Obama’s Bold Trade Plan Faces Resistance on Asia Trip

By Stuart Grudgings 2 October 2013

KUALA LUMPUR — Malaysia’s former Prime Minister Mahathir Mohamad and opposition leader Anwar Ibrahim haven’t agreed on much, if anything, in the 15 years since the latter was ousted from Mahathir’s government and then jailed on sodomy and corruption charges.

But a US-led trade pact—the most ambitious since the demise of the Doha round of global talks—has succeeded in uniting the great rivals in condemnation of what they see as a US plot to impose its economic model on Asia.

Their rare unity is one measure of the struggle President Barack Obama faces in pushing forward his signature trade pact, a cornerstone of his plans to create more US jobs, during his sweep of Southeast Asian countries and summits next week.

Obama, who touts the deal by saying that 5,000 US jobs are created for each extra $1 billion in exports, will have a rare chance to push other leaders personally for breakthroughs at an Asia-Pacific Economic Cooperation summit in Indonesia, followed by an East Asia Summit in Brunei, and a visit to Malaysia.

But the proposed Trans-Pacific Partnership (TPP), by seeking unprecedented access to domestic markets, is proving highly sensitive in developing countries such as Malaysia and Vietnam, whose political systems could be shaken by intrusions in areas such as government procurement and state-owned enterprises.

Such sensitivities are increasing the risk of a watered-down deal as politicians succumb to demands for exemptions and opt-outs from pressure groups in countries as diverse economically as Australia, Brunei, Mexico, Singapore and Peru.

“The elimination of tariffs can kill some of our industries, especially those in the process of developing,” said Nizam Mahshar, head of the Malay Economic Action Council, which is pressuring Malaysia’s government not to cross 75 “red lines” in the TPP. “We are not convinced the TPP will provide what Malaysia needs.”

The three-year-old talks, now involving 12 nations, are aimed at establishing a free-trade bloc that would stretch from Vietnam to Chile, encompassing 800 million people, about a third of world trade and nearly 40 percent of the global economy.

Proponents call it a “high-standard” agreement to eliminate tariffs and tackle an unprecedented range of non-tariff barriers that restrict growth.

For the United States, there is also strategic appeal, complementing its shift of diplomatic and military resources to Asia to tap the region’s fast growth and balance the growing influence of China, which has not joined the pact.

To its opponents, such as Mahathir and a range of advocacy groups globally, the TPP represents an encroachment of US economic might that gives big corporations unprecedented powers to challenge national policies in the name of free trade.

More intrusive than other trade pacts, the TPP seeks to regulate sensitive areas such as government procurement, intellectual property and the role of state-owned enterprises as well as giving corporations more rights to sue governments.

Tough Sell in Developing Asia

Among the Malay council’s concerns is that liberalizing state procurement rules would undermine Malaysia’s long-standing affirmative action program to benefit majority ethnic Malays.

Former Finance Minister Anwar has called the TPP a secretive push for “modern-day American hegemony” while his nemesis Mahathir, a veteran opponent of globalization and US dominance, denounced it as a threat to Malaysia’s independence.

Such opposition has put pressure on Prime Minister Najib Razak to reassure the public that the government, which says the TPP will boost by 10 percent the amount of trade covered by preferential access, will fight for its interests.

Najib’s government announced in August it was initiating fresh studies on the impact of the TPP and it says it will not be bound by deadlines to conclude the talks, which negotiators had hoped to wrap up by the end of this year.

Malaysia launched a proposal in August to exempt tobacco control measures from the agreement, countering US wording that could allow companies to challenge public health campaigns against cigarettes. Opponents of the deal have also warned it would lead to higher medicine costs by limiting access to generic drugs under intellectual property rules.

In TPP nations such as Malaysia, Japan, and Vietnam, reform-minded leaders are seen as using the pact as external leverage to break down vested interests and force liberalization of protected, inefficient sectors.

Michael Froman, the US trade representative, last week played down concern that there were too many unresolved issues to wrap up the talks this year, saying much of the work on trade deals tends to get done “at the last minute.”

“I think it’s hard to judge from the outside whether or not there is too much work to be done,” he said in Washington. “We see a path forward. There’s a lot of momentum.”

‘Dragon in the Room’

Vietnam’s Communist leadership wants to join the TPP “with a “vengeance,” said Vietnam expert Carl Thayer, seeing it as a way to steal a march on China and further internationalize an economy that has been paralyzed by a bloated state sector.

Vietnam had a trade surplus of just less than $15 billion with the United States last year, fueled largely by its garment and seafood exports, compared with a yawning deficit of nearly $17 billion with northern neighbor China.

“The TPP overall has serious costs for Vietnam, but look at the market it is gaining access to and look at the trade deficit with China,” said Thayer, emeritus professor at the Australian Defense Force Academy in Canberra.

Still, Vietnam would “negotiate down to the last man, trying to get concessions, delay, et cetera,” he added.

Hanoi may not see enough benefits from the deal—which would cut tariffs on textiles to zero in four years from 17.5 percent now—to agree to far-reaching reforms of its domestic economies, such as its huge, debt-laden state-owned enterprises.

Vietnamese trade officials acknowledge that a range of companies, including exporters who depend on state subsidies, and inefficient domestic-focused firms, would suffer from the TPP.

One stumbling block is the US insistence on “yarn-forward” origin rules for the textile sector, meaning that all materials must be sourced locally or in a fellow TPP country to qualify for duty-free access. Vietnam mainly sources its fabrics and other inputs from China.

Nguyen Xuan Duong, the director of Hung Yen Garment Corporation near Hanoi, which has 12,000 workers, hailed the TPP as a “great opportunity” but said the industry would need long-term government support to wean itself off Chinese imports.

“Local companies just want short-term profit, no one wants to invest in a sub-material factory which only gives profit after five to seven years,” said Duong, whose firm exported apparel worth $200 million last year, 70 percent to the United States.

That is one example of how the exclusion of Asia’s largest economy from the talks could have a profound impact on TPP countries’ ties with China. Chinese state media have criticized the pact as an attempt to contain China’s economic rise, although Beijing has since said it is studying joining the deal.

“China is the dragon in the room,” said Adrian Hearn, coordinator of international relations at the University of Sydney China Studies Center.

“Most TPP countries have become increasingly reliant—in some cases dependent—on Chinese markets and investment. The TPP’s provisions on state-owned enterprises will complicate the ability of its members to accept investment from Chinese companies.”