This article first appeared in The Edge Financial Daily, on October 12, 2015.

KUALA LUMPUR: Even as 12 Pacific Rim member countries of the Trans-Pacific Partnership (TPP) agreement reached consensus over the contentious areas covered in the sweeping trade pact, its impact on sectors and industries in Malaysia remains vague at this juncture.

The TPP, in which Malaysia joins ranks with Vietnam, Singapore, Australia, the United States, Mexico, Canada and others, aims to liberalise trade and set common standards in these countries which produce 40% of global economic output.

All member countries have up to two years to ratify the agreement.

Malaysia’s International Trade and Industry Minister Datuk Seri Mustapa Mohamed, in a posting on his Facebook account last Tuesday, said that the contents of the agreement and a cost benefit analysis will be tabled in Parliament in two months, whereby Parliamentarians will debate and decide to agree or disagree to the TPP.

While some quarters have argued that the TPP will offer developing countries like Malaysia and Vietnam greater access to markets across the world, others argue that it will open the door to biased arbitration favouring corporate interests above the government’s and restrict access to important goods such as cheaper medication.  

Independent economist Lee Heng Guie said while increased market accessibility and lower tariff barriers will enhance trade, the extent to which the Malaysian government is willing to compromise on its interests in areas such as government procurement, affirmative action policies, state-owned enterprises (SOEs) and investor state dispute settlement remains unclear.He said while consumers will see lower prices of goods and services as there will be varied influx in the domestic market, it will also compel companies here to increase the quality of their goods and services to gain access to markets such as the US, Canada and Australia.

This follows various standards covering areas such as compliance, quality and sustainability implemented in these nations, he said. “Competition is good because it will bring down prices,” he told The Edge Financial Daily. “At the same time, it is a test for Malaysian exporters and companies in terms of compliance.

“You’re dealing with developed economies like the US and Canada, so it is not going to be easy,” he said. Lee expects the government to safeguard its interests from being weighed down by the TPP. The question is whether it will be effective,” he said.

“As for government procurement and SOEs, they — besides Khazanah Nasional Bhd and Petronas (Petroliam Nasional Bhd) — are created for the domestic market, so once they are open to competition with all these foreign players, in a way, it will lift up their standards as well,” he said.

Referencing the term “competitive destruction”, Lee said the companies that are not able to keep up with quality, efficiency and productivity will be left behind grappling to secure its hold in the market.

“At the end of day, only the fittest will survive. It will force you to become more competitive, cost-efficient, productivity-driven rather than just relying on some protection to survive in the domestic market,” he said.

Lee said the sectors that stand to benefit from the TPP agreement are electrical and electronics (E&E), rubber, palm oil, timber and automotive components due to lower tariffs on exports to US. However, Lee cautioned that Malaysia will not be able to compete with Vietnam in low-end, low-cost manufacturing industries such as textiles and to a certain extent, electronics.

He also said the national cars may lose their market share due to increased competition posed by carmakers from the US. Furthermore, it is not clear what impact the pact will have on the National Automotive Policy.

According to the Malaysian External Trade Development Corp, Malaysia’s total exports in 2014 amounted to RM1.45 trillion, an increase of 5.9% from RM1.37 trillion in 2013.Out of the total exports, 33.4% constituted E&E products at RM256.15 billion, followed by petroleum products at 9.2% (RM70.36 billion), liquefied natural gas at 8.4% (RM64.29 billion), chemicals and chemical products at 6.7% (RM51.51 billion), palm oil at 6.1% (RM46.95 billion) and crude petroleum at 4.4% (RM33.79 billion), among others.

According to data from Bank Negara Malaysia, the US constituted 8.4% of Malaysia’s total exports in 2014, making it the country’s fourth largest trade partner.  Data from the US Census Bureau’s website shows that Malaysia’s exports to the US totalled US$30.42 billion in 2014, an increase of 11.47% from US$27.29 billion while imports were flat at US$13.07 billion in 2014 compared with US$13 billion in 2013.

Meanwhile, CIMB Investment Bank Research analyst Saw Xiao Jun said in a note that although Malaysia has reportedly won concessions in several areas such as bumiputera’s interest and government procurement, the TPP poses a risk to all drug makers based in Malaysia.

He said the Malaysian Medical Association had highlighted that the TPP agreement will extend the exclusivity period of new drugs, and generic drug producers may have to push back on new product launches which may dent their profit margins. “Currently, generic drug makers rely on new product launches to offset the declining profit margin of older generic drugs,” he said.

He also said the investment firm believes that government procurement and SOEs will be subjected to greater competition, and earnings could be at risk.“The government is the key customer of state-owned drug makers such as Pharmaniaga Bhd and CCM Duopharma Biotech Bhd,” he said.

“Their manufacturing profit margins are higher than those of their peers and their earnings are at risk should competition intensify,” he added.

MIDF Research had said last Tuesday in a note on the TPP agreement that member countries have reached a compromise on pharmaceutical patent protection of between five to eight years compared with US’ demand of 12 years.

Saw also said while the TPP should reduce or remove the barriers to the export of drugs to other member countries, most local pharmaceutical companies are focused mainly on the domestic market. He said companies such as Hovid Bhd and Pharmaniaga that are eyeing international markets are looking to venture into Nigeria, the Philippines and Indonesia — countries that are not part of the TPP.

He also said Pharmaniaga derives most of its revenue from sales to the government and any changes in the government procurement policy poses a risk to its long-term earnings prospects.

As for Hovid, Malaysia’s largest exporter of pharmaceutical products, the impact is slight as Hovid’s key export markets are not involved in the pact, he added. While the effects of the TPP will take years to manifest, he said the TPP agreement still poses a risk to the valuation of the pharmaceutical sector as it could alter its long-term prospects.

As for consumers, Saw said longer patent protection will not result in higher prices for drugs but rather a longer waiting period for cheaper, generic drugs.

CIMB has maintained a “neutral” call on the sector.  The research firm maintained its “hold” call on both Hovid and Pharmaniaga, with a target price of 42 sen and RM6 respectively, with Hovid as its preferred stock.

When contacted, an economist with a local bank, who requested anonymity, said ports are also expected to gain from the increased trading activities catalysed by the TPP, with Westports Holdings Bhd benefitting from it. However, he said it is still early days to ascertain a definite view on the impact of the TPP on other sectors as details of the TPP are sketchy.