My Say: Rethinking free trade agreements

This article first appeared in Forum, The Edge Malaysia Weekly, on January 16, 2023 - January 22, 2023.
My Say: Rethinking free trade agreements
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In recent years, there has been a tremendous increase in the number of free trade agreements (FTAs), in which two or more nations agree to reduce trade barriers substantially. Currently, much of the world is caught in an occasional frenzied effort to negotiate such agreements or join powerful regional trade blocs, or at least try to avoid being left out of such blocs as they coalesce in many regions around the globe.

FTAs are regarded as an efficient means of promoting growth in trade, opening markets and reducing trade barriers. China’s 2004 FTA with Asean can be cited as a benchmark. In four years, China-Asean trade had risen by at least 20% annually.

Similarly, the US and the European Union were showing steady interest in forming FTAs with countries throughout the region. For any nation relying on trade, free trade, economic integration and market access are of utmost importance. And it goes without saying that the most desired markets to access are the largest ones.

While FTAs are generally viewed as economic pacts, their political significance is great. For example, looking back, with the US reducing its military presence in South Korea and having to confront both rising anti-US nationalism and aggressive Chinese diplomatic efforts, it countered by offering South Korea an FTA, a pact more strategic than economic.

The same was true for many FTAs throughout the region. FTAs throughout Asia were becoming increasingly political as nations jockeyed for position.

Between 1997 and 2007, the number of FTAs rose from seven to 38, continually adding complexity to an already complicated system of international trade.

In the book History of Western Philosophy, Bertrand Russell predicted that western culture would eventually engulf and absorb all foreign cultures.

Whereas Victor Davis Hanson in his book, Why the West Has Won, claims further that the 20th century has seen an erosion of the cultural differences that impeded the adoption of a western outlook stressing efficiency through capitalist property rights and the legal protection of capital accumulation.

By adopting a Western approach, Japan, and later Singapore, Hong Kong, Taiwan and South Korea, had moved from being among the poorest countries in the world to being among the wealthiest.

Proposed Malaysia-US free trade negotiations

Capitalism offers inducements sufficiently attractive to such a wide range of people that it appears to be a powerful weapon against extremism. Along those lines, former US ambassador Christopher J LaFleur had praised Malaysia as “a predominantly Muslim country which advocates a moderate version of Islam, plays a very important role in maintaining security in Southeast Asia and promoting a vision of the future of the Islamic world, one that emphasises cooperation, emphasises economic development, that emphasises political rights and freedoms”.

On March 8, 2006, the then US president George Bush announced that negotiations had begun with Malaysia for a free trade agreement. He noted that Malaysia is the 10th largest trading partner of the US while the US is Malaysia’s largest source of imports, and looked to a beneficial relationship for both parties.

America’s status as Malaysia’s largest foreign market and its primary source of investment for many years were incentives for a pact. An FTA would increase and diversify Malaysia’s exports, and stimulate investment in Malaysia.

The US had hoped to bolster a moderate Muslim ally. An FTA with Malaysia appeared to have strong bipartisan congressional support because of Malaysia’s dependability in the fight against terrorism, and its tolerance and multiculturalism, and officials praised Malaysia as “a country that has been at the forefront of the economic dynamism that has transformed Asia in recent years”.

In short, this trade pact could be viewed as strategic in supporting a Muslim country known for its tolerance.

After five rounds of negotiations, talks were stalled, leaving no chance of an agreement in time to give the US Congress the needed three months before the president’s trade promotion authority (TPA), or “fast track” would expire. Each side had “no-go” areas on which they would not move. Market access issues such as the entry of US companies into Malaysia’s protected finance, auto and services sectors were discussed, but Malaysia refused to discuss affirmative action policies favouring bumiputeras.

Since the TPA has long expired, any enabling legislation would have to go through open-ended congressional consideration. In the current scenario, economic nationalists who are influential in the administration of US President Joe Biden are bringing many changes to American trade policy. For example, the Biden administration has focused on “a worker-centred trade policy that fosters inclusive prosperity”, and not on restarting pending talks or new FTAs.

The use of FTAs reflects political and economic wants. The prevailing current belief is that freer trade among countries brings economic benefits.

The US, in particular, stresses free trade as an effort to shape the world into a rational, western image. Capitalism is seen as a key to countering Islamic extremism. Thus, it can be argued that FTAs can at times be a tool (the metaphorical/proverbial carrot) of foreign policy.

Jockeying for economic leadership in East Asia

In the realm of international strategy and diplomacy, competition is usually a negative paradigm. Whether jostling over territory, contesting freedom of navigation or an arms race, strategic competition tends to be risky and counterproductive. In other domains, however, competition should be welcomed. For example, in a market economy, competition leads to innovation and efficiency. Thus, what should be avoided between China and the US is to be encouraged between Apple and Samsung.

Whereas in other areas, competition is neither wholly good nor bad, but is instead a delicate scenario to be managed. Asian trade diplomacy is one such area where there are competing agendas for trade liberalisation, as manifested by the emergence of a “noodle bowl” of free trade agreements in East Asia.

Is the US losing to China in the long-term geopolitical competition in East Asia? Are smaller states in Asia tilting towards China for economic benefits at the expense of US interests? Are Biden’s external policies creating more room for China to expand its influence in Asia?

We have to thank Japan for being the counterbalance between the rising dragon China and the US, which does not want to be knocked off its perch.

There is no reprieve for Malaysia. Sooner or later we would have to formulate our big power policy. Undoubtedly, it will be driven by domestic political necessity, especially economic gains. We cannot afford to be a hermit nation.

In the final analysis, against the backdrop of an unfolding global landscape, change is inevitable, unrelenting and overarching. Like the smart proverbial mousedeer (kancil), an open economy like Malaysia must learn to dance along with the behemoths of the international trading system, while making the required structural transformation in government and economy. In this context, the proverbial Sang Kancil is known for its agility and wit. Strategy and timing is of the essence — as we dance along with the goliaths, we must be careful not to get trampled by them. Instead, we ought to play according to the accepted rules and reap the maximum amount of benefits.

Samirul Ariff Othman is a widely quoted independent analyst. He was previously attached to a leading local think tank.

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