Saturday, October 25, 2014

Do Malaysia "really" benefit from trade through TPPA?

The view of Malaysian businessmen and corporate people on TPPA is that of optimism.

As a trading nation dependent on import and export with other countries, they see the beneficial flow of revenue and hopefully the profit derived to their business from TPPA as good for the country. Anything good for business is supposedly good for the country.

The view is that Malaysian goods and services have a fair chance to enter foreign market without any more barriers. So matters with regards to consumer interest, "sovereignty", and Bumiputera rights (which is effectively pittance actually) pales in comparison to the benefit. 

Unfortunately, the benefit from TPPA is not as simple as commutative arithmetic law of 1 + 1 = 2. If badly put together, the country could not achieve that 2 and perhaps even end up with less than 1. The TPPA serves the MNC interest to penetrate market. It has been extensively written in this blog, so no point rewriting it. Just key-in TPPA in this blog's saerch engine.

However, it is not sufficiently convincing to opportunity driven businessmen and corporate man. Only when it affects their interest will they appreciate the problems with TPPA. It has to hit their wallet to wake them up from their over-optimism.

An article by SM Idris as publiched in The Malaysian Insider yesterday is along that line of caution:

Malaysia may lose RM5 billion from the TPPA – S.M. Mohamed Idris

Published: 24 October 2014

A new paper by a senior economist working in a United Nations agency has shown that Malaysia will not enjoy a net gain in terms of its trade balance as a result of joining the Trans Pacific Partnership Agreement (TPPA).  Instead, Malaysia will suffer a decline in its trade balance with the other eleven TPPA countries by nearly RM5 billion.

This finding provides another major reason why Malaysia should not join the TPPA.

From arguments put forward by the Ministry of International Trade and Industry (MITI), Malaysia will gain from the TPPA by being able to sell more exports to the 11 other TPPA countries.

Even if this were true, analysts and critics, including CAP, have argued that it is dangerous to join the TPPA because of the economic and social harm to our country and our people caused by other aspects of the TPPA.

This includes the TPPA chapters on intellectual property, investment, government procurement, competition and state owned enterprises.

These chapters will result in Malaysia having to change many of our policies and laws, causing harm to the public interest, including in areas of health, environment, distributional issues and political economy.

Even if the country enjoys a big gain in trade, it is not worthwhile sacrificing our loss of freedom and space to formulate our own policies, and not worthwhile to suffer so much damage to our economy and to our social fabric.

However, the new study shows that Malaysia will not even gain from trade if it signs the TPPA. Instead, Malaysia will lose by at least RM4.77 billion in trade terms, as our imports will increase by more than our exports.

According to the paper, if Malaysia joins the TPPA, its exports will increase to the other TPPA countries, but its imports from them will increase by even more, and thus the country will have a net loss in its trade balance.  The trade balance is the difference between the value of export and import of goods.

In 2013, Malaysia exported US$93.7 billion (RM307.3 billion) of goods to the other 11 TPPA countries, and imported US$73.9 billion (RM242.4 billion) of goods.  Malaysia thus enjoyed a surplus of US$19.8 billion (RM64.9 billion) in its trade balance with the 11 countries.

The new paper shows that after the TPPA is implemented, Malaysia’s exports to the 11 countries will increase by US$1.5 billion (from US$93.7 billion to US$95.2 billion).  But its imports will rise by more than that, i.e. by US$2.9 billion (from US$73.9 billion to US$76.8 billion).

Therefore, the balance of trade for Malaysia with its 11 TPPA partner countries will worsen by US$1.465 billion (RM4.8 billion). Its trade surplus will fall from US$19.84 billion to US$18.37 billion.

The meaning of this is that Malaysia will not gain in net terms from the increased trade as a result of the TPPA. As imports will rise faster than exports, Malaysia will suffer a net loss in its trade balance. The loss is significant, i.e. US$1.465 billion or RM4.8 billion.

This worsening of Malaysia’s balance of trade may even be more than the paper’s conclusion. This is because the paper assumes that Malaysia will be able to export more textiles and clothing to the United States, at zero tariffs and without any other impediment.

In actual fact, the US is imposing a 'yarn forward rule', where TPPA countries like Malaysia can only use yarn from other TTPA countries when producing textiles and apparel items. Thus, the cost of production of some of Malaysia’s textiles and clothing will be more costly as it will not be able to use yarn from more and lower cost countries like China.

Thus, the estimated increase in Malaysian exports of textiles and apparel items to the United States by about RM490 million (US$150 million) may exaggerate the gains for Malaysia.  If the increase of textiles exports is less than this RM490 million, then the loss in trade balance for Malaysia will be more than RM4.79 billion.  The loss could be more than RM5 billion.

The new paper, “Trans Pacific partnership Agreement (TPPA): Implications for Malaysia’s Domestic Value Added Trade”, is written by Dr Rashmi Banga, a senior economist working in the United Nations Conference on Trade and Development (UNCTAD). It is published by the Centre for WTO Studies as a working paper.

In estimating the effects of the TPPA on Malaysia’s trade in goods, the paper assumes that the TPPA results in zero import duties in the products of the 12 TPPA countries.  (This is a reasonable assumption as the aim of the TPPA countries is to eliminate tariffs on all or almost all products).

The paper can be downloaded here.

Other findings of the paper

The paper also has other interesting findings. These findings, and some implications of these findings are as follows:

* Due to the TPPA, many domestic companies and industries will face increased competition from imports. There is thus a danger that the market share and sales of local companies and industries will decline, and that there will be a loss of jobs for Malaysian workers.

* The paper shows that imports will increase by more than US$100million (or RM327 million) a year in a number of  products,  including  vehicles, iron and steel, plastics, boilers, rubber products, and tobacco.  For these products, 36%-85% of these imports will be new net imports, not just a change of the source of imports from non TPPA countries to TPPA countries.

* An example of the higher imports due to the TPPA is an increase in imports of cars and trucks from Japan by US$534 million (or RM 1.75 billion). This may have an adverse effect on the sales of vehicles that are produced in Malaysia.

* A large part of the increase in Malaysian exports will be to Vietnam.  However, even if Malaysia does not join the TPPA, it would eventually enjoy this increase in exports to Vietnam when the full ASEAN free trade agreement is implemented. According to the paper, 57% of Malaysia’s increased exports resulting from the TPPA are to Vietnam  (US$843 million out of a total US$1,486 million). This suggests that most of the export increase would in any case take place even if Malaysia does not join the TPPA. Thus Malaysia could enjoy the main gain that would have resulted from the TPPA without suffering the adverse effects of the TPPA, if it does not join the TPPA.

* Due to the TPPA, Malaysia’s trade balance with the US will probably decline by at least RM1 billion.  Malaysia’s exports to the USA will increase by only US$378 million but imports from the USA will rise by US$679 million.  Thus, in terms of trade balance there will be a loss of US$301 million (RM984 million). In fact the gain for exports for Malaysia will be less, because of the “yarn forward rule” which will reduce the increase in Malaysian textiles exports because that rule will increase the cost of production. Thus the trade surplus that Malaysia enjoys with the USA may decline by more than RM1 billion due to the TPPA.

* Although Malaysia’s gross export earnings will rise by US$1.5 billion, in fact there will not be gains in net terms or value added terms. This is because the TPPA will also increase the imports of components that are used as inputs into the exports, and these imports will displace some of the locally produced inputs. In terms of “value added” (what is produced and earned in Malaysia),  the TPPA will result in less value added of Malaysian export earnings. The loss in value added of Malaysia’s exports to TPPA countries can be as much as US$17.6 billion, according to the paper. Value added of exports is more important to the economy, as compared to gross exports, as it is a much better measure of the income (and also local employment) of the country.

The new paper seems to contradict the results from an earlier study published by the Peterson Institute which had predicted that Malaysia would enjoy large gains by joining the TPPA. One reason for the different results from these two papers is that the Peterson Institute’s study was based on different assumptions.

The previous study was on estimates based on Computable General Equilibrium (CGE) models. The new paper by Dr Rashmi Banga gives a critique of the assumptions of these CGE models which overstate the gains because of unrealistic assumptions, including that there is full employment that is maintained (and  thus no effect  of the TPPA on employment) and that there would be a constant trade balance before and after the trade agreement. The models are thus designed in a manner that the liberalisation resulting from the FTA will always lead to an overall gain.


The new paper has several conclusions which are very significant. One of these is that Malaysia will not enjoy net gains but will instead suffer net losses in trade in goods as a result of joining the TPPA.

This is a very disturbing result, with major implications.

It is clear that Malaysia will suffer very significant losses in other areas of the TPPA, including intellectual property, investment, government procurement, state-owned enterprises and ban or restrictions on export taxes.

It is the assumption that all these losses and damage to the Malaysian economy and society and to our system of political economy may be worthwhile because of the assumed enormous benefits for Malaysia from expanded trade in goods.

However, if there is also a net loss to the country’s trade balance due to the TPPA, then there is really no rationale at all to want to join the TPPA.

Given the new information, CAP calls on the Government not to join the TPPA and instead to exit from the negotiations. There is no reason to continue using the country’s scarce resources in taking part in negotiations that are expensive and that carries the high risk that the country will sign on to an agreement that is very damaging to the country’s interests. – October 24, 2014.

* S.M. Mohamed Idris is the president, Consumers Association of Penang.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.

Government and MITI should take note of this finding.

Though losing RM5 billion a year is hardly much for a nation whose total import and export surpassed RM1 trillion a year. The point that need to be noted from this study is that the export will increase but import will increase more. Increased import and export only benefit businessman but does not necessarily benefit the nation.

Another way to look at it is that in the longer term senario, the RM5 billion could further increase as our export amount lessen arising from productivity and competitiveness slides.

Taking account our domestic problems and weakness on labour, education, employment, skills, housing, technology and innovation, etc, honestly will it benefit the NATION? Yes, the nation and not a group of individuals.

There are issues with regard to independence in policy-making, immediate impact on items like drugs and medicine to consumers, SOEs, government procurement, SIO, investment, Bumiputera rights, state power and rights, etc.

The government's position seemed to project a certain exuberence for TPPA that it had sent a negative political messgae to the ground that it is a matter of when for Malaysia to agree and sign the TPPA.

The public will not realised that the choice of words in PM's last mention of TPPA at a recent business forum [read The Star here] was "actively pursuing free trade agreements (FTA) with several countries and negotiating the Trans Pacific Partnership Agreement (TPPA)".

Obviously government need to go along with the mood of a business forum and project optimism for Malaysia but they remain cautionary. Our media must be more responsible in their choice of headline on TPPA.

If there is such need for trading bloc or grouping, have Government and MITI consider BRIC? Read about in Wikipedia here.


Kineas said...

BRIC? Really?

China? Yuan/Renmimbi dominance?

India? The Modi government is more interested in good relations with the USA.

Brazil? What can it offer that Malaysia needs?

Which leaves Russia. Do you trust Putin and his coterie of crony oligarchs?

Lizara said...

Plunged into the dungeon.They thinks ~ they are the brightest of 'em all. Correction : they are the cleverest for owns gains.

Anonymous said...

We should wait for China to join TPPA before we could safely consider any action. At least China could balance any power exert by US. Why is China and Europe not in TPPA yet?

Anonymous said...

Sir, The poisoned chalice for Malaysia TPPA is inspired, designed, crafted and furtively promoted by the failed State of Singapore to save herself at our expense. Out of desperation, the TPPA first appeared in 2006 with only Brunei, Chile and New Zealand in tow. After the crash of October 2008, Uncle Sam became interested. After 19 secret negotiations, it was revealed our beloved Malaysia was involved. The reason is obvious in the naive, friendly and hospitable UMNO owned New Straits Times, Streets Central Supplement Page 8,March 8 2014. When we see our beloved Malaysia's and Singapore's interests are all mixed up together as a family. Stupid and absurd ! Conflict of interest is to mild for such behaviour. Finally, the UN expert on Trade Dr Rashmi Banga's Paper shows serious losses for Malaysia after TPPA and we have no bargaining chip. Our textiles are dead as a dodo since the 1970s ! http://wtocentre.uft.acin/workingpaper/TPP%20PAPER.pdf.
Malaysia has no trading chip to offer. She only sells palm oil and petroleum in the open markets. FTZ products are foreign owned. Malaysia signs, The Malays will be like the Red Indians of North America. They signed. They died without a whimper. For the non-Malays a fate worse than death. Singapore lives.
With the flood of Singapore goods into the opened doors of Malaysia, Malay and other businesses kaput with rising unemployment, the whole BN Government loses. The Malays lose their political power, heritage, legacy and the ancient Royal Sultans. In such a scenario, the non-Malays do not count and only suffer without a resolution.

Anonymous said...

Sir, It is good that China has proposed the Free Trade Agreement for Asia-Pacific (FTAAP) as opposed to the 2006 Singapore inspired, designed and created poisoned chalice TPPA to finish off our beloved Malaysia, Malays and non-Malays without due regard to our rights to exist as a Malay biased free Nation. If we sign the TPPA as furtively sponsored by Singapore through 19 secret negotiations, the Malays will die like the Red Indians of North America. The non-Malays suffer a fate worse than death.
China's Proposal of her Free Trade Agreement of Asia-Pacific (FTAAP)is an honest and holistic Proposal without the masked intentions of the tiny Republic of Singapore. The FTAAP is firmly supported by South Korea and Thailand. Before dealing with the FTAAP, Malaysia should get rid of their compromised TPPA negotiating team and appoint a fresh one. Vide, UMNO owned New Straits Times. Streets Central Supplement. Page 8. March 8, 2014 and New Straits Times.Page 3, November 12 2014. We want Civil Servants who serve only one Master.

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