Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

The United States-Malaysia Free Trade Agreement

Written by johnleemk on 2:29:29 pm Mar 3, 2007.

A heated topic of contention as of late has been the FTA with the US. The prevailing viewpoint seems to hold that the FTA will harm us more than it helps us. Until recently, however, I had not heard more than the usual blanket condemnations of trade, which made it difficult to critically analyse the situation in concrete terms.

The most obvious thing I've noticed is that unlike traditional Western opposition to trade, the opposition here is quite, shall we say, rabidly anti-American. A lot of the people opposing the FTA feel compelled to make the usual anti-American remark, suggesting that the FTA will extend American hegemony.

Will signing the FTA take away our sovereignty? It all depends on how competent our negotiators are — and knowing our government, this means we're doomed.

Still, to some extent, the government will push back on certain issues because they need to have some space to carry on with their antics. That's why the most high-profile issue about the FTA so far has been the US government's insistence that our overt pro-Malay economic policies be curtailed.

The thing I would be most concerned about is the issue of sovereignty, really. Will the FTA harm our sovereignty to the point that we become an effective colony of the US? I think that's a value judgment that's up to the individual, because we don't have enough information to go on at this point — another thing that irks me about how the negotiations are being carried out.

Moving on, another criticism is that the FTA will result in American dominance of the economy through preferential policies. This is not a criticism of trade — ironically, it's a criticism of the statist approach to economics.

In a free market, there is no government intervention — no preferential policies. The FTA is supposed to create a level playing field, not tilt it to the opposite end by favouring foreigners over locals instead of locals over foreigners.

Is this the situation our FTA will create? Again, as we do not know what the content of the negotiations are currently, it's impossible to say. The validity of this criticism depends on what the actual terms of the FTA are — and I would argue that if the actual terms contain any overt pro-American or anti-Malaysian policies, it cannot be called a free trade agreement.

Some have correctly noted that the FTA cannot resolve certain issues with our government, such as a lack of transparency and accountability. I wish it were true, but our government is not going to open up simply because there is trade. Transparency is not a direct effect of trade.

A major issue is that the FTA will harm the pharmaceutical market by prohibiting generic drugs. I do not think there is or should be a problem with enforcing the patent rights of drug manufacturers. I do not like the restrictions we currently have on intellectual property, but there aren't many other alternatives just yet.

The trouble is that the US may be forcing us to turn away imports of generic drugs produced by countries such as India, and also curtailing the production of generics even after the patent expires. If true, this is a serious problem with the FTA, to the point that it cannot be called a free trade agreement. These artificial barriers to entry cannot be said to be free trade.

Another concern — and this is actually common to all countries which enter free trade agreements, including the US — is that the FTA will cause unemployment. I have addressed this in the past, but in short, these effects can be ameliorated by subsidies for retraining and education, and providing capital for new enterprises.

The destructive change that a newly opened market brings may be detrimental in the short run, but it pays off in the long run. The pain can be tackled if our government has the brains to apply a proper poverty-abatement policy that makes it easy for people to adapt to the new economic situation.

A similar situation exists for rice farmers, but their situation is a bit more problematic since their opportunities for retraining, etc. are so limited. In this regard, some creativity would be required to implement a policy that can achieve economies of scale from our numerous smallholders. I am no agricultural expert, but I think this can be done.

Another concern is that the trade deficit might grow under the FTA. Well, excuse me, but that's normally the point of an FTA — to give your people more choices, and to increase competitiveness in the economy as a whole.

In the short run, the deficit will grow, but it should shrink in the long run, as the economy adapts to competition and becomes more efficient. Also, several economists, including Nobel Prize-winner Milton Friedman, have argued that a trade deficit is a positive thing because it indicates there is a greater amount of choice in the economy, and that the prices of consumer goods are lower relative to other countries. It is also interesting to note that many weak economies tend to run trade surpluses, such as the Japanese economy during the 1990s.

In the end, I think the biggest problem with the FTA is not that free trade. Ironically, the problem is unfree trade — that the FTA will actually be an unfree trade pact, and promote distortions in the economy.

To address this problem, what we need are prudent and slick negotiators. Unfortunately, we don't have reason to believe that this is so for our country. If anything, our government is quite lacking in the expertise area.

Making matters worse is the total lack of transparency in how the negotiations are being carried out, and what's on the table and what's off. It's been suggested that this is because the government does not want the controversial removal of the pro-Malay policies to be publicised. I hope this is the case, but whatever the situation, this lack of transparency makes it difficult to determine what kind of deal we are getting.

In the abstract, a free trade agreement is a very positive thing, and should be supported. But are we getting a real free trade agreement from the US? That's a difficult question to answer, and one I think that cannot be fully answered until we know all the terms of the deal.

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