lowered. On the other hand, the US’s National
Association of Manufacturers estimates it will be able to double its exports to Malaysia
by 2010 under an FTA.
Malaysia currently has higher tariffs than the US, so any tariff cuts would demand a
bigger sacrifice on Malaysia’s part. The US will likely demand that Malaysia cuts all of
its tariffs to zero percent, including on rice, alcohol and tobacco, although there may be
varying periods before these come into effect. It is essential that Malaysia analyze the
impacts of bringing tariffs down to zero percent on US goods, particularly for sensitive
products such as rice. Bringing tariffs down to zero percent would mean the loss of a
policy instrument to protect against artificially cheap products coming in from the US.
In agricultural products, Malaysia may hope to gain some market access, but the gains
can be limited. For example, Australia was unable to achieve significant additional
market access for its main export, beef, or sugar, in its US FTA. While Mexico was able
to increase its vegetable exports under the North American Free Trade Agreement
(NAFTA), this benefit was more than offset in products such as maize, which is the main
crop for Mexico, and other key agricultural products, for which the US gained much
more market access. As a result the main agriculture sector of Mexico was seriously
damaged, and three million Mexican farmers have since left the land. This is
compounded by an inherent imbalance, in that the US provides agricultural subsidies,
allowing cheap US agricultural exports below the cost of production, with ensuing
difficulties for its trading partners.
Economic thinking now suggests that developing countries should not rapidly decrease
their industrial tariffs. Importantly, as a country develops, it should retain the ability to
raise its industrial tariffs on certain products such as inputs and machinery, at the right
moment and sequence, in order to temporarily protect these sectors and allow a country
to industrialize. If Malaysia’s industrial tariffs on US products are reduced to zero percent
and bound, this will reduce Malaysia’s future ability to move up the value chain by
increasing tariff protection temporarily for new, high technology industries until they can
compete. Such a move would eliminate policy space, and foreclose the possibility of
fostering a mature industrialized economy.
Services are the most important sector of the Malaysian economy for employment, local
participation, and social policy. The Malaysian Government has successfully ensured
greater local ownership and participation through careful government policies over the
last 50 years.
Malaysia’s gradual unilateral liberalization of services has allowed calibration of the
degree and rate of liberalization with the growth and capacity of the local services sector,
such that local companies can cope. Importantly, Malaysia has retained the policy space
to reverse liberalization in some sectors when circumstances changed or when foreign
competition hurt local small and medium enterprises. Malaysia’s highly effective capital
controls and other policies during the 1997 Asian financial crisis were possible, without
paying compensation, because its financial services liberalization had not been locked in
by committing at the WTO or in an FTA.
At the WTO, services liberalization occurs via a positive list where only those sectors
listed will be opened to foreign competition. Furthermore, a country has no legal
obligation to liberalize, and can liberalize at its own pace, and under its own conditions. It
can even choose not to liberalize certain sectors. In contrast, in US FTAs, services
liberalization occurs on a negative list basis where all sectors are opened to US
competition, unless they are listed in a “carve-out” or reservations list. This requires
much more detailed knowledge and impact analysis of all the service sectors, and means
that any future new sectors, which may not be known or exist now, such as new financial
instruments, are automatically opened to US competition.
The US, which has large services companies, has highlighted Malaysia’s policies in
banking, telecommunications, broadcasting, retail/distribution and professional services
sectors as non-tariff barriers and areas where it wants to see market access.
Investment policy is one of the main instruments of government in term of social
engineering (for example, in stipulating equity requirements). For development reasons
Malaysia has carefully vetted foreign investment applications and imposed conditions on
foreign investors such as transfer of technology.
An investment agreement was consistently and strongly opposed by developing
countries, including Malaysia, at the WTO, as they were concerned that this would
prevent or reduce their policy space to determine their own investment policies.
However, the obligations of the investment chapter in US FTAs go far beyond the
provisions proposed at the WTO because, for example, it requires US investors and
investments to be treated at least equal to locals (national treatment), including in preestablishment rights, which affords national treatment before an investor enters the
country, unless the exceptions are listed in the FTA. Performance requirements such as
transfer of technology are also prohibited except in certain circumstances or for listed
US FTAs also have an expropriation provision that requires compensation, including
interest, for direct or indirect expropriation of an investment. As ‘investment’ is defined
very broadly to include tangible and intangible property, loans, shares, intellectual
property etc., investors can directly sue the state at an international tribunal for violations
of the investment chapter of a US FTA, including the expropriation provision. ‘Indirect
investment’ could mean losses resulting from government regulation or policy. For
example, cases have been brought claiming loss of future market share under NAFTA
provisions, due to banning of dangerous chemicals.
Furthermore, a US FTA investment chapter could affect Malaysia’s ability to put in place
capital controls and other policies such as those used during the 1997 Asian financial
crisis, due to its requirements to allow free transfers of capital.
Government procurement is an important macroeconomic tool for stability and
management. It enables the government to spend more to stimulate the economy in times
of recession and if this money is spent on local products and local companies, its
beneficial effects are multiplied within the local economy. Furthermore, government
procurement can be used to achieve social policy objectives such as assisting
disadvantaged groups or regions.
Many developing countries, including Malaysia, fought to keep government procurement
off the WTO negotiating agenda. The WTO working group had the mandate to only
discuss “transparency in government procurement”, with possible rules limited to only
the transparency aspects, and excluding market access aspects, i.e., enabling foreign
companies to bid on equal terms with local companies for government contracts.
US FTAs go far beyond what was being discussed at the WTO. US FTAs typically have
a government procurement chapter that requires market access for US companies in the
sectors listed. This will affect federal, state and probably municipal governments. Despite
some safeguards that can be included, or even if discussions are limited to transparency
aspects, there will be pressure for Malaysia to progressively open up government
As Malaysia is a member of the WTO, it must abide by the minimum standards of
intellectual property (IP) protection set in the Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS) and is afforded flexibilities in its implementation.
However, as 98% of patents granted in Malaysia are to foreigners, it may not want to
further increase this protection.
It has been argued that intellectual property rights (IPRs) can increase innovation,
research and development, foreign direct investment, technology transfer, industrial
development and economic growth. However the experience of other countries and
economic theory do not always bear this out. In particular, a survey of the pharmaceutical
industry in Malaysia found that the strength of patent protection had little or no impact on
their decisions to conduct research and development in Malaysia, invest in Malaysia or
transfer technology.
Yet, US FTAs require stronger levels of intellectual property protection than that
stipulated by the TRIPS Agreement, as well as remove the flexibilities provided for in the
TRIPS Agreement. In practice, increasing IP protection would apply to all applicants, not
just those from the US. In addition to requiring parties to the FTA to sign many TRIPSplus IP agreements, which may not be in Malaysia’s interests, the IP chapter of US FTAs
also covers trademarks, copyright, patents and other forms of intellectual property. For
example, the copyright provisions typically extend copyright protection from 50 years (as
obliged under the TRIPS Agreement) to 70 or 95 years after the death of the author.
Of particular concern is the impact of the IP chapter of US FTAs on access to affordable
medicines. Patented medicines can be more than 100-fold more expensive than their
generic equivalents. US FTAs typically have provisions that increase the number of
medicines that can be patented, make patents last for longer, make patents easier to obtain
and allow five-year monopolies even when there is no patent, via data exclusivity.
Malaysia successfully issued a type of compulsory licence in 2003 to import some antiretroviral medicines used to treat AIDS and as a result, prices fell by 81%. US FTAs
often restrict the situations in which compulsory licences can be used and can make them
ineffective by prohibiting registration of any medicine until the end of the patent period
(at which time a compulsory licence is no longer needed). The Thai and Peruvian
Ministries of Health have estimated that their US FTAs would cause their medicine
spending to more than double in the first year ! of their US FTA and get worse after that.
The TRIPS Agreement requires some life forms to be patented (microorganisms) if they
meet patentability criteria, but allows the prohibition of patenting of plants and animals.
TRIPS also requires that protection be granted for plant varieties either by patents or an
effective sui generis system. Countries have the flexibility to define their own sui generis
system of protection for plant varieties, including safeguarding farmers’ rights to save,
reuse, exchange and sell seeds. The US, which allows patents on plants and animals, may
ask Malaysia to do the same, even though the Patent Act 1983 does not allow the
patenting of animal or plant varieties or naturally-occurring microorganisms. US FTAs
also typically require ratification of the International Convention for the Protection of
New Varieties of Plants (UPOV Convention) 1991, which affords near-monopoly plant
breeders’ rights at the expense of farmers’ rights. Malaysia already has a sui generis law,
the Protection of Ne! w Plant Varieties Act 2004, which is unique to meet the needs of
the country and protects small farmers and local researchers. This would have to be
amended if Malaysia ratifies UPOV 1991.
During the workshop, two panel discussions were held, with representatives from trade
unions (Malaysian Trade Union Congress, MTUC), local generic pharmaceutical
manufacturers (Malaysian Organisation of Pharmaceuticals Industry, MOPI), association
of bumiputera entrepreneurs (Persatuan Pedagang dan Pengusaha Melayu Malaysia,
PERDASAMA), health and environmental NGOs, people living with HIV/AIDS and
farmers giving their views on the proposed Malaysia-US FTA.
On implications for the domestic economy, one of the key issues and concerns raised was
the probable US takeover of many businesses, due to the restrictions that may be placed
on the Malaysian Government’s ability to protect and foster local industries. While local
businesses and the private sector drive the economy, they could be weakened and some
even destroyed under the US FTA. A major concern was also the demand of the US to
open up government procurement, which could result in the loss of an important tool for
macroeconomic stability, national development and social equity.
Most of the manufacturers of pharmaceuticals in Malaysia are generics manufacturers.
The generics industry as a whole strongly opposes the provisions on data exclusivity in
the US FTA, because of the serious impact it would have on the industry. It was stressed
that the generics industry actually makes a positive contribution towards the community,
as generic medicines are cheaper.
Furthermore, concerns were raised with regard to the Malaysia-US FTA’s impact on
employment and workers. Development in the economy should translate into quality
employment opportunities and an increased standard of living for workers and their
families. There were worries expressed that the US FTA could jeopardize these goals, as
shown in the case of Mexico under NAFTA.
People living with HIV/AIDS are extremely concerned that the US FTA’s TRIPS-plus
provisions would result in increased medicine prices. Many of the HIV-positive
community depend on generic medicines that are far cheaper and easily accessible. If
generic medicines become unavailable, this would deny them access to the medicines
required for their survival, as patented medicines are very expensive. Many have died and
many more will die if medicine prices are increased.
Moreover, the investment chapter of the Malaysia-US FTA is also likely to impact on
healthcare. There were worries that the introduction of schemes and regulations ensuring
equitable distribution of healthcare could be prevented.
Concerns were also raised that the Malaysia-US FTA would compound the widespread
poverty faced by the majority of Kedah rice farmers. Many of them have no knowledge
about the FTA, yet could be adversely affected by it, particularly if the country is flooded
with cheap agricultural imports from the US. Even if the Government were able to
continue to protect rice, this would be meaningless in the face of increased prices of other
imported inputs.
Even though the environment chapter of the Malaysia-US FTA could be used as leverage
to ensure that Malaysia enforces its environmental laws, this should be resolved
nationally, rather than allowing the US to police Malaysia’s implementation of
environmental laws. In addition, there are many other environmental concerns that arise.
The investment chapter under a US FTA, for example, could take away the government’s
policy space to prevent and regulate dirty industries and products. Cynicism was
expressed with regard to whether the US was genuinely concerned about protecting the
environment, especially when it does not support multilateral environmental agreements
such as the Kyoto Protocol, Convention on Biological Diversity and the Cartagena
Protocol on Biosafety, and moreover rejects measures such as the labeling of genetically
modified food. There was concern that other measures under the chapters dealing with
the application of sanitary and phytosanitary measures and tec! hnical barriers to trade,
could be abused in the name of protecting the environment.
In general, the lack of transparency over the negotiations and the rush to complete
negotiations according to the timetable set by the US were also raised as serious concerns
that need to be urgently addressed. Given that the Malaysia-US FTA may affect different
aspects of Malaysian life and all parts of Malaysian society, public awareness, public
participation and transparency were seen as essential elements of a national discussion on
the issue.