What is the TPPA?

2017-08-092017-08-09The Trans-Pacific Partnership Agreement (TPPA) is a free trade agreement (FTA) which involves a variety of socioeconomic policy issues. Currently it has 12 prospective member countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam. Membership in the TPPA is open to all 21 member states of the Asia-Pacific Economic Cooperation (Apec).

The TPPA was reached on October 5, 2015 in Atlanta, the US, after seven years of negotiations. It is different from any previously known FTAs; this is best illustrated by the TPPA content. The structure of TPPA chapters can be divided into three categories (Table 1). Chapters listed in “Standard legal chapters” and “Traditional trade issues” are found in most standard FTAs. New scopes such as government procurement, state-owned enterprises, intellectual property, and labour and environment, have previously not been found in any bilateral or multilateral FTAs signed by Malaysia.

Safeguards, Carveouts, Exemptions and Non-Conforming Measures

We analyse the exception measures afforded to Malaysia by TPPA obligation (Table 2), chapter (Table 3) and sector (Table 4). “National treatment” mentioned in Article 9.4, 10.3 and 11.3 worries the federal government and agencies the most. It was mentioned 45 times in Annex I, Annex II and Annex III. This obligation would accord to TPP investors treatment that is no less favourable than what the member state accords to its own investors. The government and agencies also rule out the obligations about “Market access” and “Local presence” 23 and 21 times, respectively.

Under the obligation “Market access”, the government or authority cannot impose limitations on the number of service suppliers, the total value of service transactions and the total number of service operations or employed persons, nor can it restrict or require TPP service suppliers to set up specific legal entities or joint ventures as a condition for the cross-border supply of a service. The government or authority cannot require a TPP service supplier to establish or maintain a representative office or to be resident in the territory, under the obligation “Local presence”.

Another two contentious obligations, “Performance requirements” and “Senior management and boards of directors”, will be carved out in 13 and 15 areas, respectively, for Malaysia. Basically, these obligations broadly ban the member state to impose or enforce certain requirements or commitments in exchange of rights to trade or invest in that territory.

The federal government and agencies strived hard to make Malaysia-specific exceptions in six out of 30 TPPA chapters (Table 2). Most concerns are with the “Investment”, “Crossborder trade in services” and “Financial services” chapters. The federal government also gained concessions to protect their procurement and state-owned enterprises, to a certain extent. For “Intellectual property”, the government also managed to mandate patent holders to come to Malaysia within 18 months to apply for marketing approval for their pharmaceutical products from the date that the product is first granted marketing approval in any country. Otherwise, the product will forfeit the data exclusivity measure stipulated in the TPPA text.

The safeguards, carve-outs and exemptions were obtained by the TPPA negotiations team across many sectors, encompassing many policy areas (Table 4). Of particular importance to the state and federal governments are the items in Annex II regarding “land and real estate” and “oil and gas”, respectively. The former gives the state authority full rights to approve as well as impose conditions and restrictions for the dealings of land by non-citizens and enterprises owned by foreign nationals. The latter gives full exclusive rights, powers, liberties and privileges to Petronas in handling petroleum in Malaysia, as oil revenue from Petronas contributes significantly to the finance of federal government.

Penang Trade Indicators

China, Taiwan and South Korea, which have consistently appeared as Penang’s top 10 trading partners throughout 2012-2014, are not TPP member countries. Three TPP member countries (US, Japan and Singapore) are in Penang’s top 10 export destinations, constituting RM35.2bil (2013) or 13.8% of total exports. Four TPP member countries (US, Japan, Singapore and Vietnam) are present in Penang’s top 10 sources of imports with RM52.8bil or 37.4% (2013) of imports originating from these countries. Three TPP members (US, Japan, Singapore) are part of Penang’s 10 largest trading partners (ranked by the sum of imports and exports) (Table 6).

However, Penang’s overall economic structure and composition of trade differs from that of the nation. In comparison, the proportion of Malaysia’s machinery and transport equipment trade is smaller than Penang’s and, notably, mineral fuels and lubricants form a larger proportion of Malaysia’s exports and imports compared to Penang’s. The large majority of Penang’s imports and exports comprise machinery and transport equipment (64.34%, 71.14%; January-November 2014), but its proportion of Penang exports has decreased slightly over time, whereas crude materials and chemicals as a fraction of exports grew slightly over time.

Turning to Penang’s imports, the percentage of machinery and transport equipment as a proportion of imports has decreased. Some increase over time was observed for the manufacturing, chemicals, mineral fuels, crude materials (inedible) and food industries. The product composition of Penang’s imports is relatively heterogeneous as opposed to exports, although as noted above, both exports and imports are dominated by machinery and transport equipment. Additionally, manufacturing goods make up 7.30% of Penang’s imports and 5.14% of Penang’s exports, whereas miscellaneous manufacturing articles make up 6.06% of Penang’s imports and 14.72% of Penang’s exports.

The PwC sector-level analysis on the Malaysian economy1 anticipates greater market access arising from the TPPA to have a positive impact on exports in the electronics and engineering, automotive, and plastics industries (0.73-1.28, 1.02-1.74 and 0.69-1.17 percentage points respectively in 2027).

Investment by Country and by Industry

Akin to their major roles in trade with Penang, TPP member countries Singapore, the US and Japan made major contributions to foreign investment in Penang in 2014 (Table 7). US investment in Penang pales in comparison to Singaporean foreign investment in Penang, whether measured in monetary or employment terms. Singaporean investment in Penang is nearly four times that of the US, associated with 3.5 times more employment than US manufacturing projects, although Singapore has 16 investments in Penang compared to 10 originating from the US.

The top five industries receiving foreign investment in Penang (Table 8) are E&E products (87.4%), scientific and measuring equipment (4.6%), chemical and chemical products (two per cent), petroleum products (1.9%) and machinery and equipment (1.2%). These five industries collectively contribute to 97% of foreign investment.

For a full report on the TPPA, visit www.penanginstitute.org/tppa.

1 PwC (2015), “Study on Potential Economic Impact of TPPA on the Malaysian Economy and Selected Key Economic Sectors”.

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