But analysts say its benefits to the economy should outweigh its costs in the medium to long term.
WHILE details of the Trans-Pacific Partnership Agreement (TPPA) are still scarce, analysts believe the overall benefits of the deal to the economy should outweigh its costs in the medium to long term.
As the International Trade and Industry Ministry gets set to release details to the public on what was agreed next week, the benefits of the TPPA for the country can be significant. Malaysia’s economy could get a boost of up to 5.5% by 2025 as the manufacturing sector sets to gain at the expense of non-TPPA countries like Thailand as a result of a shift in foreign direct investment, according to a Credit Suisse report.
Currently, 70% of Malaysia’s exports are duty free at the export destinations.
With the opening up of four new non-free trade agreement markets, namely the United States, Canada, Mexico and Peru, Malaysia will gain another 10% of exports that attract no duties. Should there be further agreements with the European Union, there could be another 10% of zero-duty exports.
RHB Research notes that the agreement is structurally positive for some of the protected industries to embrace foreign competition, improve efficiency and productivity over time but points out that the benefits of trade and investment must not be overstated as they will only come into fruition gradually.
That’s because traditional tariff barriers in international trade have already been reduced to relatively low levels. The effects of the TPPA will only start to take place two years after the agreement is ratified.
MIDF Research head Zulkifli Hamzah tells StarBizWeek that the financial markets in general are positive on Malaysia signing the TPPA and there could be some negative backlash should Malaysia fail to commit itself to the pact.
He points out that the TPPA may form an in-built stabiliser for the ringgit.
“Implicit in the trade pact is the need to maintain exchange rate stability among members to ensure that it is not disruptive to trade. The TPPA will not allow any of its members to undertake a deliberate currency devaluation in order to gain an unfair trading advantage.
“However, it remains to be seen how the TPPA would handle a situation such as the Fed’s intention to normalise its monetary policy. This is because the Fed’s stance has caused a severe depreciation, and to a large extent, misalignment of currencies especially in the emerging markets. The Fed’s move is therefore seen to be in direct conflict with the TPPA,” he explains.
The local currency made its biggest single-day jump of 3.7% in 17 years following the announcement of the pact while the local bourse gains 3.58% over the week.
Zulkifli also says the new template for free trade in the 21st century will undoubtedly subject Malaysia to more competition but it will also foster creativity and innovation for businesses looking to tap into foreign markets or expand their presence overseas.
That, in the long-term, should boost the dynamism of corporate Malaysia, which will help ensure the longevity of the economy.
Former World Trade Organisation (WTO) general council chairman Datuk Muhamad Noor Yacob says the TPPA’s scope is much wider than WTO agreements as it covers state-owned enterprises, labour, environment, regulatory coherence and investment apart from the usual issues of tariffs and non-tariff barriers.
“No less important, the TPPA might set the standard for all new trade agreements that will subsequently being negotiated, more so when the WTO Doha Round has not yet been successfully concluded after 13 years,” he says, adding that being included in the pact is important as the country has the opportunity to take part in the formulation of new rules for global trade.
Muhamad Noor also says the TPPA will foster global value chains among its participants and facilitate trade flows. That’s important to Malaysia because intermediate goods account for some 60% of the country’s imports for the first eight months this year.
Exporters and manufacturers to gain
Federal of Malaysian Manufacturers (FMM) says the TPP will diversify and deepen the country’s exports as it promises a degree of transparency and predictability in investment rules, tariff concessions and avenue to address non-tariff barriers. “It will provide a competitive edge over our regional competitors and build investor confidence in Malaysia.”
It lists some examples of how Malaysian exporters would benefit from the deal.
> Malaysian palm oil exports to Canada attract 11% duty. The conclusion of the TPPA will counter the impact on companies exporting to Canada.
> The textile industry is expected to increase its exports by 20% with the elimination of duties on textiles in the TPPA countries.
> In terms of glove exports, there has been a continuous increase in demand of nitrile gloves in the US. There are concerns that China will become more competitive in the exports of nitrile gloves in the near future. Malaysia’s participation in the TPPA will give our glove manufacturers an advantage over China in such exports to the US.
> Mexico has a highly protective tariff regime with some imports attracting tariff rates higher than 35%, with the highest rate for agricultural products reaching 72%. Mexico levies a much higher average tariff on processed products than on raw materials, and the most concerned industries include textiles, clothing, leather, and basic metal industry. The TPPA will provide the leverage needed by Malaysian exports to the Mexican market.
Alternative views
On the other hand, opposing voices to reject the TPPA surround bumiputra interests, state-owned enterprises, rights of man on the street, more expensive medicines and Internet access being criminalised, among others.
On top of that, there are concerns of the power given to foreign investors to sue the government for making laws that affect their investments under the investor-state dispute settlement (ISDS) provision.
Some fear that such provisions could pose threats to public interest and even sovereignty.
Kuala Lumpur Regional Centre for Arbitration director Datuk Sundra Rajoo earlier on explained that ISDS was originally introduced to ensure foreign investor protection and transparency over their investments while protecting the rights of the state.
“This option of providing the parties the right to choose the nature, form and venue of arbitration instils faith in the ISDS in both investors and the host countries. This also makes it feasible for parties to try other approaches such as mediation, negotiation and conciliation before resorting to arbitration.”
He says that ISDS provisions in agreements such as TPPA only serve to ensure a predictable foreign investment environment, a necessity in the modern era of global economic integration.
The International Trade and Industry Minister Datuk Seri Mustapa Mohamed has assured that the ministry has done its best to protect bumiputra interests while Malaysia’s threshold for government procurement is the highest among the 12 countries.
He says the current patent regime protection for medicine is 20 years and there is no change in Malaysia’s patent policy.
“Our biologics drug decision was for protection for five years and we have been able to do that,” said the minister. But some groups allege that there is a possible extension for another three years.
Notably, there will be technical barriers to cosmetics, medical devices, pharmaceuticals, information and communications technology products, wine and distilled spirits, proprietary formulas for pre-packaged foods and additives as well as organic agricultural products under the agreement.
Some fear that big corporations will be the biggest gainers of the deal but there is a chapter on small and medium-sized enterprises that mentions members’ shared interest in promoting the participation of SMEs.
FMM says its concern is that specific interest groups with narrow interests may seek to derail the domestic processes to put the agreement in place.
“As the TPPA holds immense potential for boosting exports, generating economic growth and creating employment, we urge that all stakeholders to focus on the overall interests of the nation and economy, especially in these particularly challenging times.”
Muhamad Noor says: “We should evaluate the TPPA on its merits.”
He believes that people should form views on whether Malaysia should ratify the TPPA after the contents are made public in another month as well as taking into consideration the studies being undertaken by Institute of Strategic and International Studies and PricewaterhouseCoopers.
Source: The Star
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