PROPOSED MALAYSIAN-UNITED STATES

FREE TRADE AGREEMENT (MUFTA):

IMPLICATIONS FOR MALAYSIAN ECONOMIC

AND SOCIAL DEVELOPMENT

TWN Third World Network

twnet@po.jaring.my

25 February 2007

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Contents

1. INTRODUCTION ............................................................................................................................. 5

2. DISADVANTAGES OF FTAS COMPARED TO MULTILATERAL TRADE

AGREEMENTS ...................................................................................................................................... 5

3. CHANGING VIEWS ON THE EFFECTS OF LIBERALISATION ............................................ 7

4. RECIPROCITY AS A PRINCIPLE IN FTAS ........................................................................... 8

5. MAIN FEATURES OF FTAS INVOLVING UNITED STATES ................................................. 9

6. MARKET ACCESS IN GOODS ...................................................................................................... 9

TRADE IN GOODS: IMPLICATIONS OF MUFTA FOR MALAYSIA ......................................... 12 1. Manufacturing.......................................................................................................................... 12 2. Agriculture ............................................................................................................................... 13 Limited gains for Malaysia ........................................................................................................... 13 Problems facing Malaysia ............................................................................................................ 13

7. SERVICES ....................................................................................................................................... 16

A. GENERAL ....................................................................................................................................... 16 B. FEATURES OF SERVICES CHAPTERS IN FTAS .................................................................................. 16 C SPECIAL CHAPTERS AND TARGETING OF KEY SECTORS, I.E. FINANCE AND TELECOMMUNICATIONS 20 D. DOES THE DEGREE OF LIBERALIZATION MATTER FOR DEVELOPMENT? .......................................... 21 E. NEED FOR A COMPREHENSIVE NATIONAL SERVICES PLAN ............................................................. 22 F. SERVICES: IMPLICATIONS OF MUFTA FOR MALAYSIA .................................................... 23

Basic Telecommunications ............................................................................................................ 24 Distribution Services, including Direct Selling............................................................................. 25 Banking ......................................................................................................................................... 25 Insurance ...................................................................................................................................... 26 Securities ....................................................................................................................................... 26 Audio-Visual and Broadcasting .................................................................................................... 27 Legal Services ............................................................................................................................... 27 Architectural Services ................................................................................................................... 28 Engineering Services .................................................................................................................... 28 Accounting and Taxation Services ................................................................................................ 28

8. INVESTMENT: LIBERALISATION AND INVESTOR PROTECTION ............................... 29

A. SINGAPORE ISSUES ........................................................................................................................ 29 B. BACKGROUND TO INVESTMENT ISSUE ........................................................................................... 29 C. MAIN DESIGN AND STRATEGIC AIM OF THE US .............................................................................. 30 D. THE NEED FOR SPACE AND FLEXIBILITY FOR INVESTMENT AND DEVELOPMENT POLICIES AND THE

EFFECTS OF AN INVESTMENT AGREEMENT .......................................................................................... 31 E. CONCLUSIONS ................................................................................................................................ 33 F. INVESTMENT: IMPLICATIONS OF MUFTA FOR MALAYSIA ............................................ 33

9. TELECOMMUNICATIONS ........................................................................................................ 37

10. FINANCIAL SERVICES .............................................................................................................. 45

11. LIBERALISATION OF GOVERNMENT PROCUREMENT. ................................................ 48

A. GOVERNMENT PROCUREMENT IN TRADE AGREEMENTS ............................................................... 48 B. FEATURES OF GOVERNMENT PROCUREMENT IN FTAS INVOLVING USA ....................................... 49 C. NATIONAL POLICY CHANGES NEEDED DUE TO FTA ....................................................................... 52

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D. EROSION OF POLICY SPACE AND IN THE ROLE OF GOVERNMENT PROCUREMENT ........................... 52 E. EFFECTS OF GOVERNMENT PROCUREMENT LIBERALIZATION UNDER FTA ..................................... 53 F. GOVERNMENT PROCUREMENT: IMPLICATIONS OF MUFTA FOR MALAYSIA ........... 54

12. COMPETITION POLICY ........................................................................................................... 61

A. BACKGROUND TO THE ISSUE ............................................................................................... 61 B. TOWARDS A DEVELOPMENT FRAMEWORK ON COMPETITION FOR DEVELOPING

COUNTRIES ..................................................................................................................................... 64 C. WHAT THE US PROPOSES ON COMPETITION IN ITS FTA: ANTI-COMPETITIVE BUSINESS CONDUCT,

DESIGNATED MONOPOLIES AND GOVERNMENT ENTERPRISES ........................................................... 66 D. COMPETITION POLICY: IMPLICATIONS FOR MALAYSIA OF MUFTA ........................... 69

14. ENVIRONMENT, BIOSAFETY AND FOOD SAFETY ........................................................... 73

A. BIOSAFETY AND LABELLING OF GENETICALLY MODIFIED ORGANISMS ................. 73 B. OTHER ENVIRONMENT ISSUES ............................................................................................. 75

1. Convention on Biological Diversity .......................................................................................... 75 2. Environmental implications in relation to the Investment chapter ........................................... 76 3. Government procurement and implications for the environment .............................................. 77

15. INTELLECTUAL PROPERTY RIGHTS (IPRS) ..................................................................... 77

A. BACKGROUND ......................................................................................................................... 77 1. WTOs TRIPS Agreement......................................................................................................... 77 2. IPR negotiations shift to FTAs ................................................................................................. 78 3. Industry influence ...................................................................................................................... 80

B. MUFTA WILL OBLIGE MALAYSIA TO SIGN UP TO MANY INTERNATIONAL IP

TREATIES ........................................................................................................................................ 81 C. IMPACT OF MUFTA ON ACCESS TO MEDICINES ............................................................... 82

The Effects..................................................................................................................................... 85 D. EFFECTS ON PATENTING OF LIFE, BIODIVERSITY, GENETIC RESOURCES,

AGRICULTURE AND FARMERS .................................................................................................. 88 1. Background .............................................................................................................................. 88 2. UPOV 1991, Plant Varieties protection and Effect on Farmers Rights ................................. 89 3. Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the

Purposes of Patent Procedure ...................................................................................................... 91 Implications for Malaysia ............................................................................................................. 92 4. Data exclusivity and farmers ................................................................................................... 92

E. PATENT COOPERATION TREATY .......................................................................................... 94 Effects on the 9

th Malaysia Plan ................................................................................................... 95

Health/quality of life ................................................................................................................................ 95 Moving up the value chain ....................................................................................................................... 95 Biotechnology .......................................................................................................................................... 95 Malaysias economic growth is affected if Malaysians are sicker ............................................................ 95

F. SCOPE OF PATENTABILITY .................................................................................................... 96 Software patents ............................................................................................................................ 97

G. COPYRIGHT ............................................................................................................................... 97 1. .Background .............................................................................................................................. 97 2. Copyright term extensions ..................................................................................................... 101

Expressions of concern in Australia about the extension of copyright duration to 70 years .................. 102 Australian Federal Government concerns .............................................................................................. 102 State Government concerns .................................................................................................................... 103 Librarians concerns ............................................................................................................................... 103 Application of Agreement to Existing Subject Matter ........................................................................... 107

3. Anti-circumvention provisions .............................................................................................. 107 When circumvention is needed .............................................................................................................. 110

4. MUFTA obliges Malaysia to join WIPO 1996 Internet Treaties ........................................... 111 5. Some implications of Copyright section for Malaysian society ............................................. 113

H. TRADEMARKS ........................................................................................................................ 114 I. ENFORCEMENT ........................................................................................................................ 114

1. General ................................................................................................................................... 114 2. Internet service provider liability............................................................................................ 115

How ISP liability works in USFTAs ...................................................................................................... 116

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The cost of ISP liability.......................................................................................................................... 119 J. IMPLEMENTATION ................................................................................................................. 120 K. IPRS: SUMMARY ON EFFECTS OF MUFTA ....................................................................... 120

16. NEED FOR POLICY FRAMEWORK AND ASSESSMENT OF COSTS AND BENEFITS

.............................................................................................................................................................. 122

EXAMPLE OF FTA COST-BENEFIT FRAMEWORK .............................................................................. 124

REFERENCES ................................................................................................................................... 125

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PROPOSED MALAYSIAN-UNITED STATES FREE TRADE

AGREEMENT (MUFTA):

IMPLICATIONS FOR MALAYSIAN ECONOMIC AND SOCIAL

DEVELOPMENT

Third World Network

1. INTRODUCTION

This paper deals with the FTA that is being negotiated between Malaysia and the

United States or MUFTA (Malaysia-US FTA). It begins with some general aspects of

bilateral FTAs. It then briefly states the architecture of issues in the MUFTA and

does a description and analysis of each issue or chapter.

It is quite a task to analyse the text of an agreement when none exists yet. MUFTA is

still being negotiated. Moreover the drafts of the negotiations are not available to the

public.

However, it is still possible to give a summary of what MUFTA may look like,

because it is quite well known that the US makes use of a template for its negotiating position in its bilateral FTAs. Its recent bilateral FTAs are rather similar

in chapter headings as well as in text. It may well be that the US would not agree to

conclude an FTA unless its text basically is in accordance with the template.

Thus, some of the FTAs, particularly the Singapore-US FTA has been used as a likely

draft of what a Malaysian-US FTA may be like, and a description and analysis is

undertaken based on such a model.

As there are so many topics, this report has been able to deal with several but not all.

Perhaps a subsequent report can be more comprehensive. We hope this contributes to

the on-going discussion on the MUFTA.

2. DISADVANTAGES OF FTAS COMPARED TO MULTILATERAL TRADE

AGREEMENTS

It is generally recognized that bilateral agreements, especially between a developing

and a developed country, are not the best option and that multilateral negotiations and

agreements are preferable. The reasons for this include:

1. Bilateral agreements usually lead to trade diversion, in that the partners divert away products that may be more cheaply priced in favour of products

from the FTA partner, even if they are not cheaply priced, thus resulting in

inefficiency.

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2. In an FTA between a developed country and a developing country or countries, the latter are usually in a weaker bargaining position due to the lack

of capacity of their economies, their weaker political situation, and their

weaker negotiating resources.

3. In the WTO, the principles of special and differential treatment, and less than full reciprocity, are recognized. Thus, developing countries are better able to

negotiate on the basis of non-reciprocity and for non-reciprocal outcomes, in

which they are not obliged to open up their markets (or undertake other

obligations) to the same degree as developed countries. However, these

development principles are usually absent in FTAs, or they are only reflected in longer implementation periods for the developing country. The

FTAs are basically on the basis of reciprocity. This equal treatment of parties that are unequal in capacity is likely to result in unequal outcomes.

4. The FTAs contain many items that are not part of the rules of the WTO. Many North-South FTAs include rules on investment, government

procurement and competition law, which have so far been rejected by

developing countries as subjects for WTO negotiations or rules. Developing

countries also refused that labour standards and environment standards be

subjects of discussion in the WTO. All these topics are now entering by the side-door through the FTAs, even though the same reasons for developing countries to reject rules on these issues should apply in FTAs as they do in the

WTO.

5. Even where issues are already the subject of rules in the WTO (e.g. intellectual property and services), there were many flexibilities and options open to developing countries in interpreting and in implementing obligations

in these areas. However, there are attempts by developed countries to remove

these flexibilities for developing countries in the FTAs. If these attempts

succeed, the policy space for developing countries to pursue development and socio-economic goals would be significantly reduced.

6. The proliferation of so many agreements also puts pressure on personnel and financial resources in developing countries and requires a lot of technical

expertise which may be not adequately available, given the large number of

agreements and the limited resources.

The report The Future of the WTO commissioned by the WTO Director-General and which was published in January 2005 has criticized the proliferation of bilateral

and regional trade agreements (RTAs), which it says has made the MFN (most favoured nation) principle the exception rather than the rule, and which has led to

increased discrimination in world trade.

However, it appears that FTA negotiations are moving ahead and negotiations on

even more FTAs and RTAs are being announced.

Several researchers have pointed out that whilst bilateral agreements may be tempting

for a developing country to get some specific advantages from its developed-country

partner, such as better market access for some of its products, there are also several

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potential dangers and disadvantages. Developed countries such as the US and Japan

are known to want to use the instrument of bilateral agreements to obtain from their

partners what they failed to achieve at the WTO, in which the developing countries

have been able to oppose or resist certain negative elements in various agreements.

3. CHANGING VIEWS ON THE EFFECTS OF LIBERALISATION

Whilst an advanced developing country which is already highly liberalized may be

able to bear the pressures of faster liberalization, other developing countries may not

be able to compete with the faster opening of their markets or with other demands of

the developed country.

Up to a few years ago, there was a widespread belief in the orthodoxy (promoted

especially by the International Monetary Fund (IMF) and World Bank, and by policy

makers in developed countries) that liberalization is necessarily good for

development, and the faster the liberalization the better it is for development. This

was the intellectual basis for developed countries to pressurize developing countries

to quickly and deeply cut their tariffs and remove non-tariff barriers, as well as open

up their services sector, financial sector and investment regime.

However, there has been growing skepticism not only from civil society but also

policy makers regarding this orthodoxy, mainly because such rapid liberalization has

led to import surges in many developing countries, with adverse effects on the local

industrial and agricultural sectors, and on the balance of payments and the debt

position. The emerging paradigm is that developing countries require certain degrees

of protection to enable the local firms and farms to compete in their own domestic

markets, and that this was the way the now-developed countries arranged their own

trade and industrial policies when they were at the development stage.

Such protection is especially required by developing countries when many

agricultural products are heavily protected by tariffs and subsidies in the developed

countries, and where export and domestic subsidies enable these countries to sell

artificially-cheapened products on the world market. Tariff protection is the means by

which developing countries can defend their farmers from unfair competition,

especially since quantitative restrictions were prohibited under the Uruguay Round.

Arguments have been put forward by developing countries along the above lines in

the WTO. The developing countries are also pursuing three tracks to strengthen the

development dimension in the WTO: (1) proposals to clarify, review or amend

existing WTO rules, due to problems of implementation of these rules; (2) proposals

to strengthen existing SDT (special and differential treatment) provisions, and to

introduce new ones where they do not exist but are required; (3) proposals to have

adequate SDT provisions in new rules or revision of rules in current negotiations

(especially in agriculture and industrial products).

Some developed countries are beginning to change their previously strict insistence

on liberalisation in developing countries. For instance the UK government has

declared that it will not seek to impose liberalization on African countries and on least developed countries. The recent G8 summit also has a statement along similar

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lines. Notably, this change in attitude is stated only for least developed countries (LDCs) and thus presumably does not apply to non-LDC developing counties. But it

can be noted that a change in attitude towards liberalization has started even in

developed countries policy circles.

4. RECIPROCITY AS A PRINCIPLE IN FTAs

There is a significant lack of a similar development track within FTAs between developed and developing countries. Instead, the FTAs are being negotiated mainly

on the basis of reciprocity, i.e. that both sides take on similar levels of obligations. The focus is almost strictly on Market Access and National Treatment i.e. how to open up markets in order to get more business opportunities. There is hardly any

development content as such, not is there much sympathy for the unequal capacity the

developing country faces, both in its level of development, and in its negotiating

capacity.

This is mainly due to the demand for such a basis by trade policy makers of developed

countries. They also point to the need for FTAs and RTAs to be consistent with WTO

rules, in particular Article XXIV of GATT 1994 (covering customs unions and free

trade areas). (WTO 1994: p522-525). This Article enables FTAs to be established

under certain conditions. One provision is that the purpose of a customs union or a free trade area should be to facilitate trade between the constituent territories and not

to raise barriers to the trade of other contracting parties with such territories. It also defines a free-trade area as a group of two or more customs territories in which the

duties and other restrictive regulations of commerce are eliminated on substantially all the trade between the constituent territories in products originating in such

territories. [GATT, Article XXIV.8(b)].

This is widely taken to mean that FTAs have to be reciprocal in nature, since SDT

provisions are not mentioned in the Article, and that tariffs and other trade restrictions

have to be eliminated on substantially all trade between the parties. It is not defined what constitutes substantially all trade. In the course of discussions between the European Union and African-Caribbean and Pacific (ACP) countries,

which are negotiating economic partnership agreements (EPAs), it is understood that

the EU considers this to mean at least 90% of trade, while some ACP countries

interpret it to mean at least 60% of trade.

There have been recent proposals to revise or clarify Article XXIV so that it clearly

enables non-reciprocal relations to prevail in FTAs between developed and

developing countries. The ACP Group has made such a proposal. Recently, China

has also made a development-oriented proposal on Article XXIV.

If the Article is not clarified or revised, if reciprocity remains the principle in an FTA

between a developed and developing country, and if the FTA covers almost all

products, then a typical developing country is likely to be at a serious disadvantage, as

it has less production capacity and probably has significantly higher tariffs, especially

on industrial products. Elimination of tariffs will thus hurt the business or viability of

local industries and even farms of the typical developing country.

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5. MAIN FEATURES OF FTAs INVOLVING UNITED STATES

The main issues in FTAs that involve developed countries such as the US, EU and

Japan typically include the following:

1. Market access in goods Manufactured goods Agricultural goods

2. Services in general 3. Specific services sectors -- financial services, telecommunications 4. Intellectual property rights 5. Investment liberalization and investor protection 6. Liberalisation of government procurement 7. Competition issues: Business practices, monopolies and government-linked

companies

8. Environment and food safety issues

9. Labour standards

Only the first item has traditionally been the subject of an FTA. The second and

fourth issues were introduced into the multilateral trading system through the

Uruguay Round that concluded in 1994. They are the new issues in GATT, and are

now in WTO.

The set of issues in items 5-7 (investment, procurement, competition) are known as

the Singapore issues as they were first introduced into the WTO through its

Ministerial Conference in 1996 in Singapore. However they were only subjects for

discussion in working groups and there has been opposition from developing

countries to make them subjects of binding rules. In July 2004, the WTO General

Council agreed that there would not be any negotiations on them during the Doha

work programme period, and work in the working groups on these issues stopped.

However, the FTAs involving the US include these items as subjects of rules. On the

last two issues, it was also agreed that labour and environment standards not be part of

rule-making in WTO. Labour standards are not even a subject of discussion in the

WTO. This is due to the fear of developing countries that they would become the

basis of protectionist measures against their products. However in the FTAs,

environment may cover environmental issues broadly and not just standards. In this paper, we include the sensitive issue of biosafety and labeling of products containing

genetically-modified organisms (GMOs) in this section.

It can be seen that subjects that have been rejected by developing countries as topics

of negotiations or even discussion have made a comeback through the FTAs.

6. MARKET ACCESS IN GOODS

Given the problems arising from FTAs, the reason some developing countries still

decide to negotiate an FTA with a developed country is the fear of being left behind,

as they see other countries, especially in their region, entering FTA negotiations with

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developed countries, which constitute their major markets. There is a fear that those

developing countries that are entering FTAs will gain a competitive edge and thus

leave those that do not join an FTA behind.

The developing country may believe that entering an FTA will give it benefits in

terms of greater access into the markets of the partners, as the FTA will provide

preferences in terms of lower tariffs or quotas.

It is thus crucial that the developing country identify the products which are important

for it, whose exports it hopes will expand through the FTA, and to assess whether

realistically whether there will be an increase in market access and to what extent.

This will then have to be measured against the costs to be incurred by the country, in

terms of market access to its own markets by the partner, as well as in terms of

concessions in other areas (such as services, investment and intellectual property).

Many countries that had hoped to obtain significant expansion of market access to the

major developed countries have been disappointed in the results of the negotiations.

A major reason for this is that there are structural, legal and political impediments that

prevent the developed country from opening its market beyond a certain limit, in

respect of its sensitive products (where further opening will cause dislocation to its

producers).

As Smith (2005) points out, there are a number of structural problems that make it

difficult for developing countries to obtain market access in sectors of interest to them

in FTAs with developed countries. Firstly, there is usually unequal bargaining power

in developing-developed country bilateral negotiations, with the developing countries

in a weaker position. Secondly, it is not possible for developed countries to reduce or

withdraw agricultural export and domestic subsidies on the products that the

developing country partner are exporting, as the subsidies would have to be removed

for all the products, which would then also benefit non-FTA partners. Thirdly, it must

be expected that the US negotiators will find it very difficult to make offers in

agriculture or in sensitive industrial products where increased market opening for

imports will be met with a political backlash from lobby groups such as big farmers,

food companies, labour unions, domestic firms and from Congress. The episode in

the US Congress in 2005, in which the bill authorizing the US-CAFTA agreement

faced massive opposition and was passed by only two votes, shows how difficult it

will be for market access demands of developing country FTA partners to be met,

even though the exports from CAFTA countries were too small to have an appreciable

impact on the US economy.

On textiles and apparel (politically extremely sensitive products for the US), even a

strong negotiating party like Singapore, was unable to overcome the US demand to

apply the yarn forward rule to qualify for immediate duty-free entry into the U.S. The yarn forward rule means that textiles and apparel from Singapore must be made from yarn sourced from Singapore or the U.S. This means that US yarn has to

be used, instead of cheaper yarn and fabric sourced from the Asian region. (Smith

2005; Koh and Chang, 2004). Singapore also had to agree to additional and

cumbersome customs procedures to verify that textiles/apparel are made in Singapore

(including allowing on-site inspections of enterprises by US officials) and additional

safeguard measures.

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On agricultural products, the negotiations on certain sensitive products can also be

expected to be very difficult. Most importantly, the US will not include lowering of

agricultural subsidies in its FTAs, thus depriving its trading partners of what would

probably be the most important concession that could lead to greater market access

for agricultural-exporting countries.

Even a developed country like Australia found that it could not gain any ground with

the US on expanding its market access on sugar, which is an important Australian

export and is highly protected in the US. Before its FTA with the USA, Australia had

a sugar quota of 87,402 tonnes per annum. During the FTA negotiations, the

Australian Government repeatedly promised no sugar, no deal. The Australian government fought very hard to increase the quota but failed to do so. The US-

Australia FTA did not provide any extra quota for Australia. (Smith 2005).

On beef, which is Australias main export to the US, Australia obtained an 18.5 per cent increase in beef quotas, but this was confined to manufacturing-grade beef

(mainly hamburger mince and pet food) and spread over 18 years. It meant that

Australias share of the American beef market could actually decline, according to Australian projections. Australian academics calculated the benefits for beef farmers

from the extra market access under the FTA to be about half a cow, per farm, per

year. Furthermore, the US has reserved the right to employ safeguards to raise tariffs

again if the quantity of Australian imports or the price of beef changes suddenly.

(Smith 2005).

The developing country partner in an FTA may have limited products where it can

effectively make use of increased market access opportunities, due to limited supply

capacity or inability to market. For instance, most of the ACP countries and the LDCs

have been unable to make use of the preferential access they have to the EU market.

And for products that the developing countries have an advantage in, these are usually

sensitive to the developed country and thus some may be excluded from the FTA market opening. Also, developed countries like the USA and Europe are well known

for making use of non tariff barriers (such as safety regulations and anti-dumping measures) to block imports of developing countries. The market access hopes may

become illusory.

On the other hand, the developing country is expected to reciprocate by opening up its

own market to the developed country, by eliminating its tariffs on a wide range of

products. This can result in significant dislocation of local producers.

Under NAFTA, Mexico agreed to total trade liberalization of all agricultural products

by 2008 (even though it had a 15-year adjustment period for corn and beans).

According to Carlsen (2003), imports of corn (the most widely grown crop in Mexico)

nearly tripled after NAFTA, and the price has dropped. Other crops fared worse, as

imports of soybean, wheat, poultry and beef have risen over 500%, displacing

domestic production. Exports especially of fruits and vegetables have risen but this

failed to compensate for the import rise. About 3 million rural jobs (out of 10

million) were lost since NAFTA.

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TRADE IN GOODS: IMPLICATIONS OF MUFTA FOR MALAYSIA

1. Manufacturing

Malaysias tariffs in manufacturing are much higher generally than those of the United States. Since both parties will have to eliminate tariffs for substantially all products, Malaysia would thus have to make more sacrifices or more concessions overall as compared to the US, in terms of tariff reduction and

elimination. This in turn could displace Malaysian industries that cannot

compete with the cheaper U.S. imports.

The US Trade Representatives Office, during the launch of the MUFTA on 8 March 2006 issued a document on the Economic and Strategic Benefits of the FTA to the U.S. It states that US exporters have much to gain from FTA with

Malaysia. It gives data that Malaysias average bound industrial tariffs are nearly 4 times higher than US tariffs (14.5% compared to 3.7%). Malaysias average applied tariff is 8.4% or more than double the 3.7% of the US.

In a sector-by-sector table, the US paper gives some examples of the higher

Malaysian tariffs compared to US tariffs, for example in transport equipment

(1.5% comprade to 3.2%), wood, pulp, paper and furniture (10.9% vs 0.7%),

leather, rubber, footwear and travel goods (14% vs 4.3%), electric machinery

(6.7% vs 1.9%), non-electric machinery (3.7% vs 1.2%), textiles and clothing

(13.5% vs 9.6%), mineral products (8.8% vs 1%).

The US National Association of Manufacturers forecast that US manufacturing

exports to Malaysia could double by 2010 under a FTA.

For the US, a major target is Malaysias present import restrictions on motor vehicles, which were highlighted in the Malaysian chapter of the USTRs report on Foreign Trade Barriers. The USTR comments that Malaysia has long

protected its automobile industry from foreign competition using high tariffs and

non-tariff trade barriers, that government policies distinguish between

national and non-national cars, and that they continue to block open trade through the approved permit system and offering rebates for national

manufacturers. It notes non-Asean CKD cars are charged 10% tariff and 80-

200% excise tax. The US is likely to demand elimination of tariff and non-tariff

barriers for motor vehicles into Malaysia. If agreed to, this has serious

implications for national cars.

Malaysian textiles companies are expecting to benefit from increased access to

the US market. However they will also face a number of hurdles, including the

yarn forward rule (imposed on other FTA partners like Singapore) to qualify for immediate duty-free entry into the U.S. This rule means that textiles and

apparel from Malaysia must be made from yarn sourced from Malaysia or the

U.S, i.e. that US yarn has to be used, instead of cheaper yarn and fabric sourced

from the Asian region. Malaysia will also have to agree to additional and

cumbersome customs procedures to verify that textiles/apparel are made in

Malaysia (including allowing on-site inspections of enterprises by US officials)

and for the US to have additional safeguard measures to be used on Malaysian

textiles.

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2. Agriculture

In the agriculture market access part of the FTA, Malaysia is likely to get a negative

deal. Firstly, there will be limited gains to Malaysia in terms of access to the US

agricultural market. Secondly, Malaysia will have to open up its agricultural sector to

US exports, and the US will probably not agree to having sensitive products such as

rice exempted.

Limited gains for Malaysia

The US is unlikely to be able to offer any significant market access. In the US-

Australia FTA, Australia was unable to gain any additional access for its sugar

exports. The gain to Australia in beef (through a higher quota) was not significant,

estimated by academics to be equivalent to about half a cow, per farm, per year.

Most importantly, the US will not offer to reduce its domestic farm subsidies in the

FTA. It argues that this can be done only through the WTO. The high US subsidies

keep the prices of its farm products artificially low, with three effects:

This prevents other countries like Malaysia to penetrate the US market more. For example if soya bean subsidies were removed, prices would reflect the

cost of production more, and increase, making palm oil more competitive.

Malaysia could insist that US subsidies be removed, but this will be

unacceptable to the US.

Subsidies enable the US to export its otherwise uncompetitive farm products, because they lower the price, often to far below the cost of production. To

defend themselves from this unfair practice, countries need higher tariffs,

otherwise the US products can take over the market with their artificially

cheap prices.

According to a recent UNCTAD paper, "Studies show that under the existing

US policy, the cost of producing major crops has been much higher than the

prices realized for them. In the year 2001, market prices were 23% below the

cost of production for corn, 48% for wheat, 32% for soybean, 52% for cotton,

and 45% for rice. In 2001, the US had a significant share in world exports in

these commodities which is as high as 35% in cotton, more than 20% in wheat

and around 10% in rice."

Because of the subsidies, US exports sell at low prices, thus out-competing more efficient producers. For example, if subsidies were removed and US

soya bean export prices increased, Malaysian palm oil (which competes with

soya oil) would be more competitive.

Problems facing Malaysia

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While the gains are limited, Malaysia can face problems since the US will demand

that all agricultural tariffs be brought to zero, within a time frame. Under NAFTA,

Mexico expanded its farm imports from the US dramatically, nearly tripling its

imports of corn (the most important crop) and increasing more than five-fold its

imports of soybean, wheat, poultry and beef. have risen over 500%. Rural job losses

were 2 to 3 million since NAFTA.

The US government has said that it wants to export more farm products to Malaysia

in particular rice, soyabeans, chicken and beef. It wants Malaysias tariffs on American farm products to be reduced to zero.

A USTR fact sheet on the FTA states that there will be opportunities for US

agricultural exporters. The US exported US$400 million of farm products to

Malaysia in 2005. It said that US growers of fruit, vegetables, nuts, processed

horticultural products and other food producers would benefit (USTR 2006).

The product that has raised most concern is rice. Malaysia currently has a 40% tariff

on rice to protect Malaysias rice farmers. It also follows a policy of having a single importer for rice, viz. BERNAS and imposes quotas on how much foreign rice may be

imported.

In the FTA negotiations, the US is likely to ask for the rice tariff to be reduced to zero

(over some years) and for non-tariff barriers to be dismantled, which could include the

quota and import monopoly by BERNAS.

The rice sector in Malaysia is relatively protected in view of ensuring food security

and protection of rural livelihoods. Presently, around 296,000 farmers depend on rice

for their livelihood, with 116,000 farmers exclusively involved in the cultivation of

padi. Further, in the 9th

Malaysia Plan, the government has set a self-sufficiency

target of 90% for rice in 2010 (from 72% in 2005).

If the rice tariff were reduced to zero then the US rice (which has subsidies from the

US government so that it can be sold at 25% below the cost of growing it) could

seriously undermine local rice production.

According to press reports, rice and tobacco have been listed in Malaysias exclusion list in the FTA negotiations (The Star 15 Jan 2007). The Agriculture Minister, Tan

Sri Muhyiddin Yassin, was reported to have said that the Cabinet had decided that the

government would not compromise on the livelihood of local farmers. The Minister

said:

Whatever happens, if rice is the cause for the FTA not to be signed, then let it be because the Government will not compromise on anything that can affect the

interest of our farmers. If the US decides to raise the matter, we will tell them to

take it or leave it, (The Star | 15 Jan 2007)

The Ministers comments came in the wake of protests by farmers and NGOs that the MUFTA would involve the import of subsidized US rice with no border protection

and this would jeopardize local rice, thus affecting farmers livelihoods and income.

15

Although Malaysia has demanded that rice, tobacco and alcohol products be on its

exclusion list, trade media reports from Washington indicate that the US will not

agree to products being excluded. If its stance is maintained, then Malaysia will face

demands that its rice and tobacco tariffs will be reduced to zero, perhaps with a

transition period. (In past USFTAs, the non-USA country had to remove all tariffs on

all US products. Only South Korea got an exception and was able to keep tariffs on

one product, rice).

At present there is not much import of US rice into Malaysia. This could be due to

the 40% tariff and the quota maintained by BERNAS. If the 40% tariff is removed,

and US rice is allowed to compete freely, its price may become competitive with local

rice.

Research by Oxfam (2005) shows that American rice is heavily subsidized.

According to Oxfam (2005):

It (the USA) is the worlds third largest rice exporter even though US rice costs over twice as much to grow as it does in export-leading Thailand and

Viet Nam. This is only possible because of lavish state funding: in 2003 the

US government ploughed $1.3bn into rice sector subsidies, supporting farmers

to produce a crop that cost them $1.8bn to grow effectively footing the bill for 72 per cent of the cost of production.

Between 2000 and 2003, it cost on average $415 to grow and mill one tonne of

white rice in the US. But that rice was dumped on export markets for $274 per

tonne, 34 per cent below its true cost. The real winner from this combination

of subsidy bonanza in the US and rapid trade liberalisation in developing

countries is US agribusiness. No wonder the countrys rice millers and exporters invest so much in lobbying alongside the US government, to open

up new export markets for their dumped surpluses.

In the period 2000-2003, the cost of production and milling of milled rice was

US$415 per tonne (41 cents per kilo) while the export price as US$274 per tonne (27

cents per kilo). The export price was thus 34% below the cost of production,

reflecting the high degree of subsidy. Without the subsidy US rice would not be

globally competitive. With the subsidy, the US is now the third largest rice exporter

in the world.

In some years the export price is even lower, and the degree of subsidy even higher.

In 2002 for example, the export price was 22.7 cents per kilo, while the production

and milling cost was 39.5 cents. The export price was 43% below the cost.

According to the US Department of Agricultures Rice Outlook (12 Feb 2007), the export price of US long-grain milled rice on 6 February was US$419 per ton. This is

equivalent to 41 cents per kilo, or 143 sen (given the exchange rate US$1 to MR3.5).

If there is a 40% tariff, the US rice would not be competitive in the Malaysian market.

However at zero tariff, it would be competitive as local rice varieties are currently

retailing at RM1.70 to RM2.00 per kilo (depending on the grade of rice).

Currently US rice is higher priced than Thai rice. The USDA report cites US$321 per

ton as the export price of Thai high-quality milled rice, which is currently lower than

the US price (US$419 per ton). However the gap is narrower in some months, and at

one point in the second half of 2005 the Thai and US rice prices converged at around

16

US$300 per ton. If a lower tariff is applied to US rice as compared to Thai rice, then

the price gap between Thai and US rice could be narrowed.

In any case, it is most unfair to allow the tariff on US rice to be reduced or even

eliminated, when there is such a huge subsidy given to US rice growers and exporters.

The position that rice should be excluded from the FTA commitments should be

maintained.

7. SERVICES

A. General

Before the Uruguay Round was launched, many developing countries had tried to

resist the inclusion of new areas like trade in services and trade-related intellectual

property rights as they believed agreements in these areas would be against their

interests as they would not have the capacity to gain from them, whilst they and their

local companies would stand to lose. Despite this reluctance, services became a part

of the Round on the understanding that developing countries would gain in other

areas, especially in enjoying more market access for their goods in agriculture, textiles

and clothing and other areas in which they have comparative advantage and where

their exports faced tariff and non-tariff barriers. However, given the actual outcome

in textiles and clothing and in agriculture, the developing countries did not get their

expected benefits.

The WTO allows each member to commit in the WTO to services liberalization

according to the extent and rate that it chooses and which suits its conditions. This is

especially true for developing countries. These countries may want to try out

liberalization in some sectors to see the extent to which it is beneficial, but they do not

have to commit the liberalization measures in the WTO (as this makes it irreversible,

or difficult to reverse).

The WTO has a positive list approach. A country makes commitments to liberalise

only in sectors that it places on its schedule. And if a sector is included in the

schedule, the country can decide the extent of liberalisation to commit in that sector,

in each of the 4 modes of service delivery. Restrictions and limits can be placed, for

example restrictions on foreign equity ownership or on national treatment in Mode 3

on commercial presence.

Additional special and differential treatment clauses have been established in the GATS and in subsequent documents that clarify that developing countries should be

allowed to liberalise less than developed countries and to choose their own pace of

liberalisation. These development provisions are especially contained in Article IV

of the GATS, Article XIX (2) of the GATS, and the Guidelines and the

Procedures for the Negotiations on Trade in Services of March 2001, which is the

main document guiding the present services negotiations.

B. Features of Services chapters in FTAs

17

Many developing countries have attempted to make use of the flexibilities in GATS,

to choose their own pace and sectors to liberalise. They have been cautious to

increase their binding commitments in the WTO, as (1) they are worried about the

possible consequences, especially since it is difficult to backtrack even if the

commitment turns out to be an error; (2) they are unable to benefit from the

liberalization of other countries, due to supply constraints (and due to continued

protection of the labour market in the North) and thus if they were to themselves

liberalise, they would have more costs than benefits; (3) they are within their rights to

choose whether to liberalise, in which way, and in which sectors, if at all.

Developed countries have been frustrated by what they perceive as the slow

movement by developing countries in the WTO. The reason for their frustration is

that services now comprise the largest sector, and their big services enterprises are

pushing to have access to the markets of the developing world. The developed

countries are now seeking the use the FTA mechanism to accelerate the liberalization

process in developing countries.

In contrast to the WTOs positive list approach to liberalization (under which a country does not commit to liberalise except in the sectors it lists down in a schedule),

US FTAs1 use the more drastic negative list approach (in which everything is

committed to be opened unless specified in the schedule). The positive list approach

was insisted on by the developing countries to enable them to have more flexibility

and policy space as to what and when to commit. It is also less risky than the

negative list approach as a country may not be aware of the full range of sectors, nor

on what it should select to exclude.

The developed countries prefer the negative list approach, as this would make it easier

for developing countries to commit to liberalization measures in more sectors. The

US has chosen this negative list approach in its FTAs with developing countries. For

example, the US-Singapore FTA has a negative list approach, in which only sectors

placed on a schedule can have limitations to the principles of national treatment,

market access, local presence, etc.

Such an approach reduces policy space for developing countries, and goes against the

more development-friendly positive list approach of the WTO. It also goes against

the principles and services structure that the developing countries fought so hard to

attain in the WTO. Among the dangers of the negative list approach are:

1. Due to this methodology, the developing country will be vulnerable to greater pressure to liberalise.

2. The country may not be sufficiently aware of all the service sectors and sub-sectors, and thus may not list all the sub-sectors it wishes not to liberalise.

3. The country may not be able to predict or plan which sectors it may wish to promote domestically in future and thus may agree to liberalise sectors which

in future it may regret doing.

4. The country may not be aware of risks in liberalizing particular sub-sectors and may find it difficult to back track when circumstances require it to

1 Except for the Jordan-USFTA which was negotiated at the same time as Jordans WTO accession and

so is an unusually short FTA that only covers a few issues.

18

protect domestic firms or the economy (e.g. as happened or may happen

during financial crises).

5. The country will not be able to predict which new services sectors may emerge in future, and thus cannot exclude these in the list.

The US-FTA chapter on cross-border services covers cross-border supply of services,

but does not cover commercial presence or investment (known as Mode 3 in GATS),

as this is covered (with its own dispute settlement system) in the investment chapter

of the FTA. However, the annexes in the services chapter with reservations covers

the exceptions for services sectors from commitments relating to both the services and

the investment chapters.

The definition of Cross-Border Supply of Services in the US-Singapore FTA is the supply of a service:

a) From the territory of one Party into the territory of the other Party. For

example, a consultant located in one country giving advice to a client located

in another country by mail, phone or internet service. (This is similar to Mode

1 or cross-border trade in GATS),

b) In the territory of one Party by a person of that Party to a person of the other party. (This is similar to consumption abroad or Mode 2 in GATS, for example a student from Singapore traveling to the US to attend university).

c) By a national of a Party in the territory of another Party. (This is movement of persons, similar to Mode 4 in GATS). [However Article 8.2.4 in the US-

Singapore FTA says this chapter does not impose any obligation on a party

with respect to a national of the other party seeking access to its employment

market, or employed on a permanent basis in its territory, and does not confer

any right on that national with respect to that access or employment.].

The non-inclusion of the investment dimension of services does not mean that this

aspect (the most prominent one in GATS) is absent. It is covered instead as part of

the investment chapter, in which the rights of the foreign investor are very clearly

spelt out.

The chapter covers measures by a Party affecting cross-border trade in services by

service providers of the other Party. Some articles also apply to measures affecting

the supply of a service by an investor or investment of the other Party as defined in

the investment chapter. Such measures include the production, distribution,

marketing, sale and delivery of a service; purchase or use of a service; access to

distribution, transport or telecommunications in connection with supply of a service;

and provision of a bond or security as condition for supply of a service.

The main principles and provisions include: national treatment for the foreign service

suppliers; most favoured nation treatment; and market access (where both parties

agree not to impose limitations on the other partys number of service providers, on the total value of service transactions or assets, on the total number of service

operations and on the total number of natural persons employed in a particular service

sector.

19

There are also provisions on freedom for transfer of funds and payments, on domestic

regulation, transparency and professional services.

In the US FTAs, since there is a negative list approach, there are annexes with

schedules of exceptions. It is understood that every sector and activity is totally

liberalized, except those placed in the annxes.

In the Singapore FTA, there are two annexes of exceptions. Annex I actually has two

sets of exceptions. The first set comprises existing non-conforming measures that are maintained by a Party. Since conforming means total liberalization and national treatment, non-conforming refers to those existing measures that restrict or limit the market access, national treatment, MFN and local presence provisions. If listed in

Annex I, these measures can continue. The second set in Annex I comprises

amendments to any non-conforming measure, to the extent that the amendment does not decrease the conformity of the measure as it existed immediately before the

amendment.

The implication is that the existing measures that do not conform to these

provisions are allowed to be exempted but the level of their non-conformity can only be decreased, and cannot be increased. This implies that there the

existing applied levels of liberalization are notified and a standstill is imposed, in that the degree of liberalization can be increased but not decreased.

The developing country party would give up the flexibility and policy space that

is presently available in GATS, to be able to liberalise unilaterally in certain

services sectors, yet not bind the full degree of that liberalization. Having a distance between the applied and the bound levels allows a country to experiment, with the possibility of backtracking, should it be necessary to do so.

However there is also Annex II in which the country lists the sectors and

activities it wants to exclude so that it can take more restrictive measures (than

what already exists). The exclusion is in respect to market access, national

treatment, MFN and local presence.

The US-Singapore FTA excludes application of the chapter to -services supplied in the exercise of governmental authority.which is supplied neither on a commercial basis nor in competition with one or more service suppliers. (Article 8.2.5.b)

As pointed out by Shashikant (2005), neither of the criteria is defined. This provision

is the same as Article 1 in GATS, which has been the subject of controversy. Many

service sectors involve the public interest and thus are delivered by governments

through a mixed system that is wholly or partly funded with a minimum charge being

paid by consumers, but tightly regulated by governments at the central, regional and

local levels. Often these systems co-exist with other private for-profit delivery

systems. Following the criteria above, these systems would fall outside the purview of

the exclusion and be subject to the terms of the agreement unless expressly reserved.

For example in Malaysia there are public hospitals which are funded by the

government with consumers paying for their treatment according to their income, with

some being subsidized. Could it be argued that this system is providing treatment on

a commercial basis? There are also private hospitals which provide the same

20

treatment as public hospitals and in a way are competing for the same patients. As a

consequence the health service sector (it can be argued) may not fall within the

exception. As many of the essential public services may not be eligible for exclusion,

foreign service providers will likely be able to access public interest sectors such as

water, health, education, national parks, and pension funds. These providers are

likely to target only the profitable sectors or the higher income earners. Consequently

not only does the government lose income but it may also be saddled with having to

provide the less profitable service sectors or subsidizing low income earners who

cannot afford the prices of foreign service providers.

(Shashikant 2005).

In the US-Singapore FTA, a provision on Domestic Regulations states that measures

relating to qualification requirements and procedures, technical standards and

licensing requirements are to be based on objective and transparent criteria and should be "no more burdensome than necessary to ensure the quality of the service".

Besides the investor-state dispute settlement process in the investment chapter, the

FTAs also have a general dispute settlement mechanism, which allows a government

to claim that a law or policy of the other country is inconsistent with the FTA

obligations or the other party has failed to fulfill its obligation or a benefit expected

from the agreement is being nullified and impaired as a result of a measure not

inconsistent with the Agreement. The dispute process requires initial consultations,

and if that fails, it must be referred to a dispute panel. The Panel can declare that a

Party to the agreement has not conformed to its obligations.

In effect the infringing law would have to be eliminated or compensation be paid.

Parties can also under certain conditions take retaliatory action suspending benefits of

equivalent effect. Trade sanctions taken by a small developing country against U.S.

will hardly make a difference but if positions were reversed the developing countrys economy would be affected. (Shashikant 2005).

C Special chapters and targeting of key sectors, i.e. finance and

telecommunications

In US FTAs with developing countries, there are usually special chapters on financial

services and telecommunications, two of the most important and sensitive service sub-

sectors. The FTAs with Singapore and Chile, for example, have these special

chapters.

The financial services chapter in the US-Singapore FTA applies to investors and

investments as well as cross-border trade. Besides the usual principles of national

treatment and MFN, the market access clause states that measures by a Party shall not

impose limitations on the number of financial institutions, the total value of financial

service transactions, the total number of financial service operations and the total

number of natural persons employed; nor should the parties restrict or require specific

types of legal entity or joint venture. Each Party shall also permit a financial

institution of the other Party to supply any new financial service that is permitted to

its own institution. There are also liberalization clauses for cross-border trade and

senior management and boards of directors.

21

There are also annexes of non-conforming measures similar to the chapter on services in general, as well as general exceptions.

There are generally similar clauses on financial services in the US-Chile agreement.

In the chapter on telecommunications in the US-Singapore FTA, there are provisions

to ensure that enterprises of the other Party have access to and use of any public

telecommunications transport networks and services offered in the country. There are

other provisions with obligations on parties to ensure that suppliers of telecom

services provide interconnection with facilities of suppliers of public

telecommunications services of the other Party, and additional obligations regarding

treatment by major suppliers, competitive safeguards, unbundling of network

elements, co-location, resale, interconnection, pricing of leased circuit services etc.

There are also provisions relating to independent regulation and privatization,

universal service, licensing process, allocation and use of scarce resources, etc.

To meet the requirements and obligations desired by the US in the financial services

and telecommunications chapters, a typical developing country partner would have to

very significantly re-orientate its policies on these two key sectors, with also

significant consequences.

D. Does the degree of liberalization matter for development?

Developed countries advocate for developing countries the fastest and broadest

liberalization in services. Institutions such as the World Bank also encourage or

pressurize developing countries to liberalise services so that they can become more

efficient. However it is wiser for developing countries to take a cautious approach

towards services liberalization.

There are several reasons why it is important for a developing country to maintain or

expand beyond a certain degree of local participation (including ownership and

control) over services. During the colonial period, the foreign firms were able to

control a large and overwhelming share of the services sectors in many countries,

including the financial and distribution sectors. Following independence, governments

took measures to increase the share of citizens in services. There developed

significant local ownership and control in banking, insurance, construction, wholesale

and retail trade, transportation, professional services, etc. Governments tended to have

monopolies in railways, telecommunications, water, postal services, energy and

power resources. When these were privatized or partly privatized, or when private

companies were allowed to compete in these areas, local companies were among

those that took up local shares. The increased participation of local firms and persons

usually developed with the assistance of the government, including preferential

treatment to locals and restraint over the growth of foreign companies.

Presently, the services sector is in many developing countries the largest sector, and it

is the area where local firms have larger participation and are better able to compete,

as compared with the manufacturing sector. While it is important to upgrade

22

technology and techniques, this can often be done by the local firms including through

importing modern technology. It does not necessarily require that large foreign firms

take over, in order for a country to have modern and efficient services. There are

natural advantages of local firms and people in activities that require presence and

knowledge of local conditions and customers. Thus it is a sector in which

strengthening and development of domestic economy, training and development of

local entrepreneurs, restructuring of social imbalances, can and should take place.

Also the service sector has many sub-sectors that are strategic in many aspects

(a) Economically strategic sectors, eg finance, distribution); (b) Essential to national economic security (energy and power,

telecommunications, transport, postal, water);

(c) Critical for the public interest and to meet social needs (water, education, health, etc).

While there are benefits to foreign investment, there are also costs, and thus a balance

is required. The services sector usually produces services that are non-tradables. Thus, there is significant foreign exchange loss associated with foreign service

providers, as there is an outflow of profits, while most of the output is for local use.

For strategic and security reasons, it is also important that there be local control over

several services sectors, including water, electricity, finance, telecommunications, etc.

To avoid or cushion financial crises, there should also be significant local

participation in banking, insurance, etc.

Public services that meet basic needs, such as water, education, health and electricity,

should also be carefully guarded. Primary importance should be placed on meeting

the needs of the public, especially the poor.

It is thus crucial that this sector is carefully regulated under national development

policy. Foreign participation has a role to play, but this has to be carefully considered

and given its proper place, within a planned framework, taking into account the

factors above (participation of domestic firms and institutions, economic, financial,

infrastructure, public needs, social development). Accelerated and excessive

liberalization of key sectors, or worse an across-the-board liberalization, under legally

binding rules of an FTA, would disrupt or hinder the process of establishing a national

services strategy.

E. Need for a comprehensive national services plan

Developing countries need to have a comprehensive national services master plan, in

order that there be a coherent policy framework. Based on such a plan and

framework, the country can formulate positions to take in its national interests,

whether in the WTO or in a possible FTA.

Among the issues to resolve in such a services plan is the degree of local and of

foreign participation in the various sub-sectors, and the development of each sub-

sector. Strategic and public consideration has to be given to key sectors such as

finance, telecommunications, water, health services.

23

Many countries do not have such a comprehensive plan. At best they have a plan for

subsectors, such as financial services or health services.

Until such a services plan is formulated, it would not be possible for a country to

properly decide on which sectors to commit to liberalise and to what extent.

F. SERVICES: IMPLICATIONS OF MUFTA FOR MALAYSIA

There will be limited gains to Malaysia from a services chapter in the MUFTA. If

Malaysia wants to export more services to the USA because of the USFTA, there

are a number of legal problems. Lets look at the example of construction services which is one of Malaysias services most ready to be exported (so far we are exporting them to developing countries).

The first problem is that to export construction services to the USA, Malaysia

usually has to send engineers, architects, surveyors etc to the USA. However it is

difficult for Malaysians to get visas to enter the USA and the USTR cannot

promise more visas for Malaysians because according to the American

Constitution only the American Congress has that power. (The USTR tried to

promise more visas to Australia in its USFTA but the US Congress got very

angry and did not agree).

Secondly, even if Malaysia could somehow export its construction services by

emailing plans etc to the USA without visiting the USA even to look at the site,

the qualifications of Malaysias engineers, architects etc must be recognised by the USA. These regulations that set what qualifications are acceptable are

usually decided by the state governments in the USA. So it is not in the USTRs power to be able to say she will allow Malaysian lawyers or architects to practise

in the USA.

More generally, Malaysia could gain if the US were to allow more generous

immigration treatment regarding visas to Malaysians to work in the US.

However, both the language of the FTA as well as the political situation in the US

will not allow for this.

On the other hand, Malaysia will face many serious problems that will entail

changing the structure and policies of many of the service sub-sectors.

Firstly, the US is insisting on a negative list approach (everything is liberalized

unless explicitly stated in an exception list).

This methodology makes Malaysia much more vulnerable to greater pressure to

liberalise (see above). Malaysia may not be sufficiently aware of all the service

sectors and sub-sectors, and thus may not list all the sub-sectors it wishes not to

liberalise; the country may not be able to predict or plan which sectors it may

wish to promote domestically in future and thus may agree to liberalise sectors

which in future it may regret doing; the country will find it difficult to back track after committing, when circumstances require it to protect domestic firms

24

or the economy (e.g. as happened or may happen during financial crises); and

the country will not be able to predict which new services sectors may emerge in

future, and thus cannot exclude these in the list.

Secondly, the exceptions are such that Malaysia has to list (in an Annex I)

existing non-conforming measures (i.e. that do not conform to total liberalization in relation to market access, national treatment and MFN), and

these measures can only be amended towards greater liberalization but not

stricter regulation. This imposes a standstill, disallowing back-tracking, and erodes policy space. Only if measures in particular sub-sectors are placed in an

Annex II can there be some space between present measures and future possible

measures.

Thirdly, the U.S. administration is assisting its companies in their demands for

opening up the Malaysian services sectors for full access to American companies.

Thus the FTA talks will put pressures on Malaysia to: (1) remove or

substantially reduce measures that presently help local firms to maintain or

strengthen their position; (2) remove regulations and policies that impose

limitations or conditions on foreign firms. If the US does not get significantly

what it wants, it will not want to conclude the FTA. On the other hand if it does

get what it wants, then Malaysia will have to largely change its policies, with

serious economic and social consequences.

The investment or commercial presence part of services will not be in the services chapter but in the investment chapter of the MUFTA, at the request of the US

(if its previous FTAs are followed). One reason for this is that the investment chapter

contains an aggressive investor-to-state dispute mechanism (which will encourage

implementation of obligations) and thus the services investment component will fall

under that.

An idea of the demands that the US is making on services investment can be seen

from the USTRs trade barriers report on Malaysia. This lists the regulations that Malaysia is presently having in various sub-sectors. These are the regulations that the

US presumably will negotiate to eliminate or substantially relax. The following are

some examples of what the USTR report 2006 says about Malaysian services. What

the report says gives an idea of the concerns that the US will raise in the negotiations

and their demands.

Basic Telecommunications

Foreign companies are entitled to acquire only up to a 30 percent equity stake in

existing fixed line operations, an investment ceiling codified as part of Malaysia's

WTO services offer which limits market access commitments to facilities-based

providers. [The USTR report says These restrictions constitute one of the most restrictive regimes for an economy of Malaysias level of development.].

Value-added service suppliers are similarly limited to 30 percent foreign equity.

25

The report says Restrictions on these activities tend to benefit the dominant provider, government-controlled Telekom Malaysia, and hamper the development of a more

efficient information infrastructure. It adds that Malaysia has made marginal improvements to this regime reflected in its January 2005 revised services offer in the

WTO, reflecting new domestic licensing categories, but these changes remain

disappointing.

The new licensing categories introduced now allow for up to 49 percent foreign

equity in suppliers categorized as application service providers, but precisely what this category encompasses is unclear.

Distribution Services, including Direct Selling

Malaysias requirements for the licensing and operation of direct selling companies include a provision that a locally incorporated direct selling company must allow for

30 percent Bumiputera equity. The Ministry also recommends local content targets.

Local companies that seek multi-level direct selling licenses require paid-in capital of

RM 1.5 million ($397,000), while companies with foreign shareholders must have

paid-in capital of RM 5 million ($1.3 million).

The Malaysian government also included local content requirements in new

"Guidelines on Foreign Participation in the Distributive Trade Services" that came

into effect in December 2004.

Among other provisions, department stores, supermarkets and hypermarkets must

reserve at least 30 percent of shelf space in their premises for goods and products

manufactured by bumiputera owned small and medium size industries. The guidelines

also require that at least 30 percent of a stores sales consist of bumiputera products, a rule that does not take into account discretionary behavior on the part of consumers.

Banking

The Malaysian government limits foreign participation in financial services to

encourage the development of domestic financial services providers. The

governments policies are guided by the Banking and Financial Institutions Act of 1989 (BAFA) and the ten-year Financial Sector Masterplan unveiled in 2001. The

plan is focused on building competitive domestic banks, in large part through banking

consolidation, and defers the introduction of new foreign competition until after 2007.

Foreign institutions are allowed to hold an equity stake in investment banks of up to

49 percent currently, foreign participation in commercial banks is still restricted to an

aggregate maximum stake of 30 percent. Foreign banks currently operate in Malaysia

under a grandfathering provision. No new licenses are being granted to either local or

26

foreign banks; foreign banks must operate as locally controlled subsidiaries. Foreign

commercial banks are only allowed to open new branches if they also add other

branches as directed by Bank Negara.

In 2004, Bank Negara pressed existing foreign banks, including U.S. banks, to expand

back office operations or establish significant computing operations in Malaysia.

On October 14, 2004, Bank Negara completed the issuance of three Islamic banking

licenses to three Middle Eastern Islamic banks. Bank Negara encourages all

commercial banks operating in Malaysia to set up full-fledged Islamic banking

subsidiaries in which foreigners may take a 49 percent equity stake.

On April 1, 2003, the government removed the restriction that foreign-controlled

companies were required to obtain 50 percent of their local credit from Malaysian

banks. However, sourcing of funds of more than RM 50 million ($13.2 million) from

local banks still requires approval from Bank Negara.

On December 28, 2005, Bank Negara announced that locally incorporated foreign

banking institutions currently operating in Malaysia would be allowed to open up to

four additional branches in 2006 (one branch in a market center, two in semi-urban

centers, and one in a non-urban center).

Insurance

The insurance industry remains dominated by foreign providers, including several

U.S. firms.

The 2001 Financial Sector Masterplan recommends phased liberalization of the

insurance industry, including increasing caps on foreign equity, fully opening the

reinsurance industry to foreign competition, and lifting existing restrictions on

employment of expatriate specialists.

Branches of foreign insurance companies were required to incorporate locally under

Malaysian law by June 30, 1998, although Malaysias government has granted individual extensions.

Foreign shareholding exceeding 49 percent is permitted only with Malaysian

government approval. As part of the 1997 WTO Financial Services Agreement,

Malaysia agreed to allow existing foreign shareholders of locally incorporated

insurance companies to increase their shareholding to 51 percent. New entry by

foreign insurance companies is limited to equity participation in locally incorporated

insurance companies, and aggregate foreign shareholding in such companies may not

exceed 30 percent. However, this limit has been subject to negotiation.

Securities

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Malaysia currently allows 49 percent foreign ownership in stock-broking companies

and a 30 percent foreign stake in unit trusts. The Securities Commissions ten-year Capital Market Masterplan, released in February 2001, proposed liberalizing foreign

participation limits by 2003, at which time foreigners would be permitted to purchase

a limited number of existing stock-broking licenses and to take a majority stake in

unit trust management companies.

Fund management companies may be 100 percent foreign-owned if they provide

services only to foreigners, but they are limited to 70 percent foreign ownership if

they provide services to both foreign and local investors. On March 22, 2005, the

government allowed five foreign stock brokerages and a foreign fund management

company to set up operations in Malaysia. More foreign fund management companies

are expected to utilize four of the remaining licenses.

In September 2003, the Securities Commission began allowing foreign firms

operating in Malaysia to seek listing on the Kuala Lumpur Stock Exchange. Futures

brokerage firms may now be 100 percent foreign-owned.

Audio-Visual and Broadcasting

Malaysias government maintains broadcast content quotas on both radio and television programming. Eighty percent of television programming is required to

originate from local production companies owned by ethnic Malays (an increase from

the previous limit of 60 percent). However, in practice, local stations have been

granted substantial latitude in programming due to a lack of local programming. Sixty

percent of radio programming must be of local origin. Foreign investment in

terrestrial broadcast networks is prohibited. As a condition for obtaining a license to

operate, video rental establishments are required to have 30 percent local content in

their inventories. Malaysia regularly censors movies and television shows deemed

offensive on religious or sexual grounds.

Advertising Commercials are restricted to a maximum of 20 percent foreign film

content. The government recently relaxed enforcement of regulations governing the

appearance of foreign actors in commercials shown in Malaysia. The Government of

Malaysia has an informal and vague guideline that commercials cannot promote a foreign lifestyle.

Legal Services

Foreign lawyers may not practice Malaysian law, nor may they affiliate with local

firms or use their international firms name. Foreign law firms may not operate in Malaysia except as minority partners with local law firms, and their stake in any

partnership is limited to 30 percent.

Under the Legal Profession Act of 1976, the practice of Malaysian law is normally

restricted to Malaysian citizens or permanent residents who have apprenticed with a

Malaysian lawyer, are competent in Bahasa Malaysia (the official language), and have

a local law degree or are accredited British Barristers at Law. The Attorney General

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has authority to grant limited exceptions on a case-by-case basis, provided the

applicant has seven years of legal experience.

Malaysian law does not allow for foreign legal consultancy except on a limited basis

in the Labuan International Offshore Financial Center (see Banking below). Malaysia limits such foreign attorneys scope of services to advice concerning home country and international law.

Persons not licensed as lawyers are subject to criminal penalties if they directly or

indirectly undertake activities relating to the Malaysian legal system, including

drafting documents.

Architectural Services

A foreign architectural firm may operate in Malaysia only as a joint-venture

participant in a specific project with the approval of the Board of Architects.

Malaysian architectural firms may not have foreign architectural firms as registered

partners. Foreign architects may not be licensed in Malaysia but are allowed to be

managers, shareholders, or employees of Malaysian firms. Only licensed architects

may submit architectural plans.

Engineering Services

Foreign engineers may be licensed by the Board of Engineers only for specific

projects, and must be sponsored by the Malaysian company carrying out the project.

The license i