Malaysia and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

A Case of Cold Feet?

By Edika Amin, 26 April 2019

Malaysia is yet to make a decision on whether or not to ratify the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Currently, the 11-member CPTPP has been operative since December 2018 in Australia, Canada, Japan, Mexico, New Zealand, Singapore and more recently Vietnam as of January 2019.  Of the eleven nations, there remain four countries that have yet to ratify the agreement namely Malaysia, Brunei, Chile, and Peru. By law, the CPTPP will only be deemed effective within 60 days from the day they complete the domestic process and bring forward the ratification instrument to New Zealand, the country responsible as the depository.

MALAYSIA’S STANCE

The Government seems to be in no rush to ratify the agreement. This is evident based on recent media engagements by Pakatan Harapan Ministers. Among comments made include:

1. January 2019;International Trade and Industry Minister Datuk Darell Leiking emphasized that no deadline is in place to ratify the CPTPP. The Minister stressed that the agreement will only be ratified after the government is certain that it would benefit the nation.
2. March 2019;Deputy International Trade and Industries Minister Dr Ong Kian Ming stated that Malaysia needs more time to decide whether it will ratify the CPTPP as they are still in the midst of evaluating the cost and benefits of the agreement. The Deputy Minister also stated that Malaysia will need to take into account how foreign investors will view the country’s position within ASEAN in the long term if Malaysia does not ratify.
3. April 2019;during the American Malaysian Chamber of Commerce Annual General Meeting, Prime Minister Mahathir had gone on record and stated that many officials from key ministries are “not quite happy” about the pact. Nonetheless, he believes the country will be able to ratify the CPTPP in due time.

MALAYSIA PURSUING ALTERNATIVE TRADE OPPORTUNITIES

While Malaysia has been showing signs of ‘cold feet’ with the CPTPP, the government has begun to seek out opportunities via interim Free Trade Agreements (FTA) developed on a bilateral basis and other alternative multilateral agreements. Among current initiatives includes:

1. Malaysian Ministry of International Trade and Industry (MITI) is preparing trade delegations to both Chile and Brazil targeted for 2H 2019.
2. Malaysia has shown interest in developing a FTA with Mexico prior to finalization of United States–Mexico–Canada Agreement, which has been signed but not yet ratified.
3. Malaysia is deepening their relationship with South America having been invited to take up an observer status alongside New Zealand and Mexico within MERCOSUR, a trade bloc that comprises of Argentina, Brazil, Paraguay, Uruguay and seven other Associate Members.
4. Lastly, Malaysia remains hopeful on the development of the Regional Comprehensive Economic Partnership (RCEP). The country is not ruling out the possibility that RCEP can provide Malaysia with sufficient benefits that can ultimately deem the CPTPP unnecessary.

Additional information: Malaysia has already signed and implemented 7 bilateral FTAs with Japan, Pakistan, India, New Zealand, Chile, Australia and Turkey. While at the ASEAN level, Malaysia has 6 regional FTAs with ASEAN Free Trade Agreement (AFTA), China, Korea, Japan, Australia, New Zealand and India.

ANALYSIS

Malaysia is unlikely to ratify the CPTPP within the first three quarters of 2019. Among the major hurdle at this juncture is the need to significantly amend a number of laws pursuant to the treaty’s ratification. Key chapters include:

1. Investment:Amending current investment laws can potentially result in a “regulatory chill” on the Malaysian government where the government will face difficulties in introducing new policies which may be good for the people but negative for investors.
2. State-owned enterprises:Another controversial chapter in the agreement is regarding state-owned enterprises (SOEs) which is the new topic in FTAs. Better known in Malaysia as Government-Linked Companies (GLCs), these institutions have been instrumental in strengthening Malaysia’s economy. The spill-over has largely benefited small and medium-sized enterprises by generating employment for locals as well as providing opportunities for them to enhance their businesses. Given the significant role of SOEs in Malaysia’s success story of economic development, this is not something than can be easily discounted.
3. Labor:Malaysia still lags behind on numerous labor policies to meet the acceptable standards of CPTPP. Although, Malaysia has been making efforts in recent months to better adopt the best practices set by the International Labor Organization (i.e. Competency Requirements and Referring Cases to the Industrial Court) many are of the belief that these amendments should occur organically rather than rushed.

Economist have opined that the CPTPP’s effect on Malaysia will likely be ‘modest’ in nature and certainly nowhere near ‘transformational’. In addition, Malaysia already has FTAs with many countries in the CPTPP except for Canada, Mexico and Peru. Market access to these countries can be easily be obtained by having bilateral FTAs without having to be chained to binding rules on non-trade issues of the CPTPP. Furthermore, Canada, Mexico and Peru are not countries with which Malaysia has significant trade with.

Nevertheless, there remain significant repercussions if Malaysia were to opt out of the CPTPP.  Factors that will also need to be taken into consideration include:

1. Reputational: Foreign investors will watch with interest on how Malaysia positions itself on the CPTPP. As the region’s top three trading powerhouses – Singapore, Vietnam and Thailand – have either ratified the agreement or expressed strong interest to join the CPTPP, Malaysia may risk being left out. This can potentially alter Malaysia’s position in ASEAN in the long term.
2. Opportunity Cost: As more countries ratify the treaty, those inside would benefit from further investment and trade resulting from the deal to ensure sustainable economic development.
3. Promotion of best practices: The CPTPP is not just about trade agreement but also about economic regulation and good governance. Malaysia is already integrated in the global value and supply chains, part of the international trade agreements as well as a member of the World Trade Organization. As such, many perceive agreements such as the CPTPP to be a natural step for Malaysia in reaching the next stage of development.