Article 9.4 (1) in the investment chapter of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) specifies that:
Each Party shall accord to investors of another Party treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, operation and sale of investments in its territory.
This is termed “national treatment”. If Malaysia fails to treat a foreign firm equally, then that firm can drag us to an international tribunal under the investor-state dispute settlement (ISDS) provisions of the CPTPP and demand a hefty compensation.
It is not only the foreign firms that have actually invested in Malaysia that have this right to demand “National Treatment”. The CPTPP includes any firm or person from any of the CPTPP countries who intends to invest in Malaysia in its definition of investor (Article 9.1: Definitions).
To be fair, there is a safety provision in the CPTPP that allows participating countries (“parties” in CPTPP parlance) to list the sectors where certain specified provisions of the CPTPP do not apply. These are termed “non-conforming measures” and are listed by participating country in Annexes One and Two of the CPTPP document.
Annex One Malaysia is 31 pages long and its Annex Two is 18 pages long, and they preclude several sectors from certain specified provisions of the CPTPP.
For example, page three of Annex One Malaysia states that:
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foreign equity is limited to 49% for investment in the manufacture and assembly of motor vehicles. However no foreign equity restrictions are imposed on the following categories –
- Luxury passenger vehicles with an engine capacity of over 1800cc and a on the road price of not less than RM150,000;
- Pickup trucks and commercial vehicles
- Electric or hybrid vehicles
- Motorcycles with engine capacity of more than 200cc.
In a similar tone, Malaysia negotiators have specified in page five of its Annex Two that with regard to CPTPP’s provisions on “national treatment”, “performance requirements” and “market access”, Malaysia reserves the right to:
adopt and maintain any measure that provides assistance to Bumiputra for the purpose of supporting Bumiputra participation in the Malaysian market by the creation of new or additional licenses or permits for Bumiputra eligible to receive such assistance, provided that such measures shall not affect the rights of existing licence and permit holders or future applicants for rights and permits in sectors where foreign participation is allowed.
There are 47 specific non-conforming provisions registered in these two annexes for Malaysia, and the interested reader can go to the Ministry of International Trade and Industry’s website and click on the CPTPP text link to have a read.
But it is important to note that the lists in these two annexes are “negative” lists. In other words, all the sectors not specifically included in the annexes will have to comply with all the terms of the CPTPP.
For example, the wholesale purchase and distribution of fresh vegetables is not specifically mentioned in either of the two annexes. However, Annex One – 21 which deals with “distributive services”, allows an investor from any CPTPP country to register a firm in Malaysia and enter the wholesale market for fresh vegetables as long as the investor:
- Gets approval from the Ministry of Domestic Trade
- Appoints a few bumiputra directors, and
- Employs some Malaysians at managerial level
(Annex One – 21: Non-Conforming Measures for Distributive Trade)
There are at present many wholesalers in this sector. The competition among them keeps the selling prices of fresh vegetables at the farms at a reasonable level. Because if any wholesaler offers too low a price, the farmer has the option of seeking another wholesaler.
It is a working example of how the free market mechanism is ‘fair’ to all parties – the producers, the distributors and the consumers. It works because none of the players enjoys a monopolistic position.
However, a foreign firm with deep pockets could attempt to grow its business by buying from the farmers at a slightly higher price compared to the local wholesalers and selling at a lower price to the wet markets and supermarkets. In this way the foreign firm could, over a period of a few years, gain a large share of the market, in the process driving many local wholesalers out of the business.
Once the foreign firm achieves a dominant position in the fresh vegetable market, it will be able to lower the price it offers to the farmers while increasing the price of vegetables it offers to the supermarkets and wet markets. And thus, the price of vegetables for the consumers – the ordinary people – will go up.
The above is not a far-fetched scenario. We can see it unfolding in the ride-hailing versus ordinary taxi drivers situation in the country. A certain ride-hailing company is now tightening its terms for its drivers while increasing the rates it charges to customers.
This happens to be the modus operandi of many large corporations. They know the ‘market power’ that comes from creating an oligopoly of large players enables them to appropriate the surplus from other smaller players in the chain for producing and distributing that particular product or service.
So, they are prepared to raise capital to be generous in both their purchases and sales of that commodity and run at a loss for the period it takes to drive the existing players out of the sector. Then they will leverage their market power to reap huge profits.
There are several other sectors that can be similarly affected. The provision of secretarial services to companies registered with the Companies Commission is not listed in either Annex One or Two. Neither are accounting services for the several hundred thousand companies incorporated in Malaysia.
As long as the foreign investor complies with Annex One – 21 mentioned above, the foreign investor can venture into secretarial and accounting services.
As for retail sales of pharmaceutical products, apart from the provisions in Annex One – 21, the foreign investor also has to comply with Annex One – 14 that specifies that “foreign pharmacists cannot prepare, dispense or sell pharmaceutical products In Malaysia”.
But both of these non-conforming provisions do not preclude a foreign investor from setting up a chain of pharmacies that employ locally registered pharmacists to provide drugs at a discounted price to gain market share as described above.
Similarly, it appears that an investor from another CPTPP country can set up a chain of GP clinics if it complies with Annex One – 21 and employs locally registered doctors.
The above is not an exhaustive list. Any sector where sales are large enough can become the target of predatory foreign firms. A multinational firm with its headquarters in the US can also enter the Malaysian market citing “national treatment” provisions using its subsidiary in Australia, Singapore or any other CPTPP nation.
The downside of having large foreign-owned chains developing oligopolistic positions within our distribution system for good and services is not confined to the near certainty that the prices of these goods and services will rise once the foreign firm consolidates its market share.
We also need to consider the impact of the involvement of foreign investors on Malaysian aggregate demand.
The displacement of dozens of local vegetable wholesalers by one or two large foreign-owned wholesalers will result in the siphoning of profits in that sector to Kuala Lumpur, Singapore and even further afield.
Aggregate market demand in the Kinta district of Perak will drop as local wholesalers who live in and spend in the Kinta District get replaced by foreign firms which repatriate their profits.
One has to bear in mind Article 9.9 of the CPTPP:
Each party shall permit all transfers relating to a covered investment to be made freely without delay into and out of its territory. Such transfers include profits, dividends, interest, capital gains, royalty payments, management fees and other fees.
The foreign investor is not here to develop the Malaysian economy or provide employment to Malaysians. If he or she sees an opportunity to make higher returns by investing his profits from his Malaysian operations in some other country, he wouldn’t give it a second thought.
In comparison, small proprietors currently populating the wholesale and retail sector are far more likely to spend and invest in the Malaysian market, thus creating more business and employment opportunities for the local people.
I wonder whether PricewaterhouseCoopers (PwC), which was commissioned by the Ministry of International Trade and Industry to conduct a cost-benefit analysis of the CPTPP, factored in this probability (of foreign firms developing oligopolistic positions in various sectors and expatriating their profits) when they concluded that Malaysian gross domestic product (GDP) will increase at a faster rate if Malaysia ratified the CPTPP.
Or did they focus mainly on the expected increase in exports due to the marginal lowering of tariffs in the CPTPP countries? (Marginal because Malaysia already has free trade agreements with seven out of the other 10 CPTPP member countries, and World Trade Organization (WTO) regulations have already brought down the tariffs in Canada, Mexica and Peru – the three CPTPP members with whom we do not yet have a free trade agreement.)
I very much doubt that PwC attempted to calculate the extent to which the Malaysian GDP would be adversely affected by the outflow of funds from the domestic market due to the actions of foreign firms taking over several of the services currently provided almost entirely by local firms.
Malaysian small and medium-sized businesses (SMEs), especially those in the wholesale and retail sectors of the economy, should take stock of the dangers sketched out in this article.
Yes, the CPTPP agreement comprises 30 chapters and 2,000 pages with exceptions and qualifying statements spread out over several annexes. It is not an easy document to master.
But it is important the SMEs get some competent economists to go through the CPTPP document carefully as it appears to some among us that, over the next 10 to 15 years, tens of thousands of SMEs are going to be driven out of the market by predatory foreign firms.
Gabungan Kedaulatan Negara (GKN), a collection of several NGOs and other groups, has asked for Malaysia to immediately withdraw from the CPTPP so that a proper in-depth economic analysis can be carried out on all outstanding issues including those highlighted in this article.
Article 4 of the preamble to the CPTPP specifies that six months’ written notice has to be given by any country wishing to withdraw from the CPTPP. No penalties are specified in the CPTPP document for withdrawing, but any country withdrawing runs the risk of being dragged to an international tribunal under the ISDS provisions by a foreign firm which made an investment in that country after the date of ratification.
Such a firm can claim that it has been “expropriated” by the loss of the benefits contained in the CPTPP agreement. And such a firm has a reasonable chance of winning a considerable sum as compensation.
Because of this, Malaysia will get locked in to the CPTPP by the fear that there might be multiple expensive lawsuits if we allow too much time to elapse before we withdraw.
GKN submitted a memorandum to the new PM on his second day in office, urging him to take immediate action to avoid getting trapped in an economic agreement that has not been properly evaluated nor debated in Parliament and civil society.
We hope that now the immediate excitement of naming the cabinet is over, the government will make limiting the damage caused by the premature ratification of the CPTPP one of its key priorities.