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Asia Pacific trade deal restricts new government from protecting public welfare

CPTPP nations

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Gabungan Kedaulatan Negara, a platform of civil society organisations, economists and labour groups, would like to respond to the statements of the Federation of Malaysian Manufacturers (FMM) dated 29 November and the Malaysian Consortium of Mid-Tier Companies (MCMTC) dated 4 December with regard to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

First, we stress that not being a party to the CPTPP does not mean that it will be “disastrous for the economy”, as asserted by the FMM or that Malaysia “reverse out of the global market” as claimed by MCMTC. It means that Malaysia’s current economic relations with other countries through the World Trade Organization’s multiple agreements and the numerous bilateral and regional trade and investment agreements continue to apply.

The export market share and foreign investments into Malaysia until now are the result of a range of policies and incentives that have nothing to do with the CPTPP-type of agreements. There are many studies, including from the World Bank and US government, that link foreign direct investments to a country’s natural and human resources, infrastructure and political stability as major factors.

Secondly, the CPTPP is fundamentally about liberalising economies for multinational corporations and financial firms. Its roots are the US-led Trans-Pacific Partnership (TPP) championed by President Barack Obama and signed in 2015. After the Trump administration walked out of the TPP, the remaining 11 countries decided to proceed, and they agreed to temporarily suspend 22 out of more than 1,000 provisions in the TPP and renamed it the CPTPP to be signed in March 2018.

The TPP/CPTPP is highly intrusive into national sovereignty and policymaking on non-trade issues, including in investments, government procurement, government-linked companies and affirmative action for bumiputras. Reform is certainly needed in many of our country’s policies, institutions and practices and we will support the ‘unity government’s’ commitments for reform and rebuilding our economy.

However, legally binding instruments such as the CPTPP that are about liberalising national economies and increasing foreign corporate rights are not the tools for that as claimed by some. In fact, the CPTPP will have the opposite effect.

This is because less than a third of the 30 chapters and almost 2,000 pages of the CPTPP deals directly with trade in goods. The bulk of the agreement targets market access for foreign companies into Malaysia’s government procurement, sets restrictions on state-owned enterprises, and puts conditions on capital controls in situations of financial crisis. Several chapters such as those on services and investment also impact state and local government policies, laws and regulations which will have to be changed to comply with the CPTPP.

Yes, there are exceptions, limitations and some safeguards that have been negotiated but these are highly insufficient and were obtained from the other 11 negotiating countries as of late 2015 when the original TPP was concluded. Today in 2022 we are living in a very different world, with the Covid pandemic, a war in Ukraine, an impending recession and the US shifting gears to launch a new round of their domestic industrial policies for “America First” and returning their pivot to the Asia Pacific region in their competition with China. More turbulent times are ahead, and Malaysia should not have its hands tied to take the bold measures that are urgently needed.

The FMM and MCMTC statements refer to the cost-benefit analysis published by the Ministry of International Trade and Industry on 25 July 2022. Let us look at salient features of that analysis which was the basis for the ministry to conclude that the CPTPP’s benefits outweighs its costs and the move to ratify this agreement on 29 September, a few days before Parliament was dissolved.

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The terms of reference from the ministry for the cost-benefit analysis focused on 12 manufacturing sectors, as well as the construction and services sectors. It did not include the potential economic impact of the CPTPP on consumers. The analysis also did not address national strategic interests, such as in social welfare and security.

What was the methodology of the cost-benefit analysis? The computable general equilibrium (CGE) model was used that simulates the Malaysian economy for the period 2021 to 2030 to assess the potential impact of the CPTPP on Malaysia. This model is a simulation model and widely criticised for making assumptions that do not reflect the real world.

The cost-benefit analysis study itself clearly states on page 57: “By definition, a model is a simplification of the real world. As such the CGE model has several limitations” and “contains assumptions or characteristics that may not entirely represent real-world features”.

On page 15 it says: “The CGE model simulates the Malaysian economy under various CPTPP scenarios, conditional on other global and domestic economic developments as well as inter-sectoral and inter-institutional behavioural trends remaining unchanged over the simulation period”. How can any Malaysian accept this assumption when the world has shifted so drastically since the TPP in 2015 and even since the CPTPP was signed in March 2018?

The cost-benefit analysis was also conducted with limited data apart from goods tariff data. On page 57 of the study, we see this: “CGE models are constrained by data availability … As such, the estimation for other modelling parameters is based on literature review, theory and to a certain extent, intuition”.

Non-tariff measures (eg health and safety requirements for food imports and halal certification) were highlighted as difficult to quantify, and so the cost and benefit analysis assumes that all CPTPP countries will reduce these by 50%, which in reality may be very different as developed countries often use non-tariff measures to restrict imports from developing countries for their domestic protectionist reasons.

Where actual numbers are available for tariffs that Malaysia agreed to reduce to zero for all products under the CPTPP, the cost-benefit analysis actually found that by 2030 with CPTPP implementation, additional imports into Malaysia will exceed additional exports from other CPTPP countries. Countries like Japan, Vietnam and Canada reserved tariffs for their sensitive products, and did not commit to reducing 100% of their products to zero tariff.

Increased tariff-free imports into Malaysia will displace domestic producers and jobs, and the cost-benefit analysis acknowledges the Malaysia Steel Association estimates a loss in market share from the CPTPP and there will be increased competition for Malaysian machinery, oil and gas equipment companies. This is only part of the story.

Therefore, while the headline conclusion on page 22 of the cost-benefit analysis highlights: “Trade balance is projected to be USD53.5 billion in 2030, and remain in surplus at 8.5% of GDP in 2030”, the reality is in the two tables on that page that show imports exceeding exports, and a fall in trade surplus compared to Malaysia NOT ratifying the CPTPP (from 8.9% to 8.5%).

The same table shows that if China and the UK were to join the CPTPP, Malaysia’s trade surplus will fall even more to 7.8% of gross domestic product (GDP) because we will import more from those two countries than we can export.

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The FMM statement refers to foreign investors not being able to make investor-state dispute settlement (ISDS) claims for violation of investment contracts with the government or investment authorisations. This has been temporarily suspended for all CPTPP countries as part of the 22 suspended provisions.

However, the FMM fails to say that the most commonly used grounds for ISDS claims are in Section A of the CPTPP’s investment chapter that still apply. In fact ISDS claims related to investment contracts or authorisations are less than 6% of the breaches of international investment agreements found. The other 94% of breaches according to ISDS tribunals are about substantive investor rights like those in Section A of the CPTPP investment chapter.

The Ministry of International Trade and Industry’s cost-benefit analysis also downplays the ISDS claims that can be made that threaten not just government policymaking but insults the judiciary because the ISDS process bypasses national courts when an investor has grievances. Worse, the CPTPP increases investor protection beyond what any rule of law would allow. The definition of ‘investment’ and what is covered under the CPTPP are also very broad and beyond Malaysia’s pre-CPTPP.

We provide some examples of new threats in the investment chapter.

There is a “fair and equitable treatment” requirement and this has been interpreted by some investment tribunals dealing with other agreements as a standstill on laws and regulations, ie no new laws or regulations and no changing them if this is adverse to the foreign investor.

This interpretation has been described by the UN’s trade and development body, Unctad, as “nearly impossible to achieve” because all governments make new policies, or because governments need to implement new regulations or change them in response to new external crises such as a pandemic or financial crisis or climate change.

No exceptions could be listed to the CPTPP’s “fair and equitable treatment” provision. According to Unctad, out of 284 known cases of CPTPP type of obligations, there were 139 on claimed “fair and equitable treatment” violations. Even though not every case is successful, the threat can chill governments into not taking necessary action. And when an investor is successful the cost is huge for a country. There are 15 known ISDS cases with awards of more than $1bn each with interest which can be compounded monthly, for these types of ISDS cases which have not been suspended in the CPTPP.

We note that the ministry’s cost-benefit analysis states on page 36 that “the Government may have to prepare and allocate resources to respond to possible ISDS claims”.

CPTPP has an expropriation provision which requires compensation at market value plus interest for government actions which reduce the profits of investors from other CPTPP countries. International law firms such as Hogan Lovells and Reed Smith have advised investors that expropriation and fair and equitable treatment can be used to challenge Covid measures such as price controls, export bans and lockdowns or movement control orders. The cost-benefit analysis stated that there has only been one case related to Covid measures but, since the ministry published that study, three more cases have reportedly been threatened against Chile while Peru reversed a Covid measure to avoid an ISDS claim.

The CPTPP prevents Malaysia from capping foreign equity or requiring investors to use local inputs, transfer technology (at affordable prices) or appoint Malaysians as senior managers or directors except in the sectors listed in Malaysia’s CPTPP annexes.

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However, even in the sectors where Malaysia has exceptions in its annexes, any caps on foreign equity can still be successfully challenged under fair and equitable treatment and expropriation. This happened to the post-apartheid South African government when it required foreign investors to sell 26% of their shares to black South Africans, and it was sued under ISDS for $375m, so it settled by removing this requirement.

There are general health and public morals exceptions in the CPTPP taken from World Trade Organization (WTO) language but even if these are successfully defended (at the WTO, two out of 48 cases have been successful), a foreign investor can still claim for loss of profits including future profits under fair and equitable treatment.

The US, Australian, New Zealand and Chilean governments now oppose ISDS and after a cabinet decision instructing Malaysia not to include ISDS in the Regional Comprehensive Economic Partnership (RCEP), it was removed. Yet it is still in force for the CPTPP investment chapter Section A.

We have only highlighted a few of the fundamental problems of the CPTPP and, based on our own detailed analysis of the CPTPP provisions and Malaysia’s commitments and safeguards, we are alarmed. Even more analysis is needed for each level of government – federal, state, local – to truly comprehend the full implications because the CPTPP applies to all.

Unilateral liberalisation by a country can be reviewed and reversed when needed, but when it is done under legally binding multilateral and regional agreements, this autonomy is drastically reduced and can even be removed. The CPTPP takes Malaysia from having freedom to change and reverse course when policies are wrong or need strengthening, to a position where changes that are good for the country but affect the profits of foreign investors can trigger huge compensation claims.

This is the time to safeguard our national sovereignty and policy space, not reduce them. Malaysians cannot accept cost-benefit analyses that are not comprehensive and transparent; we cannot accept assurances that there is still policy space left when what is needed now, more than ever, is maximum policy space.

Since a new government is now in place, it is vital for it to take a relook at the CPTPP and its implications, and the ratification should not have been rushed prior to the dissolution of Parliament and consequently the government.

Given that:

  • There has been a change of government and the need for the prime minister and ministers to understand fully the implications
  • There is a need to take into account the change of circumstances in the external world including an impending recession, which has not been taken into account by the cost-benefit analysis, it is only prudent and right for the current government to not have its hands tied in policymaking in the public interest and the welfare of the people, and therefore withdraw from the CPTPP urgently

The CPTPP allows any government to withdraw at any time by giving six months’ notice. Hence, it is within the new government’s legal rights to do the right thing: to withdraw the ratification and to reassess the implications of the CPTPP in light of current national and international circumstances.

We therefore reiterate our call to the government to withdraw from the CPTPP and conduct a truly comprehensive and public assessment. – Gabungan Kedaulatan Negara

The views expressed in Aliran's media statements and the NGO statements we have endorsed reflect Aliran's official stand. Views and opinions expressed in other pieces published here do not necessarily reflect Aliran's official position.

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