On November 15, International Trade and Industry Minister Mohamed Azmin Ali signed the Regional Comprehensive Economic Partnership (RCEP) agreement on behalf of Malaysia.
Besides the obviously upbeat minister, spokesmen from certain
business circles and pro-market think-tanks, opinions and voices about the
trade agreement are few and far in between.
Beyond general media coverage, the public has little information
and when the agreement was made public after the signing, few understood its
implications and even fewer asked if RCEP is necessary for our country.
For starters, RCEP is not the type of trade agreement that most
of us may think. It is not only about exporting and importing goods, but
instead consists of 20 chapters. It is part of a trend of agreements started by
the United States around 1994 that are designed to open up national economies
(especially developing countries like Malaysia) to foreign companies and banks.
The US “template” includes services (retail, banking
professional, and everything we can think of that is not goods), intellectual
property, investment (focused on giving foreign investors more rights),
government procurement and many areas where foreign entities desire to profit
from.
The early version of several RCEP chapters that were leaked
revealed many controversial aspects of the US-led Trans-Pacific Partnership
Agreement (TPPA), such as the right of foreign investors to sue a host
government and intellectual property obligations that would result in extended
monopolies and more expensive medicines and turning agriculture seeds into
private property at the expense of small farmers.
When the Trump administration walked out of the TPPA, Japan
played a key role in forging the Comprehensive and Progressive Agreement for
Trans-Pacific Partnership (CPTPP) that incorporates all the TPPA provisions and
suspended for the time being a number of controversial intellectual property
requirements. Malaysia signed the CPTPP but has not ratified it, the step
needed to be legally bound.
Not surprisingly, there were protests in many of the countries
that negotiated RCEP over the past few years over the migration of problematic
TPPA/CPTPP provisions into the RCEP negotiations.
Some RCEP countries also said no, which resulted in an agreement
that does not have many TPPA/CPTPP provisions that give more rights to foreign
corporations and intrude into national development policy making. But
developing countries, including Malaysia, have agreed to more market access for
foreign service providers and investors in areas that could impact negatively
on local firms, especially SMEs.
A worrying trend has already been set in motion. Foreign equity
share of the Malaysian economy has increased from 25% in 1990 to 37% in 2011 to 45.3%
in 2015. This was due to the liberal unilateral opening up of
the economy to foreign players since 2009, especially in the services sector,
noticeably in the insurance and private hospital sector.
If this continues (which we expect is the case until now), local
small- and medium-sized firms will be crowded out, and national wealth
distribution policies especially towards the poor and marginalised will be
undermined.
RCEP started as an Asean initiative to create a regional market
with six non-member countries (China, India, Japan, South Korea, Australia and
New Zealand). However, India decided to pull out last November.
For RCEP to enter into force and become operational, the next
step is ratification by at least six Asean members and three non-Asean members.
Before Malaysia decides to ratify, a close study of the now public agreement is
needed to assess the impact on the country.
RCEP aims to expand market access among participating countries
by lowering tariffs on imported goods. Apart from dealing with traditional
goods trade, RCEP also opens up the services sector, introducing more
protection for foreign investors in ways that restrict what a government may
need to regulate (e.g. in a Covid-19 pandemic) and new rules on e-commerce.
Proponents might argue that RCEP is good for our economy, but
unlike TPPA where a partial cost benefit analysis was done, this time the
government did not even produce any assessment to show this claim.
Let’s just look at goods trading (import and export): 10 out of
15 biggest trading countries with Malaysia, are RCEP signatory countries. Last
year, Malaysia had about 60% import and 56% export dealing with the RCEP
countries; the trade balance recorded a surplus of RM51 billion.
Surplus is a good thing, but if we examine closely, the trade
balance mostly came from Singapore (RM47.6 billion). Singapore is well known in
the world for zero tariffs on almost every traded good, and has already removed
100% of its tariffs in existing trade agreements with RCEP countries including
Malaysia.
Therefore, RCEP would not make any difference. Also, all Asean
countries are already in the Asean Free Trade Area, thus the focus of RCEP for
Asean countries is effectively the markets of the five non-Asean countries that
have signed on. For that, Malaysia had achieved a negative trade balance of
RM30.3 billion in 2019 with the latter. The significant deficit was with China. Australia and New Zealand
have also removed all tariffs for all products from ASEAN under an existing
FTA, so again there is no added value from RCEP.
The MITI minister was
reported to say that there will be simplified rules of origin to replace the
existing complicated rules to determine whether a product is made in a country
when multiple components come from different countries.
Take a look at the RCEP
agreement and you will see more than 159 pages on rules of origin before we can
export under RCEP! It is also misleading to think that RCEP consolidates or
replaces existing ASEAN agreements, or ASEAN FTAs with Australia-New Zealand,
China, Korea and Japan. RCEP and any new
agreement will have to co-exist and be navigated by governments.
The difference between RCEP and TPPA/CPTPP in terms of content,
may also give the impression that the former is more “lenient” on certain requirements.
For example, RCEP does not yet have the problematic
“investor-state dispute settlement” mechanism in place that allows foreign
investors to directly sue the government. However, even if RCEP has diluted
some of the worst aspects of CPTPP, one should not be lulled into thinking that
RCEP is any less pro-corporate/big business.
The SME chapter has been
welcomed by some but it is about 2 pages of promoting information -sharing and
strengthening cooperation compared to 23 pages that deals with investment and
investor protection. Moreover, the SME chapter cannot be enforced if nothing is
done for SMEs, but an RCEP government can sue another RCEP government to
enforce the investment chapter.
If RCEP were so upbeat and positive, then why did India quit?
What was it worried about?
That could be a signal of risks and problems to come. Indian
Prime Minister Narendra Modi claimed that the decision not to join RCEP is
because India’s key concerns were
not addressed.
India would not want to compromise on the core interests of
farmers, traders, workers and the poor. In a nutshell, India worries that if
cheaper Chinese goods flood the local market, domestic producers might not be
able to compete. India identified and flagged the three most vulnerable
sectors: textiles, dairy and agriculture. Even without RCEP, India already has
a goods trade deficit with China.
So, why do these so-called free trade agreements (FTAs) matter
to us? Firstly, they have a very broad scope touching on almost all aspects of
our economy and lives, not just trade. So, we need to look at the details and
be clear about the pros and cons and how different parts of our society will be
impacted.
Secondly, the government will have to amend federal or even
state and local government laws, regulations and policies so that they will not
be in conflict with the agreement. Put simply, the bigger and “more
comprehensive” an FTA the government takes on, the more public policies would
be affected and put under great pressure to be changed. Future policy-making
space would be constrained too. Is it good for democracy?
The sovereignty of the country means protecting the policy space
and right for all levels of our government and lawmakers to make rational
policies in the best interest of the nation, and not because any FTA compels
them to do or not to do so.
So, the question remains, under RCEP, which reality is more
likely: Malaysia produces and exports more goods or will it import more? If our
country were to import more cheap goods, wouldn’t our local producers of
similar kind be affected?
A look at the most recent 12-12 online big sale of products
would show that much of them came from and were made in China. This is already
happening even before RCEP kicks in.
Most likely consumers would not complain about cheaper goods,
but if jobs and livelihoods are lost in the long run with the squeezing out of
SMEs and farmers that cannot compete fairly against the big foreign companies
and producers, how will we buy?
Some politicians and civil servants might have a romantic
fantasy about FTAs. In their mindset, the more FTAs the country signs, the
better it is for the economy.
Prominent economist Jomo Kwame Sundaram recently cautioned that
gains from FTA are minuscule and the claims
of benefits by proponents are exaggerated, as they often ignore
most costs and risks associated with such agreements.
In conclusion, the government and people should be reminded that
there are many ways to develop and grow the economy. The high economic growth
period for Malaysia in the 1990s was achieved without much fanfare of FTAs.
Prudent, visionary, sustainable and comprehensive economic
planning should be the key, and the government of the day should pay heed that
foreign equity share of the Malaysian economy is already very high.
If our trade, investment and economic policies generally are not corrected, more rakyat will be left behind.
32nd article for Agora@TMI column (extended version), published on The Malaysian Insight, 14 Dec 2020
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