Thursday 28 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly, on January 18 - 24, 2015.

 

Malaysia’s Parliament has a rare opportunity to do the right thing — to unite across party lines to protect the public interest for present as well as future generations of Malaysians. The prevailing presumption in the US is that for the Trans-Pacific Partnership agreement (TPP) to come into effect, it must first be ratified by national legislatures, including the Malaysian Parliament and the US Congress.

Who gains from freer TTP trade?

Most people think the TTP is about greater growth from freer trade. Nothing could be further from the truth. Even the overly optimistic computable general equilibrium (CGE) projections, made on methodologically moot grounds, recognise that more trade does not mean more growth. After all, freer trade will not only mean more of some exports, but also more of other imports with no guarantee that all partners will benefit in the absence of adequate compensatory mechanisms.

The net gains for growth from increased trade are difficult to estimate reliably and depend very much on crucial assumptions made for modelling. Even TPP advocates acknowledge limited net economic benefits from trade liberalisation, with the widely cited 2012 Peterson Institute projections suggesting modest additional GDP growth after 10 years. Hence, while everyone agrees that the TPP is likely to result in greater trade, there is no reliable evidence that increased trade will mean more growth, let alone economic welfare improvements, for all.

A more realistic United Nations Global Policy Model (GPM) released early this week incorporates effects on employment not considered by the CGE models, which typically assume full employment. Even accepting the CGE projections of TPP trade impacts, the GPM offers more realistic macroeconomic projections, considering changes in employment and inequality, and their likely impacts on economic growth.

The GPM finds that overall economic gains will be negligible for other participating countries — less than 1% after 10 years for developed countries, and less than 3% for developing countries. The projected increases in aggregate demand and economic growth are even more limited than the Peterson Institute’s already modest claims, and even negative for the US and Japan, as the TPP will likely lead to employment losses and greater inequality.

The GPM projects a total of 771,000 net jobs lost in all TPP countries over the decade as well as greater inequality, with a lower labour share of national income. It will also lead to losses in GDP and employment in non-TPP countries.

These projections are largely due to two changes. First, more production for export will partly replace production for domestic markets, with negative consequences, as exports are less labour-intensive and use more imported inputs than production for domestic markets. Second, businesses will strive to become more competitive by cutting labour costs, negatively affecting income distribution, thus further weakening domestic demand.

The TPP is not mainly about “freer trade”, especially for Malaysia. As many studies have shown, both the US and Malaysia are among the world’s most open economies, with little more trade to be gained by further reducing tariffs. The main remaining trade constraints are non-tariff barriers, which the TPPA does not address, for example, the campaign against Malaysian palm oil or earlier US restrictions on Malaysian solar panel imports.

Similar CGE models have yielded different projections on economic gains. The US Department of Agriculture’s Economic Research Service study did not see much of a growth dividend from increased trade. The Peterson Institute claimed modest growth gains come from large, but dubious projected increases in foreign direct investment (FDI). Further, there is no evidence that FDI reliably increases economic growth more than domestic investment.

Organisation for Economic Cooperation and Development (OECD) or developed countries with more competent trade negotiating capacity — such as the US, New Zealand, Canada, Australia and Japan — had delayed a TPP agreement in Honolulu in mid-2015 before the Atlanta deal in October. The delay was due to squabbling over how best to manage trade in particular areas, reflecting influential lobbies in their countries; thus, the TPP will likely advance interests contrary to freer trade.

Observers involved were surprised by Malaysia’s minimal demands in the negotiations — in contrast to Vietnam, for example, presumed to have modest negotiating capacity — beyond the predictable exceptions for politically favoured businesses in the name of NEP affirmative action. Curiously, many wishful-thinking Malaysians opposed to such abuses continue to support the TPP, presuming that it will somehow, almost magically, improve governance and address other problems in the country.

A major recent concern for Malaysia has been the so-called “middle income trap”. Strengthening international specialisation is likely to reinforce the existing international division of labour, instead of accelerating productivity gains in line with a more dynamic and transformational approach to trade and development. Yet, as a middle-income country, it will also be difficult for Malaysia to compete successfully with Vietnam and other such developing economies on the basis of labour costs for the primary commodity production promoted by the TPP. All this is likely to work to keep Malaysia stuck in the middle income trap.

Unfortunately, despite the exaggerated claims of its proponents, the TPP provisions for the trade in goods are probably among its less dangerous aspects. For example, despite the 1997-98 Southeast Asian financial crisis as well as the 2008-09 financial meltdown and ensuing protracted Great Recession, TPP provisions for further liberalisation of financial services will undermine national prudential regulation and expose economies to greater vulnerabilities from abroad.

What kind of partnership?

Many ostensible provisions and safeguards in the TPP have hazardous, asymmetric implications. For instance, compared to Malaysia, the US federal government has much less scope for discretionary spending compared to the state governments, which are, in many instances, larger than many other TPP economies. The converse is true in Malaysia, which means that exempting state governments from TPP provisions, for example, on government procurement, will have different implications for the two countries.

The TPP is mainly about greatly strengthening investor rights, including those associated with intellectual property. The evidence shows that stronger intellectual property rights (IPRs) hardly promote research, but often actually impede innovation, besides undermining public health and consumer welfare by limiting competition and raising prices. The TPP will greatly strengthen IPRs for big pharmaceutical, information technology, media and other companies, for example, by allowing Big Pharma longer monopolies on patented medicines, keeping cheaper generics off the market, and blocking the development and availability of similar new medicines.

The recent prosecution of Martin Shkreli for running a Ponzi scheme is instructive, as it shows that US IPR legislation does not provide effective checks against price-gouging. Shkreli had defended increasing the price of Daraprim — which treats a life-threatening infection in patients with cancer, HIV/AIDS and other immune problems — by 5,555% from US$13.50 to US$750 a pill as “altruistic”!

The rapid drafting of the 6,000-plus pages of the TPP was “assisted” by 500-odd official corporate trade (and investment) advisers to the US Trade Representative. The TPP will thus greatly strengthen foreign investor rights at the expense of Malaysian businesses and the public interest. The TPP’s investor-state dispute settlement (ISDS) system will oblige governments to compensate foreign investors for losses of expected profits in binding private arbitration!

ISDS will confer private foreign investors with the right to sue national governments for regulatory or policy changes that, they claim, diminish the expected profitability of their investments. It has been and can be applied even where rules are non-discriminatory, or profits are made by causing public harm.

Foreign corporate interests claim that the ISDS is necessary to protect property rights where the rule of law and credible courts are lacking — clearly displaying contempt for national courts such as Malaysia’s. Yet, the same is being sought by the US in the Transatlantic Trade and Investment Partnership (TTIP) deal with the EU. But instead of needed reforms to improve the judiciary’s performance and reputation, the TTP will expose Malaysia to new risks and liabilities.

The basic problem remains: ISDS provisions make it hard for governments to fulfil their basic obligations — to protect their citizens’ health and safety, to ensure economic development and stability, and to safeguard the environment.

For example, the most popular herbicide sold in the world has been declared by the World Health Organisation to be carcinogenic. By banning such toxic materials, with the ISDS, the government would be liable to compensate its manufacturers not to harm our people, instead of forcing them to compensate those already harmed!

The taxpayer will be hit twice — first, to pay for the health damage caused, and then, to compensate agrochemical manufacturers for their lost profits if the government bans it. Thus, the ISDS may even deter the government from banning the substance, putting the public at risk.

Ending multilateralism?

Like many other recent bilateral and plurilateral trade agreements, the TPP has less to do with freeing trade, but instead advances the interests of the powerful business interests involved, as the Cato Institute and other market liberals have noted. As trade liberalisation guru Professor Jagdish Bhagwati has shown, such agreements are not only sub-optimal, but also undermine multilateral trade liberalisation as well as multilateralism more generally.

The rush to conclude the TPP before the mid-December Nairobi World Trade Organization (WTO) ministerial may have killed the Doha “Development” Round of trade negotiations (in line with US-EU preferences), which began in 2001 with the promise of rectifying the anti-development and food security outcomes of the previous Uruguay Round following the Seattle WTO ministerial fiasco.

Regardless of their pious denials, Asean members joining the TPP have inadvertently also undermined existing commitments, for example, to the Asean Free Trade Area and Asean Economic Community. Such political realignment also abandons the late Tun Abdul Razak Hussein’s commitment to make Asean a “zone of peace, freedom and neutrality”, an irony for the host of the last Asean summit.

It is no secret that the main US motivation for the TPP was to exclude China.  At his last State of the Union address, President Barack Obama triumphantly announced, “With TPP, China does not set the rules in the region; we do.” Broad support for the Asian Infrastructure Investment Bank (AIIB), even from traditional US allies, was a major embarrassment. One can understand why Vietnam, an erstwhile US enemy, is keen to join the TPP to strengthen its hand in its often difficult bilateral relations with its giant neighbour to the north, although it too will be compelled to pay a high economic price for Uncle Sam’s “protection”.

Yet, despite his country’s own problems with China, Philippine President Benigno Aquino chose not to participate in the negotiations. Thailand, with an economy even more open than Malaysia’s, also chose to stay away. On the other hand, Singapore’s existing bilateral arrangements with the US go much further than the TPP, in line with its own unique strategic considerations. Already, some other, mainly European governments have conveyed their dismay at the TPP as it will weaken their own negotiating positions for the Trans-Atlantic Trade and Investment Partnership.

But why is the Malaysian government so keen to join, considering the dubious economic benefits as well as huge risks involved. In response to Obama’s “pivot to Asia”, Prime Minister Datuk Seri Najib Razak may want to signal his own “pivot to America”, which may be his prerogative regardless of his late father’s legacy, which previous prime ministers have maintained. There have already been some “benefits”, for example, US allegations of human and labour rights violations, which had previously disqualified Malaysia from consideration, were dropped before the mid-2015 Honolulu meeting.

Now that the Najib administration’s political alignment has been clearly signalled, we must now turn to the long-term welfare of Malaysians. In the US, Obama has more, albeit shrinking support from Republicans, than from his own Democrats, for the TPP. Criticisms of the TPP have been growing among US politicians, not only among all Democrat presidential contenders, but also the leading Republican aspirants. Hence, it would be appropriate for the TPP parliamentary vote to be a matter of conscience for all members of parliament, without the party whips being exercised. After all, some Opposition MPs have already signalled their support for the TPP.

If the TPP is simply a trade deal, there would be fewer grounds for concern. Unfortunately, its other provisions will undermine Malaysian development prospects and the public interest, with the ability for the government and the public to set things right, irreversibly signed away. There are influential segments of the Malaysian elite who hope that joining the TPP will reduce poor governance, corruption and other abuses. Unfortunately for them, this is merely wishful thinking. Also, the TPP is not a “hop-on, hop-off” option, as some naively think.

Undoubtedly, we Malaysians have many problems and challenges to address — together. There is a great deal to get and set right, but dreaming that the TPP will somehow, miraculously, solve some, if not all of our most vexing problems is, sadly, deluding ourselves. Let us address such problems, but not by fooling ourselves that our interests coincide with those of the foreign corporations who drafted the TPP.

Members of parliament — from the Barisan Nasional and the opposition — have an opportunity to reject this threat to the Malaysian public interest. They are our last defence against a TPP “own goal”.


Jomo Kwame Sundaram was an assistant secretary-general responsible for analysis of economic development in the United Nations system during 2005 to 2015, and received the 2007 Wassily Leontief Prize for Advancing the Frontiers of Economic Thought

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