PROPOSED MALAYSIA-UNITED STATES FREE

TRADE AGREEMENT (MUFTA):

IMPLICATIONS FOR MALAYSIAN ECONOMIC
AND SOCIAL DEVELOPMENT

TWN
Third World Network
twnet@po.jaring.my

25 February 2007

Contents
1. INTRODUCTION..............................................................................................................................5
2. DISADVANTAGES OF FTAS COMPARED TO MULTILATERAL TRADE AGREEMENTS
...................................................................................................................................................................5
3. CHANGING VIEWS ON THE EFFECTS OF LIBERALISATION.............................................7
4. RECIPROCITY AS A PRINCIPLE IN FTAS.............................................................................8
5. MAIN FEATURES OF FTAS INVOLVING UNITED STATES....................................................9
6. MARKET ACCESS IN GOODS.......................................................................................................9
TRADE IN GOODS: IMPLICATIONS OF MUFTA FOR MALAYSIA.........................................12
1. Manufacturing...........................................................................................................................12
2. Agriculture................................................................................................................................13
Limited gains for Malaysia............................................................................................................13
Problems facing Malaysia.............................................................................................................14
7. SERVICES.........................................................................................................................................16
A. GENERAL........................................................................................................................................16
B. FEATURES OF SERVICES CHAPTERS IN FTAS...................................................................................17
C SPECIAL CHAPTERS AND TARGETING OF KEY SECTORS, I.E. FINANCE AND TELECOMMUNICATIONS
.............................................................................................................................................................21
D. DOES THE DEGREE OF LIBERALIZATION MATTER FOR DEVELOPMENT?.........................................22
E. NEED FOR A COMPREHENSIVE NATIONAL SERVICES PLAN.............................................................23
F. SERVICES: IMPLICATIONS OF MUFTA FOR MALAYSIA.....................................................23
Basic Telecommunications.............................................................................................................25
Distribution Services, including Direct Selling.............................................................................26
Banking..........................................................................................................................................26
Insurance........................................................................................................................................27
Securities........................................................................................................................................27
Audio-Visual and Broadcasting.....................................................................................................28
Legal Services................................................................................................................................28
Architectural Services....................................................................................................................29
Engineering Services.....................................................................................................................29
Accounting and Taxation Services.................................................................................................29
8. INVESTMENT: LIBERALISATION AND INVESTOR PROTECTION.................................29
A. SINGAPORE ISSUES........................................................................................................................29
B. BACKGROUND TO INVESTMENT ISSUE...........................................................................................30
C. MAIN DESIGN AND STRATEGIC AIM OF THE US..............................................................................31
D. THE NEED FOR SPACE AND FLEXIBILITY FOR INVESTMENT AND DEVELOPMENT POLICIES AND THE
EFFECTS OF AN INVESTMENT AGREEMENT..........................................................................................32
E. CONCLUSIONS.................................................................................................................................34
F. INVESTMENT: IMPLICATIONS OF MUFTA FOR MALAYSIA.............................................34
9. TELECOMMUNICATIONS..........................................................................................................38
10. FINANCIAL SERVICES...............................................................................................................46
11. LIBERALISATION OF GOVERNMENT PROCUREMENT...................................................49
A. GOVERNMENT PROCUREMENT IN TRADE AGREEMENTS...............................................................49
B. FEATURES OF GOVERNMENT PROCUREMENT IN FTAS INVOLVING USA.......................................50

C. NATIONAL POLICY CHANGES NEEDED DUE TO FTA.......................................................................52

D. EROSION OF POLICY SPACE AND IN THE ROLE OF GOVERNMENT PROCUREMENT..........................53
E. EFFECTS OF GOVERNMENT PROCUREMENT LIBERALIZATION UNDER FTA.....................................54
F. GOVERNMENT PROCUREMENT: IMPLICATIONS OF MUFTA FOR MALAYSIA...........55
12. COMPETITION POLICY.............................................................................................................62
A. BACKGROUND TO THE ISSUE................................................................................................62
B. TOWARDS A DEVELOPMENT FRAMEWORK ON COMPETITION FOR DEVELOPING
COUNTRIES......................................................................................................................................65
C. WHAT THE US PROPOSES ON COMPETITION IN ITS FTA: ANTI-COMPETITIVE BUSINESS
CONDUCT, DESIGNATED MONOPOLIES AND GOVERNMENT ENTERPRISES..........................................67
D. COMPETITION POLICY: IMPLICATIONS FOR MALAYSIA OF MUFTA............................70
14. ENVIRONMENT, BIOSAFETY AND FOOD SAFETY............................................................74
A. BIOSAFETY AND LABELLING OF GENETICALLY MODIFIED ORGANISMS.................74
B. OTHER ENVIRONMENT ISSUES.............................................................................................76
1. Convention on Biological Diversity...........................................................................................76
2. Environmental implications in relation to the Investment chapter............................................77
3. Government procurement and implications for the environment..............................................78
15. INTELLECTUAL PROPERTY RIGHTS (IPRS).......................................................................78
A. BACKGROUND..........................................................................................................................78
1. WTOs TRIPS Agreement..........................................................................................................78
2. IPR negotiations shift to FTAs..................................................................................................79
3. Industry influence.......................................................................................................................81
B. MUFTA WILL OBLIGE MALAYSIA TO SIGN UP TO MANY INTERNATIONAL IP
TREATIES..........................................................................................................................................82
C. IMPACT OF MUFTA ON ACCESS TO MEDICINES................................................................83
The Effects......................................................................................................................................86
D. EFFECTS ON PATENTING OF LIFE, BIODIVERSITY, GENETIC RESOURCES,
AGRICULTURE AND FARMERS....................................................................................................89
1. Background...............................................................................................................................89
2. UPOV 1991, Plant Varieties protection and Effect on Farmers Rights...................................90
3. Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the
Purposes of Patent Procedure.......................................................................................................92
Implications for Malaysia..............................................................................................................93
4. Data exclusivity and farmers....................................................................................................94
E. PATENT COOPERATION TREATY............................................................................................95
Effects on the 9th Malaysia Plan....................................................................................................96
Health/quality of life................................................................................................................................96
Moving up the value chain......................................................................................................................96
Biotechnology.........................................................................................................................................96
Malaysias economic growth is affected if Malaysians are sicker............................................................96

F. SCOPE OF PATENTABILITY......................................................................................................97
Software patents.............................................................................................................................98
G. COPYRIGHT................................................................................................................................98
1. .Background...............................................................................................................................98
2. Copyright term extensions......................................................................................................102
Expressions of concern in Australia about the extension of copyright duration to 70 years...................103
Australian Federal Government concerns..............................................................................................103
State Government concerns...................................................................................................................104
Librarians concerns..............................................................................................................................105
Application of Agreement to Existing Subject Matter...........................................................................108

3. Anti-circumvention provisions...............................................................................................108
When circumvention is needed..............................................................................................................111

4. MUFTA obliges Malaysia to join WIPO 1996 Internet Treaties.............................................112

5. Some implications of Copyright section for Malaysian society..............................................114
H. TRADEMARKS.........................................................................................................................115
I. ENFORCEMENT.........................................................................................................................116
1. General.....................................................................................................................................116
2. Internet service provider liability.............................................................................................116

How ISP liability works in USFTAs......................................................................................................117

The cost of ISP liability.........................................................................................................................120

J. IMPLEMENTATION...................................................................................................................121
K. IPRS: SUMMARY ON EFFECTS OF MUFTA.......................................................................121
16. NEED FOR POLICY FRAMEWORK AND ASSESSMENT OF COSTS AND BENEFITS123
EXAMPLE OF FTA COST-BENEFIT FRAMEWORK...............................................................................125
REFERENCES.....................................................................................................................................126

PROPOSED MALAYSIA-UNITED STATES FREE TRADE

AGREEMENT (MUFTA):
IMPLICATIONS FOR MALAYSIAN ECONOMIC AND SOCIAL
DEVELOPMENT
Third World Network

1. INTRODUCTION
This paper deals with the FTA that is being negotiated between Malaysia and the
United States or MUFTA (Malaysia-US FTA). It begins with some general aspects of
bilateral FTAs. It then briefly states the architecture of issues in the MUFTA and does
a description and analysis of each issue or chapter.
It is quite a task to analyse the text of an agreement when none exists yet. MUFTA is
still being negotiated. Moreover the drafts of the negotiations are not available to the
public.
However, it is still possible to give a summary of what MUFTA may look like,
because it is quite well known that the US makes use of a template for its
negotiating position in its bilateral FTAs. Its recent bilateral FTAs are rather similar
in chapter headings as well as in text. It may well be that the US would not agree to
conclude an FTA unless its text basically is in accordance with the template.
Thus, some of the FTAs, particularly the Singapore-US FTA has been used as a likely
draft of what a Malaysian-US FTA may be like, and a description and analysis is
undertaken based on such a model.
As there are so many topics, this report has been able to deal with several but not all.
Perhaps a subsequent report can be more comprehensive. We hope this contributes to
the on-going discussion on the MUFTA.
2. DISADVANTAGES OF FTAS COMPARED TO MULTILATERAL TRADE
AGREEMENTS
It is generally recognized that bilateral agreements, especially between a developing
and a developed country, are not the best option and that multilateral negotiations and
agreements are preferable. The reasons for this include:
1. Bilateral agreements usually lead to trade diversion, in that the partners
divert away products that may be more cheaply priced in favour of products
from the FTA partner, even if they are not cheaply priced, thus resulting in
inefficiency.

2. In an FTA between a developed country and a developing country or countries,

the latter are usually in a weaker bargaining position due to the lack of
capacity of their economies, their weaker political situation, and their weaker
negotiating resources.
3. In the WTO, the principles of special and differential treatment, and less than
full reciprocity, are recognized. Thus, developing countries are better able to
negotiate on the basis of non-reciprocity and for non-reciprocal outcomes, in
which they are not obliged to open up their markets (or undertake other
obligations) to the same degree as developed countries. However, these
development principles are usually absent in FTAs, or they are only
reflected in longer implementation periods for the developing country. The
FTAs are basically on the basis of reciprocity. This equal treatment of
parties that are unequal in capacity is likely to result in unequal outcomes.
4. The FTAs contain many items that are not part of the rules of the WTO. Many
North-South FTAs include rules on investment, government procurement and
competition law, which have so far been rejected by developing countries as
subjects for WTO negotiations or rules. Developing countries also refused
that labour standards and environment standards be subjects of discussion in
the WTO. All these topics are now entering by the side-door through the
FTAs, even though the same reasons for developing countries to reject rules on
these issues should apply in FTAs as they do in the WTO.
5. Even where issues are already the subject of rules in the WTO (e.g. intellectual
property and services), there were many flexibilities and options open to
developing countries in interpreting and in implementing obligations in these
areas. However, there are attempts by developed countries to remove these
flexibilities for developing countries in the FTAs. If these attempts succeed,
the policy space for developing countries to pursue development and socioeconomic goals would be significantly reduced.
6. The proliferation of so many agreements also puts pressure on personnel and
financial resources in developing countries and requires a lot of technical
expertise which may be not adequately available, given the large number of
agreements and the limited resources.
The report The Future of the WTO commissioned by the WTO Director-General
and which was published in January 2005 has criticized the proliferation of bilateral
and regional trade agreements (RTAs), which it says has made the MFN (most
favoured nation) principle the exception rather than the rule, and which has led to
increased discrimination in world trade.
However, it appears that FTA negotiations are moving ahead and negotiations on even
more FTAs and RTAs are being announced.
Several researchers have pointed out that whilst bilateral agreements may be tempting
for a developing country to get some specific advantages from its developed-country
partner, such as better market access for some of its products, there are also several
potential dangers and disadvantages. Developed countries such as the US and Japan

are known to want to use the instrument of bilateral agreements to obtain from their
partners what they failed to achieve at the WTO, in which the developing countries
have been able to oppose or resist certain negative elements in various agreements.

3. CHANGING VIEWS ON THE EFFECTS OF LIBERALISATION

Whilst an advanced developing country which is already highly liberalized may be
able to bear the pressures of faster liberalization, other developing countries may not
be able to compete with the faster opening of their markets or with other demands of
the developed country.
Up to a few years ago, there was a widespread belief in the orthodoxy (promoted
especially by the IMF and World Bank, and by policy makers in developed countries)
that liberalization is necessarily good for development, and the faster the liberalization
the better it is for development. This was the intellectual basis for developed
countries to pressurize developing countries to quickly and deeply cut their tariffs and
remove non-tariff barriers, as well as open up their services sector, financial sector
and investment regime.
However, there has been growing skepticism not only from civil society but also
policy makers regarding this orthodoxy, mainly because such rapid liberalization has
led to import surges in many developing countries, with adverse effects on the local
industrial and agricultural sectors, and on the balance of payments and the debt
position. The emerging paradigm is that developing countries require certain degrees
of protection to enable the local firms and farms to compete in their own domestic
markets, and that this was the way the now-developed countries arranged their own
trade and industrial policies when they were at the development stage.
Such protection is especially required by developing countries when many
agricultural products are heavily protected by tariffs and subsidies in the developed
countries, and where export and domestic subsidies enable these countries to sell
artificially-cheapened products on the world market. Tariff protection is the means by
which developing countries can defend their farmers from unfair competition,
especially since quantitative restrictions were prohibited under the Uruguay Round.
Arguments have been put forward by developing countries along the above lines in
the WTO. The developing countries are also pursuing three tracks to strengthen the
development dimension in the WTO: (1) proposals to clarify, review or amend
existing WTO rules, due to problems of implementation of these rules; (2) proposals
to strengthen existing SDT (special and differential treatment) provisions, and to
introduce new ones where they do not exist but are required; (3) proposals to have
adequate SDT provisions in new rules or revision of rules in current negotiations
(especially in agriculture and industrial products).
Some developed countries are beginning to change their previously strict insistence
on liberalisation in developing countries. For instance the UK government has
declared that it will not seek to impose liberalization on African countries and on
least developed countries. The recent G8 summit also has a statement along similar
lines. Notably, this change in attitude is stated only for least developed countries
7

(LDCs) and thus presumably does not apply to non-LDC developing counties. But it
can be noted that a change in attitude towards liberalization has started even in
developed countries policy circles.

4. RECIPROCITY AS A PRINCIPLE IN FTAs

There is a significant lack of a similar development track within FTAs between
developed and developing countries. Instead, the FTAs are being negotiated mainly
on the basis of reciprocity, i.e. that both sides take on similar levels of obligations.
The focus is almost strictly on Market Access and National Treatmenti.e. how to
open up markets in order to get more business opportunities. There is hardly any
development content as such, not is there much sympathy for the unequal capacity the
developing country faces, both in its level of development, and in its negotiating
capacity.
This is mainly due to the demand for such a basis by trade policy makers of developed
countries. They also point to the need for FTAs and RTAs to be consistent with WTO
rules, in particular Article XXIV of GATT 1994 (covering customs unions and free
trade areas). (WTO 1994: p522-525). This Article enables FTAs to be established
under certain conditions. One provision is that the purpose of a customs union or a
free trade area should be to facilitate trade between the constituent territories and not
to raise barriers to the trade of other contracting parties with such territories. It also
defines a free-trade area as a group of two or more customs territories in which the
duties and other restrictive regulations of commerce are eliminated on substantially
all the trade between the constituent territories in products originating in such
territories. [GATT, Article XXIV.8(b)].
This is widely taken to mean that FTAs have to be reciprocal in nature, since SDT
provisions are not mentioned in the Article, and that tariffs and other trade restrictions
have to be eliminated on substantially all trade between the parties. It is not
defined what constitutes substantially all trade.
In the course of discussions
between the European Union and African-Caribbean and Pacific (ACP) countries,
which are negotiating economic partnership agreements (EPAs), it is understood that
the EU considers this to mean at least 90% of trade, while some ACP countries
interpret it to mean at least 60% of trade.
There have been recent proposals to revise or clarify Article XXIV so that it clearly
enables non-reciprocal relations to prevail in FTAs between developed and
developing countries. The ACP Group has made such a proposal. Recently, China
has also made a development-oriented proposal on Article XXIV.
If the Article is not clarified or revised, if reciprocity remains the principle in an FTA
between a developed and developing country, and if the FTA covers almost all
products, then a typical developing country is likely to be at a serious disadvantage, as
it has less production capacity and probably has significantly higher tariffs, especially
on industrial products. Elimination of tariffs will thus hurt the business or viability of
local industries and even farms of the typical developing country.

5. MAIN FEATURES OF FTAs INVOLVING UNITED STATES

The main issues in FTAs that involve developed countries such as the US, EU and
Japan typically include the following:
1. Market access in goods
Manufactured goods
Agricultural goods
2. Services in general
3. Specific services sectors -- financial services, telecommunications
4. Intellectual property rights
5. Investment liberalization and investor protection
6. Liberalisation of government procurement
7. Competition issues: Business practices, monopolies and government-linked
companies
8. Environment and food safety issues
9. Labour standards
Only the first item has traditionally been the subject of an FTA. The second and
fourth issues were introduced into the multilateral trading system through the
Uruguay Round that concluded in 1994. They are the new issues in GATT, and are
now in WTO.
The set of issues in items 5-7 (investment, procurement, competition) are known as
the Singapore issues as they were first introduced into the WTO through its
Ministerial Conference in 1996 in Singapore. However they were only subjects for
discussion in working groups and there has been opposition from developing
countries to make them subjects of binding rules. In July 2004, the WTO General
Council agreed that there would not be any negotiations on them during the Doha
work programme period, and work in the working groups on these issues stopped.
However, the FTAs involving the US include these items as subjects of rules. On the
last two issues, it was also agreed that labour and environment standards not be part of
rule-making in WTO. Labour standards are not even a subject of discussion in the
WTO. This is due to the fear of developing countries that they would become the
basis of protectionist measures against their products. However in the FTAs,
environment may cover environmental issues broadly and not just standards. In this
paper, we include the sensitive issue of biosafety and labeling of products containing
genetically-modified organisms (GMOs) in this section.
It can be seen that subjects that have been rejected by developing countries as topics
of negotiations or even discussion have made a comeback through the FTAs.

6. MARKET ACCESS IN GOODS

Given the problems arising from FTAs, some developing countries decide to negotiate
an FTA with a developed country is the fear of being left behind, as they see other

countries, especially in their region, entering FTA negotiations with developed

countries, which constitute their major markets. There is a fear that those developing
countries that are entering FTAs will gain a competitive edge and thus leave those that
do not join an FTA behind.
The developing country may also believe that entering an FTA will give it benefits in
terms of greater access into the markets of the partners, as the FTA will provide
preferences in terms of lower tariffs or quotas.
It is thus crucial that the developing country identify the products which are important
for it, whose exports it hopes will expand through the FTA, and to assess whether
realistically whether there will be an increase in market access and to what extent.
This will then have to be measured against the costs to be incurred by the country, in
terms of market access to its own markets by the partner, as well as in terms of
concessions in other areas (such as services, investment and intellectual property).
Many countries that had hoped to obtain significant expansion of market access to the
major developed countries have been disappointed in the results of the negotiations.
A major reason for this is that there are structural, legal and political impediments that
prevent the developed country from opening its market beyond a certain limit, in
respect of its sensitive products (where further opening will cause dislocation to its
producers).
As Smith (2005) points out, there are a number of structural problems that make it
difficult for developing countries to obtain market access in sectors of interest to them
in FTAs with developed countries. Firstly, there is usually unequal bargaining power
in developing-developed country bilateral negotiations, with the developing countries
in a weaker position. Secondly, it is not possible for developed countries to reduce or
withdraw agricultural export and domestic subsidies on the products that the
developing county partner are exporting, as the subsidies would have to be removed
for all the products, which would then also benefit non-FTA partners. Thirdly, there
may exist laws that frame the terms of reference for what the developed country can
offer.
The United States negotiators are also constrained in the terms they can offer in FTAs
by their Bipartisan Trade Promotion Authority Act of 2002 (Smith 2005). This Act
prevents US negotiators from concluding FTAs which:

reduce any rate of duty (other than a rate of duty that does not exceed 5
percent ad valorem on the date of the enactment of this Act) to a rate of duty
which is less than 50 percent of the rate of such duty that applies on such date
of enactment

reduce the rate of duty below that applicable under the Uruguay Round
Agreements, on any import sensitive agricultural product;
o The term import sensitive agricultural product means an agricultural
product

(A) with respect to which, as a result of the Uruguay Round

Agreements the rate of duty was the subject of tariff reductions

10

by the United States and, pursuant to such Agreements, was

reduced on January 1, 1995, to a rate that was not less than 97.5
percent of the rate of duty that applied to such article on
December 31, 1994; or

(B) which was subject to a tariff-rate quota on the date of the

enactment of this Act

Besides the above, the Act does not enable special and differential treatment as its
negotiating objectives include reciprocal market access,1 to obtain reciprocal tariff
and non-tariff barrier elimination agreements2 and to obtain rules which are
comparable to US ones3.
Besides the legal constraint posed above, it must be expected that the US negotiators
will find it very difficult to make offers in agriculture or in sensitive industrial
products where increased market opening for imports will be met with a political
backlash from lobby groups such as big farmers, food companies, labour unions,
domestic firms and from Congress. The episode in the US Congress in 2005, in
which the bill authorizing the US-CAFTA agreement faced massive opposition and
was passed by only two votes, shows how difficult it will be for market access
demands of developing country FTA partners to be met, even though the exports from
CAFTA countries were too small to have an appreciable impact on the US economy.
On textiles and apparel (politically extremely sensitive products for the US), even a
strong negotiating party like Singapore, was unable to overcome the US demand to
apply the yarn forward rule to qualify for immediate duty-free entry into the U.S.
The yarn forward rule means that textiles and apparel from Singapore must be made
from yarn sourced from Singapore or the U.S. This means that US yarn has to be
used, instead of cheaper yarn and fabric sourced from the Asian region. (Smith 2005;
Koh and Chang, 2004). Singapore also had to agree to additional and cumbersome
customs procedures to verify that textiles/apparel are made in Singapore (including
allowing on-site inspections of enterprises by US officials) and additional safeguard
measures.
On agricultural products, the negotiations on certain sensitive products can also be
expected to be very difficult. Most importantly, the US will not include lowering of
agricultural subsidies in its FTAs, thus depriving its trading partners what would
probably be the most important concession that could lead to greater market access
for agricultural-exporting countries.
Even a developed country like Australia found that it could not gain any ground with
the US on expanding its market access on sugar, which is an important Australian
export and is highly protected in the US. Before its FTA with the USA, Australia had
a sugar quota of 87,402 tonnes per annum. During the FTA negotiations, the
Australian Government repeatedly promised no sugar, no deal. The Australian
1

S2102(a)(1). S2102(b)(10): RECIPROCAL TRADE IN AGRICULTURE.(A) The principal

negotiating objective of the United States with respect to agriculture is to obtain competitive
opportunities for United States exports of agricultural commodities in foreign markets substantially
equivalent to the competitive opportunities afforded foreign exports in United States markets which
includes (ii): reducing tariffs to levels that are the same as or lower than those in the
United States;
2
S2102(b)(1)(B)
3
For example in investment: s2102(b)3 and intellectual property: s2102(b)4(A)(i)(II)

11

government fought very hard to increase the quota but failed to do so. The USAustralia FTA did not provide any extra quota for Australia. (Smith 2005).
On beef, which is Australias main export to the US, Australia obtained an 18.5 per
cent increase in beef quotas, but this was confined to manufacturing-grade beef
(mainly hamburger mince and pet food) and spread over 18 years. It meant that
Australias share of the American beef market could actually decline, according to
Australian projections. Australian academics calculated the benefits for beef farmers
from the extra market access under the FTA to be about half a cow, per farm, per year.
Furthermore, the US has reserved the right to employ safeguards to raise tariffs again
if the quantity of Australian imports or the price of beef changes suddenly. (Smith
2005).
The developing country partner in an FTA may have limited products where it can
effectively make use of increased market access opportunities, due to limited supply
capacity or inability to market. For instance, most of the ACP countries and the LDCs
have been unable to make use of the preferential access they have to the EU market.
And for products that the developing countries have an advantage in, these are usually
sensitive to the developed country and thus some may be excluded from the FTA
market opening. Also, developed countries like the USA and Europe are well known
for making use of non tariff barriers (such as safety regulations and anti-dumping
measures) to block imports of developing countries. The market access hopes may
become illusory.
On the other hand, the developing country is expected to reciprocate by opening up its
own market to the developed country, by eliminating its tariffs on a wide range of
products. This can result in significant dislocation of local producers.
Under NAFTA, Mexico agreed to total trade liberalization of all agricultural products
by 2008 (even though it had a 15-year adjustment period for corn and beans).
According to Carlsen (2003), imports of corn (the most widely grown crop in Mexico)
nearly tripled after NAFTA, and the price has dropped. Other crops fared worse, as
imports of soybean, wheat, poultry and beef have risen over 500%, displacing
domestic production. Exports especially of fruits and vegetables have risen but this
failed to compensate for the import rise. About 2 million rural jobs were lost since
NAFTA.
TRADE IN GOODS: IMPLICATIONS OF MUFTA FOR MALAYSIA
1. Manufacturing
Malaysias tariffs in manufacturing are much higher generally than those of the
United States. Since both parties will have to eliminate tariffs for substantially
all products, Malaysia would thus have to make more sacrifices or more
concessions overall as compared to the US, in terms of tariff reduction and
elimination. This in turn could displace Malaysian industries that cannot
compete with the cheaper U.S. imports.
The US Trade Representatives Office, during the launch of the MUFTA on 8
March 2006 issued a document on the Economic and Strategic Benefits of the
FTA to the U.S. It states that US exporters have much to gain from FTA with
12

Malaysia. It gives data that Malaysias average bound industrial tariffs are
nearly 4 times higher than US tariffs (14.5% compared to 3.7%). Malaysias
average applied tariff is 8.4% or more than double the 3.7% of the US.
In a sector-by-sector table, the US paper gives some examples of the higher
Malaysian tariffs compared to US tariffs, for example in transport equipment
(1.5% comprade to 3.2%), wood, pulp, paper and furniture (10.9% vs 0.7%),
leather, rubber, footwear and travel goods (14% vs 4.3%), electric machinery
(6.7% vs 1.9%), non-electric machinery (3.7% vs 1.2%), textiles and clothing
(13.5% vs 9.6%), mineral products (8.8% vs 1%).
The US National Association of Manufacturers forecast that US manufacturing
exports to Malaysia could double by 2010 under a FTA.
For the US, a major target is Malaysias present import restrictions on motor
vehicles, which were highlighted in the Malaysian chapter of the USTRs report
on Foreign Trade Barriers. The USTR comments that Malaysia has long
protected its automobile industry from foreign competition using high tariffs and
non-tariff trade barriers, that government policies distinguish between
national and non-national cars, and that they continue to block open trade
through the approved permit system and offering rebates for national
manufacturers. It notes non-Asean CKD cars are charged 10% tariff and 80200% excise tax. The US is likely to demand elimination of tariff and non-tariff
barriers for motor vehicles into Malaysia. If agreed to, this has serious
implications for national cars.
Malaysian textiles companies are expecting to benefit from increased access to
the US market. However they will also face a number of hurdles, including the
yarn forward rule (imposed on other FTA partners like Singapore) to qualify
for immediate duty-free entry into the U.S. This rule means that textiles and
apparel from Malaysia must be made from yarn sourced from Malaysia or the
U.S, i.e. that US yarn has to be used, instead of cheaper yarn and fabric sourced
from the Asian region. Malaysia will also have to agree to additional and
cumbersome customs procedures to verify that textiles/apparel are made in
Malaysia (including allowing on-site inspections of enterprises by US officials)
and for the US to have additional safeguard measures to be used on Malaysian
textiles.
2. Agriculture
In the agriculture market access part of the FTA, Malaysia is likely to get a negative
deal. Firstly, there will be limited gains to Malaysia in terms of access to the US
agricultural market. Secondly, Malaysia will have to open up its agricultural sector to
US exports, and the US will probably not agree to having sensitive products such as
rice exempted.
Limited gains for Malaysia

13

The US is unlikely to be able to offer any significant market access. In the USAustralia FTA, Australia was unable to gain any additional access for its sugar
exports. The gain to Australia in beef (through a higher quota) was not significant,
estimated by academics to be equivalent to about half a cow, per farm, per year.
Most importantly, the US will not offer to reduce its domestic farm subsidies in the
FTA. It argues that this can be done only through the WTO. The high US subsidies
keep the prices of its farm products artificially low, with three effects:

This prevents other countries like Malaysia to penetrate the US market more.
For example if soya bean subsidies were removed, prices would reflect the
cost of production more, and increase, making palm oil more competitive.
Malaysia could insist that US subsidies be removed, but this will be
unacceptable to the US.

Subsidies enable the US to export its otherwise uncompetitive farm products,

because they lower the price, often to far below the cost of production. To
defend themselves from this unfair practice, countries need higher tariffs,
otherwise the US products can take over the market with their artificially
cheap prices.
According to a recent UNCTAD paper, "Studies show that under the existing
US policy, the cost of producing major crops has been much higher than the
prices realized for them.In the year 2001, market prices were 23% below the
cost of production for corn, 48% for wheat, 32% for soybean, 52% for cotton,
and 45% for rice. In 2001, the US had a significant share in world exports in
these commodities which is as high as 35% in cotton, more than 20% in wheat
and around 10% in rice."

Because of the subsidies, US exports sell at low prices, thus out-competing

more efficient producers. For example, if subsidies were removed and US
soya bean export prices increased, Malaysian palm oil (which competes with
soya oil) would be more competitive.

Problems facing Malaysia

While the gains are limited, Malaysia can face problems since the US will demand
that agricultural tariffs be brought to zero, within a time frame. Under NAFTA,
Mexico expanded its farm imports from the US dramatically, nearly tripling its
imports of corn (the most important crop) and increasing more than five-fold its
imports of soybean, wheat, poultry and beef. have risen over 500%. Rural job losses
were 2 to 3 million since NAFTA.
The US government has said that it wants to export more farm products to Malaysia
in particular rice, soyabeans, chicken and beef. It wants Malaysias tariffs on
American farm products to be reduced to zero.
A USTR fact sheet on the FTA states that there will be opportunities for US
agricultural exporters. The US exported US$400 million of farm products to
14

Malaysia in 2005. It said that US growers of fruit, vegetables, nuts, processed

horticultural products and other food producers would benefit (USTR 2006).
The product that has raised most concern is rice. Malaysia currently has a 40% tariff
on rice to protect Malaysias rice farmers. It also follows a policy of having a single
importer for rice, viz. BERNAS and imposes quotas on how much foreign rice may be
imported.
In the FTA negotiations, the US is likely to ask for the rice tariff to be reduced to zero
(over some years) and for non-tariff barriers to be dismantled, which could include the
quota and import monopoly by BERNAS.
The rice sector in Malaysia is relatively protected in view of ensuring food security
and protection of rural livelihoods. Presently, around 296,000 farmers depend on rice
for their livelihood, with 116,000 farmers exclusively involved in the cultivation of
padi. Further, in the 9th Malaysia Plan, the government has set a self-sufficiency
target of 90% for rice in 2010 (from 72% in 2005).
If the rice tariff were reduced to zero then the US rice (which has subsidies from the
US government so that it can be sold at 25% below the cost of growing it) could
seriously undermine local rice production.
According to press reports, rice and tobacco have been listed in Malaysias exclusion
list in the FTA negotiations (The Star 15 Jan 2007). The Agriculture Minister, Tan Sri
Muhyiddin Yassin, was reported to have said that the Cabinet had decided that the
government would not compromise on the livelihood of local farmers. The Minister
said:
Whatever happens, if rice is the cause for the FTA not to be signed, then let it be
because the Government will not compromise on anything that can affect the
interest of our farmers. If the US decides to raise the matter, we will tell them to
take it or leave it, (The Star | 15 Jan 2007)
The Ministers comments came in the wake of protests by farmers and NGOs that the
MUFTA would involve the import of subsidized US rice with no border protection
and this would jeopardize local rice, thus affecting farmers livelihoods and income.
Although Malaysia has demanded that rice, tobacco and alcohol products be on its
exclusion list, trade media reports from Washington indicate that the US will not
agree to products being excluded. If its stance is maintained, then Malaysia will face
demands that its rice and tobacco tariffs will be reduced to zero, perhaps with a
transition period.
At present there is not much import of US rice into Malaysia. This could be due to
the 40% tariff and the quota maintained by BERNAS. If the 40% tariff is removed,
and US rice is allowed to compete freely, its price may become competitive with local
rice.
Research by Oxfam (2005) shows that American rice is heavily subsidized.
According to Oxfam (2005):
It (the USA) is the worlds third largest rice exporter even though US rice
costs over twice as much to grow as it does in export-leading Thailand and
15

Viet Nam. This is only possible because of lavish state funding: in 2003 the
US government ploughed $1.3bn into rice sector subsidies, supporting farmers
to produce a crop that cost them $1.8bn to grow effectively footing the bill
for 72 per cent of the cost of production.
Between 2000 and 2003, it cost on average $415 to grow and mill one tonne of
white rice in the US. But that rice was dumped on export markets for $274 per
tonne, 34 per cent below its true cost. The real winner from this combination
of subsidy bonanza in the US and rapid trade liberalisation in developing
countries is US agribusiness. No wonder the countrys rice millers and
exporters invest so much in lobbying alongside the US government, to open
up new export markets for their dumped surpluses.
In the period 2000-2003, the cost of production and milling of milled rice was
US$415 per tonne (41 cents per kilo) while the export price as US$274 per tonne (27
cents per kilo). The export price was thus 34% below the cost of production,
reflecting the high degree of subsidy. Without the subsidy US rice would not be
globally competitive. With the subsidy, the US is now the third largest rice exporter
in the world.
In some years the export price is even lower, and the degree of subsidy even higher.
In 2002 for example, the export price was 22.7 cents per kilo, while the production
and milling cost was 39.5 cents. The export price was 43% below the cost.
According to the US Department of Agricultures Rice Outlook (12 Feb 2007), the
export price of US long-grain milled rice on 6 February was US$419 per ton. This is
equivalent to 41 cents per kilo, or 143 sen (given the exchange rate US$1 to MR3.5).
If there is a 40% tariff, the US rice would not be competitive in the Malaysian market.
However at zero tariff, it would be competitive as local rice varieties are currently
retailing at RM1.70 to RM2.00 per kilo (depending on the grade of rice).
Currently US rice is higher priced than Thai rice. The USDA report cites US$321 per
ton as the export price of Thai high-quality milled rice, which is currently lower than
the US price (US$419 per ton). However the gap is narrower in some months, and at
one point in the second half of 2005 the Thai and US rice prices converged at around
US$300 per ton. If a lower tariff is applied to US rice as compared to Thai rice, then
the price gap between Thai and US rice could be narrowed.
In any case, it is most unfair to allow the tariff on US rice to be reduced or even
eliminated, when there is such a huge subsidy given to US rice growers and exporters.
The position that rice should be excluded from the FTA commitments should be
maintained.

7. SERVICES
A. General
Developing Before the Uruguay Round was launched, many developing countries had
tried to resist the inclusion of new areas like trade in services and trade-related
intellectual property rights as they believed agreements in these areas would be

16

against their interests as they would not have the capacity to gain from them, whist
they and their local companies would stand to lose. Despite this reluctance, services
became a part of the Round on the understanding that developing countries would
gain in other areas, especially in enjoying more market access for their goods in
agriculture, textiles and clothing and other areas in which they have comparative
advantage and where their exports faced tariff and non-tariff barriers. However, given
the actual outcome in textiles and clothing and in agriculture, the developing countries
did not get their expected benefits.
The WTO allows each member to commit in the WTO to services liberalization
according to the extent and rate that it chooses and which suits its conditions. This is
especially true for developing countries. These countries may want to try out
liberalization in some sectors to see the extent to which it is beneficial, but they do not
have to commit the liberalization measures in the WTO (as this makes it irreversible,
or difficult to reverse).
The WTO has a positive list approach. A country makes commitments to liberalise
only in sectors that it places on its schedule. And if a sector is included in the
schedule, the country can decide the extent of liberalisation to commit in that sector,
in each of the 4 modes of service delivery. Restrictions and limits can be placed, for
example restrictions on foreign equity ownership or on national treatment in Mode 3
on commercial presence.
Additional special and differential treatment clauses have been established in the
GATS and in subsequent documents that clarify that developing countries should be
allowed to liberalise less than developed countries and to choose their own pace of
liberalisation. These development provisions are especially contained in Article IV
of the GATS, Article XIX (2) of the GATS, and the Guidelines and the Procedures
for the Negotiations on Trade in Services of March 2001, which is the main
document guiding the present services negotiations.
B. Features of Services chapters in FTAs
Many developing countries have attempted to make use of the flexibilities in GATS,
to choose their own pace and sectors to liberalise. They have been cautious to
increase their binding commitments in the WTO, as (1) they are worried about the
possible consequences, especially since it is difficult to backtrack even if the
commitment turns out to be an error; (2) they are unable to benefit from the
liberalization of other countries, due to supply constraints (and due to continued
protection of the labour market in the North) and thus if they were to themselves
liberalise, they would have more costs than benefits; (3) they are within their rights to
choose whether to liberalise, in which way, and in which sectors, if at all.
Developed countries have been frustrated by what they perceive as the slow
movement by developing countries in the WTO. The reason for their frustration is
that services now comprise the largest sector, and their big services enterprises are
pushing to have access to the markets of the developing world. The developed
countries are now seeking the use the FTA mechanism to accelerate the liberalization
process in developing countries.
17

In contrast to the WTOs positive list approach to liberalization (under which a

country does not commit to liberalise except in the sectors it lists down in a schedule),
US FTAs4 use the more drastic negative list approach (in which everything is
committed to be opened unless specified in the schedule). The positive list approach
was insisted on by the developing countries to enable them to have more flexibility
and policy space as to what and when to commit. It is also less risky than the
negative list approach as a country may not be aware of the full range of sectors, nor
on what it should select to exclude.
The developed countries prefer the negative list approach, as this would make it easier
for developing countries to commit to liberalization measures in more sectors. The
US has chosen this negative list approach in its FTAs with developing countries. For
example, the US-Singapore FTA has a negative list approach, in which only sectors
placed on a schedule can have limitations to the principles of national treatment,
market access, local presence, etc.
Such an approach reduces policy space for developing countries, and goes against the
more development-friendly positive list approach of the WTO. It also goes against
the principles and services structure that the developing countries fought so hard to
attain in the WTO. Among the dangers of the negative list approach are:
1. Due to this methodology, the developing country will be vulnerable to greater
pressure to liberalise.
2. The country may not be sufficiently aware of all the service sectors and subsectors, and thus may not list all the sub-sectors it wishes not to liberalise.
3. The country may not be able to predict or plan which sectors it may wish to
promote domestically in future and thus may agree to liberalise sectors which
in future it may regret doing.
4. The country may not be aware of risks in liberalizing particular sub-sectors
and may find it difficult to back track when circumstances require it to
protect domestic firms or the economy (e.g. as happened or may happen
during financial crises).
5. The country will not be able to predict which new services sectors may emerge
in future, and thus cannot exclude these in the list.
The US-FTA chapter on cross-border services covers cross-border supply of services,
but does not cover commercial presence or investment (known as Mode 3 in GATS),
as this is covered (with its own dispute settlement system) in the investment chapter
of the FTA. However, the annexes in the services chapter with reservations covers the
exceptions for services sectors from commitments relating to both the services and the
investment chapters.
The definition of Cross-Border Supply of Services in the US-Singapore FTA is the
supply of a service:
a) From the territory of one Party into the territory of the other Party. For
example, a consultant located in one country giving advice to a client located
4

Except for the Jordan-USFTA which was one of the first USFTAs (signed in 2000 before the current
fast track legislation).

18

in another country by mail, phone or internet service. (This is similar to Mode

1 or cross-border trade in GATS),
b) In the territory of one Party by a person of that Party to a person of the other
party. (This is similar to consumption abroad or Mode 2 in GATS, for
example a student from Singapore traveling to the US to attend university).
c) By a national of a Party in the territory of another Party. (This is movement of
persons, similar to Mode 4 in GATS). [However Article 8.2.4 in the USSingapore FTA says this chapter does not impose any obligation on a party
with respect to a national of the other party seeking access to its employment
market, or employed on a permanent basis in its territory, and does not confer
any right on that national with respect to that access or employment.].
The non-inclusion of the investment dimension of services does not mean that this
aspect (the most prominent one in GATS) is absent. It is covered instead as part of the
investment chapter, in which the rights of the foreign investor are very clearly spelt
out.
The chapter covers measures by a Party affecting cross-border trade in services by
service providers of the other Party. Some articles also apply to measures affecting
the supply of a service by an investor or investment of the other Party as defined in
the investment chapter. Such measures include the production, distribution,
marketing, sale and delivery of a service; purchase or use of a service; access to
distribution, transport or telecommunications in connection with supply of a service;
and provision of a bond or security as condition for supply of a service.
The main principles and provisions include: national treatment for the foreign service
suppliers; most favoured nation treatment; and market access (where both parties
agree not to impose limitations on the other partys number of service providers, on
the total value of service transactions or assets, on the total number of service
operations and on the total number of natural persons employed in a particular service
sector.
There are also provisions on freedom for transfer of funds and payments, on domestic
regulation, transparency and professional services.
In the US FTAs, since there is a negative list approach, there are annexes with
schedules of exceptions. It is understood that every sector and activity is totally
liberalized, except those placed in the annxes.
In the Singapore FTA, there are two annexes of exceptions. Annex I actually has two
sets of exceptions. The first set comprises existing non-conforming measures that
are maintained by a Party. Since conforming means total liberalization and national
treatment, non-conforming refers to those existing measures that restrict or limit the
market access, national treatment, MFN and local presence provisions. If listed in
Annex I, these measures can continue. The second set in Annex I comprises
amendments to any non-conforming measure, to the extent that the amendment does
not decrease the conformity of the measure as it existed immediately before the
amendment.

19

The implication is that the existing measures that do not conform to these
provisions are allowed to be exempted but the level of their non-conformity
can only be decreased, and cannot be increased. This implies that there the
existing applied levels of liberalization are notified and a standstill is
imposed, in that the degree of liberalization can be increased but not decreased.
The developing country party would give up the flexibility and policy space that
is presently available in GATS, to be able to liberalise unilaterally in certain
services sectors, yet not bind the full degree of that liberalization. Having a
distance between the applied and the bound levels allows a country to
experiment, with the possibility of backtracking, should it be necessary to do so.
However there is also Annex II in which the country lists the sectors and
activities it wants to exclude so that it can take more restrictive measures (than
what already exists). The exclusion is in respect to market access, national
treatment, MFN and local presence.
The US-Singapore FTA excludes application of the chapter to -services supplied in
the exercise of governmental authority.which is supplied neither on a commercial
basis nor in competition with one or more service suppliers. (Article 8.2.5.b)
As pointed out by Shashikant (2005), neither of the criteria is defined. This provision
is the same as Article 1 in GATS, which has been the subject of controversy. Many
service sectors involve the public interest and thus are delivered by governments
through a mixed system that is wholly or partly funded with a minimum charge being
paid by consumers, but tightly regulated by governments at the central, regional and
local levels. Often these systems co-exist with other private for-profit delivery
systems. Following the criteria above, these systems would fall outside the purview of
the exclusion and be subject to the terms of the agreement unless expressly reserved.
For example in Malaysia there are public hospitals which are funded by the
government with consumers paying for their treatment according to their income, with
some being subsidized. Could it be argued that this system is providing treatment on
a commercial basis? There are also private hospitals which provide the same
treatment as public hospitals and in a way are competing for the same patients. As a
consequence the health service sector (it can be argued) may not fall within the
exception. As many of the essential public services may not be eligible for exclusion,
foreign service providers will likely be able to access public interest sectors such as
water, health, education, national parks, and pension funds. These providers are likely
to target only the profitable sectors or the higher income earners. Consequently not
only does the government lose income but it may also be saddled with having to
provide the less profitable service sectors or subsidizing low income earners who
cannot afford the prices of foreign service providers.
(Shashikant 2005).
In the US-Singapore FTA, a provision on Domestic Regulations states that measures
relating to qualification requirements and procedures, technical standards and
licensing requirements are to be based on objective and transparent criteria and
should be "no more burdensome than necessary to ensure the quality of the service".

20

Besides the investor-state dispute settlement process in the investment chapter, the
FTAs also have a general dispute settlement mechanism, which allows a government
to claim that a law or policy of the other country is inconsistent with the FTA
obligations or the other party has failed to fulfill its obligation or a benefit expected
from the agreement is being nullified and impaired as a result of a measure not
inconsistent with the Agreement. The dispute process requires initial consultations,
and if that fails, it must be referred to a dispute panel. The Panel can declare that a
Party to the agreement has not conformed to its obligations.
In effect the infringing law would have to be eliminated or compensation be paid.
Parties can also under certain conditions take retaliatory action suspending benefits of
equivalent effect. Trade sanctions taken by a small developing country against U.S.
will hardly make a difference but if positions were reversed the developing countrys
economy would be affected. (Shashikant 2005).
C

Special chapters and targeting of key sectors, i.e. finance and

telecommunications

In US FTAs with developing countries, there are usually special chapters on financial
services and telecommunications, two of the most important and sensitive service subsectors.
The FTAs with Singapore and Chile, for example, have these special
chapters.
The financial services chapter in the US-Singapore FTA applies to investors and
investments as well as cross-border trade. Besides the usual principles of national
treatment and MFN, the market access clause states that measures by a Party shall not
impose limitations on the number of financial institutions, the total value of financial
service transactions, the total number of financial service operations and the total
number of natural persons employed; nor should the parties restrict or require specific
types of legal entity or joint venture. Each Party shall also permit a financial
institution of the other Party to supply any new financial service that is permitted to
its own institution. There are also liberalization clauses for cross-border trade and
senior management and boards of directors.
There are also annexes of non-conforming measures similar to the chapter on
services in general, as well as general exceptions.
There are generally similar clauses on financial services in the US-Chile agreement.
In the chapter on telecommunications in the US-Singapore FTA, there are provisions
to ensure that enterprises of the other Party have access to and use of any public
telecommunications transport networks and services offered in the country. There are
other provisions with obligations on parties to ensure that suppliers of telecom
services provide interconnection with facilities of suppliers of public
telecommunications services of the other Party, and additional obligations regarding
treatment by major suppliers, competitive safeguards, unbundling of network
elements, co-location, resale, interconnection, pricing of leased circuit services etc.

21

There are also provisions relating to independent regulation and privatization,

universal service, licensing process, allocation and use of scarce resources, etc.
To meet the requirements and obligations desired by the US in the financial services
and telecommunications chapters, a typical developing country partner would have to
very significantly re-orientate its policies on these two key sectors, with also
significant consequences.
D. Does the degree of liberalization matter for development?
Developed countries advocate for developing countries the fastest and broadest
liberalization in services. Institutions such as the World Bank also encourage or
pressurize developing countries to liberalise services so that they can become more
efficient. However it is wiser for developing countries to take a cautious approach
towards services liberalization.
There are several reasons why it is important for a developing country to maintain or
expand beyond a certain degree of local participation (including ownership and
control) over services. During the colonial period, the foreign firms were able to
control a large and overwhelming share of the services sectors in many countries,
including the financial and distribution sectors. Following independence, governments
took measures to increase the share of citizens in services. There developed
significant local ownership and control in banking, insurance, construction, wholesale
and retail trade, transportation, professional services, etc. Governments tended to have
monopolies in railways, telecommunications, water, postal services, energy and power
resources. When these were privatized or partly privatized, or when private
companies were allowed to compete in these areas, local companies were among
those that took up local shares. The increased participation of local firms and persons
usually developed with the assistance of the government, including preferential
treatment to locals and restraint over the growth of foreign companies.
Presently, the services sector is in many developing countries the largest sector, and it
is the area where local firms have larger participation and are better able to compete,
as compared with the manufacturing sector. While it is important to upgrade
technology and techniques, this can often be done by the local firms including through
importing modern technology. It does not necessarily require that large foreign firms
take over, in order for a country to have modern and efficient services. There are
natural advantages of local firms and people in activities that require presence and
knowledge of local conditions and customers. Thus it is a sector in which
strengthening and development of domestic economy, training and development of
local entrepreneurs, restructuring of social imbalances, can and should take place.
Also the service sector has many sub-sectors that are strategic in many aspects
(a) Economically strategic sectors, eg finance, distribution);
(b) Essential to national economic security (energy and power,
telecommunications, transport, postal, water);
(c) Critical for the public interest and to meet social needs (water, education,
health, etc).

22

While there are benefits to foreign investment, there are also costs, and thus a balance
is required. The services sector usually produces services that are non-tradables.
Thus, there is significant foreign exchange loss associated with foreign service
providers, as there is an outflow of profits, while most of the output is for local use.
For strategic and security reasons, it is also important that there be local control over
several services sectors, including water, electricity, finance, telecommunications, etc.
To avoid or cushion financial crises, there should also be significant local
participation in banking, insurance, etc.
Public services that meet basic needs, such as water, education, health and electricity,
should also be carefully guarded. Primary importance should be placed on meeting
the needs of the public, especially the poor.
It is thus crucial that this sector is carefully regulated under national development
policy. Foreign participation has a role to play, but this has to be carefully considered
and given its proper place, within a planned framework, taking into account the
factors above (participation of domestic firms and institutions, economic, financial,
infrastructure, public needs, social development). Accelerated and excessive
liberalization of key sectors, or worse an across-the-board liberalization, under legally
binding rules of an FTA, would disrupt or hinder the process of establishing a national
services strategy.
E. Need for a comprehensive national services plan
Developing countries need to have a comprehensive national services master plan, in
order that there be a coherent policy framework. Based on such a plan and
framework, the country can formulate positions to take in its national interests,
whether in the WTO or in a possible FTA.
Among the issues to resolve in such a services plan is the degree of local and of
foreign participation in the various sub-sectors, and the development of each subsector. Strategic and public consideration has to be given to key sectors such as
finance, telecommunications, water, health services.
Many countries do not have such a comprehensive plan. At best they have a plan for
subsectors, such as financial services or health services.
Until such a services plan is formulated, it would not be possible for a country to
properly decide on which sectors to commit to liberalise and to what extent.
F. SERVICES: IMPLICATIONS OF MUFTA FOR MALAYSIA
There will be limited gains to Malaysia from a services chapter in the MUFTA. If
Malaysia wants to export more services to the USA because of the USFTA, there
are a number of legal problems. Lets look at the example of construction
services which is one of Malaysias services most ready to be exported (so far we
are exporting them to developing countries).
23

The first problem is that to export construction services to the USA, Malaysia
usually has to send engineers, architects, surveyors etc to the USA. However it is
difficult for Malaysians to get visas to enter the USA and the USTR cannot
promise more visas for Malaysians because according to the American
Constitution only the American Congress has that power. (The USTR tried to
promise more visas to Australia in its USFTA but the US Congress got very
angry and did not agree).
Secondly, even if Malaysia could somehow export its construction services by
emailing plans etc to the USA without visiting the USA even to look at the site,
the qualifications of Malaysias engineers, architects etc must be recognised by
the USA. These regulations that set what qualifications are acceptable are
usually decided by the state governments in the USA. So it is not in the USTRs
power to be able to say she will allow Malaysian lawyers or architects to practise
in the USA.
More generally, Malaysia could gain if the US were to allow more generous
immigration treatment regarding visas to Malaysians to work in the US.
However, both the language of the FTA as well as the political situation in the US
will not allow for this.
On the other hand, Malaysia will face many serious problems that will entail
changing the structure and policies of many of the service sub-sectors.
Firstly, the US is insisting on a negative list approach (everything is liberalized
unless explicitly stated in an exception list).
This methodology makes Malaysia much more vulnerable to greater pressure to
liberalise (see above). Malaysia may not be sufficiently aware of all the service
sectors and sub-sectors, and thus may not list all the sub-sectors it wishes not to
liberalise; the country may not be able to predict or plan which sectors it may
wish to promote domestically in future and thus may agree to liberalise sectors
which in future it may regret doing; the country will find it difficult to back
track after committing, when circumstances require it to protect domestic firms
or the economy (e.g. as happened or may happen during financial crises); and
the country will not be able to predict which new services sectors may emerge in
future, and thus cannot exclude these in the list.
Secondly, the exceptions are such that Malaysia has to list (in an Annex I)
existing non-conforming measures (i.e. that do not conform to total
liberalization in relation to market access, national treatment and MFN), and
these measures can only be amended towards greater liberalization but not
stricter regulation. This imposes a standstill, disallowing back-tracking, and
erodes policy space. Only if measures in particular sub-sectors are placed in an
Annex II can there be some space between present measures and future possible
measures.
Thirdly, the U.S. administration is assisting its companies in their demands for
opening up the Malaysian services sectors for full access to American companies.

24

Thus the FTA talks will put pressures on Malaysia to: (1) remove or
substantially reduce measures that presently help local firms to maintain or
strengthen their position; (2) remove regulations and policies that impose
limitations or conditions on foreign firms. If the US does not get significantly
what it wants, it will not want to conclude the FTA. On the other hand if it does
get what it wants, then Malaysia will have to largely change its policies, with
serious economic and social consequences.
The investment or commercial presence part of services will not be in the
services chapter but in the investment chapter of the MUFTA, at the request of the US
(if its previous FTAs are followed). One reason for this is that the investment chapter
contains an aggressive investor-to-state dispute mechanism (which will encourage
implementation of obligations) and thus the services investment component will fall
under that.
An idea of the demands that the US is making on services investment can be seen
from the USTRs trade barriers report on Malaysia. This lists the regulations that
Malaysia is presently having in various sub-sectors. These are the regulations that the
US presumably will negotiate to eliminate or substantially relax. The following are
some examples of what the USTR report 2006 says about Malaysian services. What
the report says gives an idea of the concerns that the US will raise in the negotiations
and their demands.

Basic Telecommunications
Foreign companies are entitled to acquire only up to a 30 percent equity stake in
existing fixed line operations, an investment ceiling codified as part of Malaysia's
WTO services offer which limits market access commitments to facilities-based
providers. [The USTR report says These restrictions constitute one of the most
restrictive regimes for an economy of Malaysias level of development.].
Value-added service suppliers are similarly limited to 30 percent foreign equity.
The report says Restrictions on these activities tend to benefit the dominant provider,
government-controlled Telekom Malaysia, and hamper the development of a more
efficient information infrastructure.
It adds that Malaysia has made marginal
improvements to this regime reflected in its January 2005 revised services offer in the
WTO, reflecting new domestic licensing categories, but these changes remain
disappointing.
The new licensing categories introduced now allow for up to 49 percent foreign
equity in suppliers categorized as application service providers, but precisely what
this category encompasses is unclear.

25

Distribution Services, including Direct Selling

Malaysias requirements for the licensing and operation of direct selling companies
include a provision that a locally incorporated direct selling company must allow for
30 percent Bumiputera equity. The Ministry also recommends local content targets.
Local companies that seek multi-level direct selling licenses require paid-in capital of
RM 1.5 million ($397,000), while companies with foreign shareholders must have
paid-in capital of RM 5 million ($1.3 million).
The Malaysian government also included local content requirements in new
"Guidelines on Foreign Participation in the Distributive Trade Services" that came
into effect in December 2004.
Among other provisions, department stores, supermarkets and hypermarkets must
reserve at least 30 percent of shelf space in their premises for goods and products
manufactured by bumiputera owned small and medium size industries. The guidelines
also require that at least 30 percent of a stores sales consist of bumiputera products, a
rule that does not take into account discretionary behavior on the part of consumers.

Banking
The Malaysian government limits foreign participation in financial services to
encourage the development of domestic financial services providers. The
governments policies are guided by the Banking and Financial Institutions Act of
1989 (BAFA) and the ten-year Financial Sector Masterplan unveiled in 2001. The
plan is focused on building competitive domestic banks, in large part through banking
consolidation, and defers the introduction of new foreign competition until after 2007.
Foreign institutions are allowed to hold an equity stake in investment banks of up to
49 percent currently, foreign participation in commercial banks is still restricted to an
aggregate maximum stake of 30 percent. Foreign banks currently operate in Malaysia
under a grandfathering provision. No new licenses are being granted to either local or
foreign banks; foreign banks must operate as locally controlled subsidiaries. Foreign
commercial banks are only allowed to open new branches if they also add other
branches as directed by Bank Negara.
In 2004, Bank Negara pressed existing foreign banks, including U.S. banks, to expand
back office operations or establish significant computing operations in Malaysia.
On October 14, 2004, Bank Negara completed the issuance of three Islamic banking
licenses to three Middle Eastern Islamic banks. Bank Negara encourages all
commercial banks operating in Malaysia to set up full-fledged Islamic banking
subsidiaries in which foreigners may take a 49 percent equity stake.

26

On April 1, 2003, the government removed the restriction that foreign-controlled

companies were required to obtain 50 percent of their local credit from Malaysian
banks. However, sourcing of funds of more than RM 50 million ($13.2 million) from
local banks still requires approval from Bank Negara.
On December 28, 2005, Bank Negara announced that locally incorporated foreign
banking institutions currently operating in Malaysia would be allowed to open up to
four additional branches in 2006 (one branch in a market center, two in semi-urban
centers, and one in a non-urban center).

Insurance
The insurance industry remains dominated by foreign providers, including several
U.S. firms.
The 2001 Financial Sector Masterplan recommends phased liberalization of the
insurance industry, including increasing caps on foreign equity, fully opening the
reinsurance industry to foreign competition, and lifting existing restrictions on
employment of expatriate specialists.
Branches of foreign insurance companies were required to incorporate locally under
Malaysian law by June 30, 1998, although Malaysias government has granted
individual extensions.
Foreign shareholding exceeding 49 percent is permitted only with Malaysian
government approval. As part of the 1997 WTO Financial Services Agreement,
Malaysia agreed to allow existing foreign shareholders of locally incorporated
insurance companies to increase their shareholding to 51 percent. New entry by
foreign insurance companies is limited to equity participation in locally incorporated
insurance companies, and aggregate foreign shareholding in such companies may not
exceed 30 percent. However, this limit has been subject to negotiation.

Securities
Malaysia currently allows 49 percent foreign ownership in stock-broking companies
and a 30 percent foreign stake in unit trusts. The Securities Commissions ten-year
Capital Market Masterplan, released in February 2001, proposed liberalizing foreign
participation limits by 2003, at which time foreigners would be permitted to purchase
a limited number of existing stock-broking licenses and to take a majority stake in
unit trust management companies.
Fund management companies may be 100 percent foreign-owned if they provide
services only to foreigners, but they are limited to 70 percent foreign ownership if
they provide services to both foreign and local investors. On March 22, 2005, the
government allowed five foreign stock brokerages and a foreign fund management
company to set up operations in Malaysia. More foreign fund management companies
are expected to utilize four of the remaining licenses.
27

In September 2003, the Securities Commission began allowing foreign firms

operating in Malaysia to seek listing on the Kuala Lumpur Stock Exchange. Futures
brokerage firms may now be 100 percent foreign-owned.

Audio-Visual and Broadcasting

Malaysias government maintains broadcast content quotas on both radio and
television programming. Eighty percent of television programming is required to
originate from local production companies owned by ethnic Malays (an increase from
the previous limit of 60 percent). However, in practice, local stations have been
granted substantial latitude in programming due to a lack of local programming. Sixty
percent of radio programming must be of local origin. Foreign investment in
terrestrial broadcast networks is prohibited. As a condition for obtaining a license to
operate, video rental establishments are required to have 30 percent local content in
their inventories. Malaysia regularly censors movies and television shows deemed
offensive on religious or sexual grounds.
Advertising Commercials are restricted to a maximum of 20 percent foreign film
content. The government recently relaxed enforcement of regulations governing the
appearance of foreign actors in commercials shown in Malaysia. The Government of
Malaysia has an informal and vague guideline that commercials cannot promote a
foreign lifestyle.

Legal Services
Foreign lawyers may not practice Malaysian law, nor may they affiliate with local
firms or use their international firms name. Foreign law firms may not operate in
Malaysia except as minority partners with local law firms, and their stake in any
partnership is limited to 30 percent.
Under the Legal Profession Act of 1976, the practice of Malaysian law is normally
restricted to Malaysian citizens or permanent residents who have apprenticed with a
Malaysian lawyer, are competent in Bahasa Malaysia (the official language), and have
a local law degree or are accredited British Barristers at Law. The Attorney General
has authority to grant limited exceptions on a case-by-case basis, provided the
applicant has seven years of legal experience.
Malaysian law does not allow for foreign legal consultancy except on a limited basis
in the Labuan International Offshore Financial Center (see Banking below).
Malaysia limits such foreign attorneys scope of services to advice concerning home
country and international law.
Persons not licensed as lawyers are subject to criminal penalties if they directly or
indirectly undertake activities relating to the Malaysian legal system, including
drafting documents.

28

Architectural Services
A foreign architectural firm may operate in Malaysia only as a joint-venture
participant in a specific project with the approval of the Board of Architects.
Malaysian architectural firms may not have foreign architectural firms as registered
partners. Foreign architects may not be licensed in Malaysia but are allowed to be
managers, shareholders, or employees of Malaysian firms. Only licensed architects
may submit architectural plans.

Engineering Services
Foreign engineers may be licensed by the Board of Engineers only for specific
projects, and must be sponsored by the Malaysian company carrying out the project.
The license is only valid for the duration of a specific project. In general, a foreign
engineer must be registered as a professional engineer in his or her home country,
have a minimum of 10 years experience, and have a physical presence in Malaysia of
at least 180 days in one calendar year. To obtain temporary licensing for a foreign
engineer, the Malaysian company often must demonstrate to the Board that they
cannot find a Malaysian engineer for the job.
Foreign engineers are not allowed to operate independently of Malaysian partners, or
serve as directors or shareholders of an engineering consulting company. A foreign
engineering firm may establish a non-temporary commercial presence if all directors
and shareholders are Malaysian. Foreign engineering companies may collaborate with
a Malaysian firm, but the Malaysian company is required to submit the plans for
domestic approval.

Accounting and Taxation Services

Foreign accounting firms may provide accounting and taxation services in Malaysia
only through affiliates. All accountants who wish to provide auditing and taxation
services in Malaysia must register with the Malaysian Institute of Accountants (MIA)
before they may apply for a license from the Ministry of Finance. Citizenship or
permanent residency is required for registration with MIA. Malaysian citizens or
permanent residents who received degrees from local universities or are members of
at least one of the 11 overseas professional bodies recognized by Commonwealth
countries may apply for registration. The American Institute of Certified Public
Accountants (AICPA) is not recognized by Commonwealth countries.

8. INVESTMENT: LIBERALISATION AND INVESTOR

PROTECTION
A. Singapore Issues
The Singapore issues -- defined as investment, competition and government
procurement -- are now off the WTO negotiating agenda, at least for the duration of
the Doha work programme. Many developing countries, including India, Malaysia,
29

Indonesia and the Philippines, worked hard to keep them off the rubric of the
multilateral trade agenda. However these topics are proposed by the US and other
developed countries in bilateral FTAs.
B. Background to investment issue
Many developing countries opposed the introduction of an investment agreement in
the WTO, as they were concerned this would prevent or reduce their policy space to
determine their own investment policies, such as choice of and conditions for foreign
investment, including entry requirements, equity requirements, performance
requirements, regulation on funds transfer, etc.
Most bilateral FTA agreements with developed countries now include investment
agreements, which can incorporate the elements and standards preferred by the
developed countries. The US-Singapore FTA allows for a broad definition of
investors and investments, high standards for the right of establishment, national
treatment, prohibition of performance standards, freedom for funds transfer,
expropriation clause, as well as investor-to-state dispute settlement (i.e. the foreign
investor and not only his government can take the host government to an international
court for claimed violation of the agreement).
In FTAs involving the US, the
expropriation clause typically has a broad definition of expropriation, that may
include regulatory takings, or loss of profit and revenue due to an application or
change of government regulation or policy. Investors claiming to have suffered
losses due to expropriation within this broad definition can take up cases against the
host government for compensation. Many such investor-to-state cases have been
taken up under NAFTA.
Developing countries should be very cautious, as to whether (a) they would like to
include an investment component to their FTA; (b) if yes, that such a component does
not commit them to standards and elements that may be detrimental to their
investment and development policies. Present national policy and legal space to
determine the definition and scope of investment, right to establishment, type of
foreign investment to welcome and not welcome, national treatment, transfer of funds,
and on performance requirements, dispute settlement system, etc. should not be
narrowed or removed by the FTAs. It should be noted that some of the policies
undertaken by Malaysia during the financial crisis of 1997-2000 may not be allowed
under provisions that could be proposed under an FTA. There is a strong case that
binding rules relating to investment should not be part of a developed-developing
country FTA. This is especially since the WTO members have decided not to start
any negotiations on an investment agreement in the WTO, as developing countries are
concerned about the adverse implications for development.
The investment issue has been a controversial subject at the WTO. It was part of the
Doha agenda agreed to in 2001, but there was a groundswell of opposition to starting
negotiations on investment and other Singapore issues at Cancun in 2003. In July
2004, investment was dropped off the Doha negotiations agenda by the WTO General
Council.

30

However the investment issue in a deeper and broader way has made a comeback in
bilateral free trade agreements. At present this is the main arena where the battle is
being fought, of whether to include investment or what kind of investment chapter to
include within the FTA.
There is a long history of developed countries attempting to persuade developing
countries to agree to a binding international investment treaty. During the Uruguay
Round, the developed countries included investment rules in the Agreement on TradeRelated Investment Measures (TRIMS) negotiations. However, developing countries
were unable to accept this and succeeded in restricting the TRIMS agreement to only
trade-related measures. The developed countries tried again in 1995-96 to have the
WTO negotiate an investment agreement but the Singapore Ministerial only agreed on
setting up a working group for discussion on trade and investment. They tried again
through the OECD to have an investment agreement, but this failed. They then tried
to have the issue as part of the Doha Round, but they failed again. The attempt is
being made now through bilateral FTAs.
C. Main design and strategic aim of the US
The main features of an international investment agreement (and of an investment
chapter in bilateral FTAs) as advocated by the major developed countries are rather
well known and have remained constant in the past many years, although there may
be differences in some of the details. Among these main features are the following:

Obligations on the right to entry and establishment: These provide foreign

investors the rights to entry and establishment in member countries without (or
with minimal) conditions and regulations and to operate in the host countries
without most conditions now existing. In FTAs involving the USA, the foreign
investor is given pre-establishment rights. This means that rights are provided
to potential investors even before they enter the country, implying that there
would be no or minimal regulation on the entry of investments. In contrast, postestablishment rights means that the host country can decide whether or not to
accept a potential investor or investment and can impose conditions on the
investment if it decides to allow entry to the investor.

Non-discrimination and national treatment principles: National treatment and

MFN status would be given to foreign investors and investments. National
treatment means that the foreign investor would be given rights to be treated no
less favourably than local investors (the meaning is that the foreign investor can
be given treatment better than or equal to but not less than the local). Measures
that promote or give preferential treatment to local investors may be curbed as
these are seen to be discriminating against foreign investors.

Scope and definition: The original definition of investment has been very broad
(eg in the proposed OECD Multilateral Agreement on Investment (MAI) it covers
FDI, portfolio investments, credit, IPRs and even non-commercial organisations,
and in all sectors except security and defence.). This broad definition is adopted
in FTAs involving the USA.

31

Ban on Performance Requirements: The host state would be prohibited from

imposing performance requirements on the foreign investor or investment (unless
it is listed as an exception in the FTA). For example, regulation on limits and
conditions on equity, obligations for technology transfer, measures for using local
materials and for increasing exports or limiting imports would be prohibited or
disciplined.

Rights given for funds transfer: Obligations to allow free mobility of funds into
and out of the country, thus restricting or prohibiting regulations/controls on funds
transfer.

Protection of Investors rights against expropriation: There would also be strict

standards of protection for foreign investors' rights, especially in relation to
"expropriation" of property. A wide definition is given to expropriation in the
MAI model; it includes "creeping expropriation". In FTAs involving the US,
direct and indirect expropriation are included. Indirect expropriation usually
includes the loss of goodwill and future revenue/profits of a company or an
investor, as a result of a government measure or policy. If there is such
expropriation, the host state is liable to compensate the investor in full including
interest at a commercially reasonable rate.

The agreement is legally binding and subject to dispute settlement in designated

international courts. In most FTAs involving the USA, the dispute settlement
system includes enabling investors to bring cases against the host state, in the
designated international courts.

D. The need for space and flexibility for investment and development policies and
the effects of an investment agreement
Foreign investment is a complex phenomenon with many aspects. Its relationship
with development is such that there can be positive as well as negative aspects. There
is an important need for the role of government and government policy to regulate
investments so that the positive benefits are derived, while the adverse effects are
minimized or controlled. The experience of countries shows that governments have
traditionally made use of a wide range of policy instruments in the formulation of
investment policy and in the management of investment. It is crucial that developing
countries continue to have the policy space and flexibility to exercise their right to
such policies and policy instruments.
Due to its particular features, foreign investment can have the tendency towards
adverse effects or trends that require careful management. These include:
(a) possible contribution to financial fragility due to the movements of funds into
and out of the country, and to some types of financially destabilizing activities;
(b) possible effects on balance of payments (especially increased imports and
outflow of investment income, which has to be balanced by export earnings and

32

new capital inflows; if the balance is not attained naturally, it may have to be
attained or attempted through regulation);
(c) possible effects on the competitiveness and viability of local enterprises;
(d) possible effects on balance between local and foreign ownership and
participation in the economy.
(e) possible effect on the balance of ownership and participation among local
communities in the society.
On the other hand foreign investment can make positive contributions, such as:
(a) use of modern technology and technological spillovers to local firms.
(b) global marketing network
(c) contribution to capital funds and export earnings
(d) increased employment
In order that these potential benefits be realized, and that a good balance is attained
between the negative and positive effects, so there be a overall net positive effect,
there is a crucial role for governments in a sophisticated set of investment and
development policies.
An investment agreement or chapter of the type envisaged by the proponents would
make it much more difficult to achieve a positive balance as it would severely
constrain the space and flexibility for investment and development policies.
Such an agreement or chapter is ultimately designed to maximise foreign investors'
rights whilst minimising the authority, rights and policy space of governments and
developing countries. This has serious consequences in terms of policy making in
economic, social and political spheres, affecting the ability to plan in relation to local
participation and ownership, balancing of equity shares between foreign and locals
and between local communities, the ability to build capacity of local firms and
entrepreneurs, etc. It would also weaken the position of government vis--vis foreign
investors (including portfolio investors) in such areas as choice of investments and
investors, transfer of funds, performance requirements aimed at development
objectives such as technology transfer, protecting the balance of payments, and the
formulation of social and environmental regulations.
It is argued by proponents that an investment agreement will attract more FDI to
developing countries. There is no evidence of this. FDI flows to countries that are
already quite developed, or there are resources and infrastructure, or where there is a
sizable market.
A move towards a binding investment agreement is thus dangerous as it would
threaten options for development, social policies and nation building strategies. It is
thus proposed that the strategy to be adopted should be to prevent the investment issue
from entering the mode of "negotiations." In the working group, cogent points should
be put forward on why an agreement on investment rules is not suitable nor beneficial
for the WTO or for FTAs. In the discussion on "clarification" and on "modality",
points should be made towards this end.

33

E. Conclusions
There should not be an investment chapter of the kind envisaged by the developed
country proponents in a FTA.
There should not be a legally binding agreement for securing establishment rights and
national treatment for foreign investment and investors, and especially it should not
allow for investor-state dispute settlement (i.e. investors to be able to take cases
against the host states).
The principles that originate for the purposes of trade relations (eg in GATT and
WTO) including national treatment and MFN were meant to apply to trade in goods
and are inappropriate when applied to investment. Instead, their application to
investment would be damaging to the development interests of developing countries.
Traditionally developing countries have had the freedom and right to regulate the
entry and conditions of establishment and operation of foreign investments; restricting
their rights and policy space would have adverse repercussions.
A more appropriate framework must be a balanced one, with the main aim of
regulating corporations (instead of regulating governments); it could be one that is not
legally binding. An attempt to establish such a balanced framework was made at the
UN in the 1980s, when a code of conduct on transnational corporations was
negotiated. However the negotiations failed to produce an outcome.

F. INVESTMENT: IMPLICATIONS OF MUFTA FOR MALAYSIA

The US administration has listed its dissatisfaction with the present Malaysian
regulations on foreign investment, which it calls investment barriers. It is
asking for these policies to be changed through the FTA.
The USTRs Foreign Trade Barriers report, in a comment on investment
barriers has this to say about Malaysia:
Malaysia encourages foreign direct investment in export-oriented
manufacturing and hightechnology industries, but retains considerable
discretionary authority over individual investments, and restricts foreign
investment in other sectors. Especially in the case of investments focused
toward the domestic market, it has used this authority to restrict foreign equity
(normally to 30 percent) and to require foreign firms to enter into joint
ventures with local partners. As noted above, foreign investment in the
financial services industry is restricted;foreign investment in terrestrial
broadcasting is prohibited. To alleviate the effects of the regional economic
crisis, in 1998, Malaysia temporarily relaxed foreign-ownership and export
requirements in the manufacturing sector for those companies that did not
directly compete with local producers. In June 2003, the government extended
indefinitely the policy, permitting 100 percent foreign ownership in new
34

investment, if it was for the expansion of existing investments in

manufacturing concerns. In September 2004, the government announced that
venture capital firms could be 100 percent foreign-owned.
The US will try through the FTA negotiations to get Malaysia to withdraw or
reduce its investment policies that regulate many sectors, and to enable US firms
to establish themselves freely in Malaysia, to be given national treatment and not
subject to control.
The implications include:
1. Granting pre-establishment rights to US investors and companies. Even
before entering the country, the potential investor has the right to invest. The
role of the foreign investment committee to screen and approve/not approve or to
impose conditions on intending foreign investors would be much reduced.
2. American investors will have national treatment, i.e. the right to be treated
as well or better than local investors. This prevents government from having
positive policies that favour local investors and firms.
3. Many performance requirements (conditions for allowing a foreign firm to
operate) will have to be banned in relation to US investors. These were imposed
so that the US firms would be obliged to contribute to the Malaysian economy,
by for example establishing joint ventures with locals, transferring technology
and using local materials.
4. US investors would have the right to own 100% of their own companies.
Limits on the extent of ownership by American investors can only be placed if
these limitations are listed down in an exclusion list within the FTA.
5. There cannot be restrictions placed on the inflow and outflow of funds of
American investors. Several of the measures adopted by Malaysia during the
financial crisis of 1997-1999 (such as a moratorium on the outflow of ringgitdenominated assets held by foreigners in Malaysia) would not be allowed under
the FTA rules. Investors who feel their rights have been violated and have
suffered a loss can sue the government for compensation for expropriation.
6. Malaysia would be bound by rules prohibiting "expropriation" of the
American investors property. A wide definition is given to expropriation in the
FTA, which will include direct and indirect expropriation are included.
Indirect expropriation usually includes the loss of goodwill and future
revenue/profits of a company or an investor, as a result of a government measure
or policy. If there is such expropriation, the host state is liable to compensate the
investor in full including interest at a commercially reasonable rate.
7. Malaysia would be subject to investment dispute settlement under the FTA
in which either the US government or US investors can sue the Malaysian
government for compensation for losses claimed by the investors for
expropriation. The cases are to be brought before an international court (one
choice is the International Centre for Settlement of Investment Disputes). The

35

cases can involve claims worth millions or hundreds of millions or even more
than a billion dollars, as the experience of other countries having an FTA with
the US (eg Canada, Mexico) has shown. Through the FTA, Malaysia would thus
be agreeing to subject itself to legal suits by American investors claiming that
they have suffered or will suffer losses and potential losses resulting from
government measures and policies.
8. The scope of the investment chapter will be very broad. Following the
Singapore-US FTA, investment means every asset owned or controlled, directly
or indirectly, by an investor, that has the characteristics of an investment. Forms
that an investment may take include: (a) an enterprise; (b) shares, stock, and
other forms of equity participation in an enterprise; (c) bonds, debentures, other
debt instruments, and loans; (d) futures, options, and other derivatives;
(e) turnkey, construction, management, production, concession, revenue-sharing,
and other similar contracts; (f) intellectual property rights; (g) licenses,
authorizations, permits, and similar rights conferred pursuant to applicable
domestic law; and (h) other tangible or intangible, movable or immovable
property, and related property rights, such as leases, mortgages, liens, and
pledges. This means that all these forms of investments (and the investors) will
be subject to the rules on pre-establishment rights, market access and national
treatment, as well as funds transfer, expropriation and investor-to-state dispute.
9. The investment chapter also takes a negative list approach, in that every
sector is taken to be totally liberalized unless exceptions are specifically listed.
There are many disadvantages with this negative list approach: (a) Malaysia
is much more vulnerable to greater pressure to liberalise; (b) Malaysia may not
be sufficiently aware of all the sectors and sub-sectors for which protection of
local industry or firms are required and thus may not list all the sub-sectors it
wishes not to liberalise. (c) The country may not be able to predict or plan which
sectors it may wish to promote domestically in future and thus may agree to
liberalise sectors which in future it may regret doing. (d) The country will find it
difficult to back track after committing, when circumstances require it to
protect domestic firms or the economy (e.g. as happened or may happen during
financial crises). (e) The country will not be able to predict which new sectors
may emerge in future, and thus cannot exclude these in the list.
10. As in the services chapter, the exceptions are to be explicitly listed in three
categories. Annex I will contain (a) a list of existing non-conforming measures
(i.e. that do not conform to national treatment, MFN, performance requirements
and senior management/board of directors) and (b) an amendment to any nonconforming measure as long as it does not decrease the conformity of the
measure. Thus Annex I installs a standstill and prevents any existing measure
from becoming stricter. It is important to note that the exceptions cover only
national treatment, MFN, performance requirements and senior
management/board but there is no exception for other provisions, including
minimum standard of treatment, transfer of funds and expropriation, nor the
investor-to-state dispute system.
11. Exceptions can also be entered into an Annex II, in which Malaysia can list
sectors and activities it wants to exempt for measures it wants to adopt or

36

maintain. However, again, these measures are only in relation to national

treatment, MFN, performance requirements and management/board. Other
measures such as transfer of funds and expropriation are not exempted.
12. As part of the New Economic Policy and its subsequent variations, the
Malaysian government has been actively making use of investment and equity
measures as its main instrument for socio-economic strategy in boosting the
participation of local people, with special reference to Bumiputra. The original
NEP target was to reduce the foreign share of corporate equity from about 70%
while increasing the Bumiputra share from 1% to 30%, without affecting the
share of non-Bumiputra. Various mechanisms, institutions and policy measures
were introduced and maintained towards this end, including institutions such as
PNB, ASN, Khazanah and measures such as limitations on foreign equity
ownership in various sectors, and specific measures for allocating equity share
and shares to Bumiputra.
The FTA with the US will considerably erode this approach, as the main strategic
principle under the FTA is that the countries should as a rule conform to the
principles of the right of entry and establishment of American iuvestments, that
their investors be allowed 100% ownership of their own companies and that
equity requirements or the joint-venture structure should not be imposed, nor
should there be any performance requirements, and these investors are to be
granted national treatment. Any measure that goes against these are
considered non-conforming and has to be listed as an exception. These
exceptions are also subject to negotiations.
The FTA would thus be a major instrument to substantially erode the policy, and
may well be the start of its overall elimination, as (a) there will be pressures from
the US for progressively decreasing the so-called non conforming measures
and (b) other countries other than the US will also demand similar treatment be
given to them, including through upgrading their FTAs with Malaysian (Japan)
or wanting it included in the FTAs they negotiate with Malaysia (Australia, New
Zealand, European Union, etc).
13. The sectors in which American companies want Malaysia to eliminate or
erode its present policies are mainly in services. Their demands in specific subsectors are in the USTR report on Trade Barriers, summarized in the section of
this paper on services. The measures include restrictions and limitations on
foreign ownership, and requirements that a certain amount of local (Bumiputra)
products be displayed on shelves of hypermarkets. These measures are likely to
be negotiated by the US for elimination or phasing out.
14. The provision on free and unrestricted transfer of funds (inflows and
outflows) for American investors has the potential to increase financial
instability, and to prevent measures that can be taken to lessen financial
instability or crises. It would be more difficult to prevent the entry of speculative
funds and instruments (given the provisions on pre-establishment rights and free
funds transfer) and to take measures that restrict the outflow of funds, as during
an emergency. In the negotiations for the Singapore-US FTA, Singapore wanted
an exception to freedome of funds transfer in the casse of short-term speculative

37

funds during an financial emergency, but the US did not agree. The only
concession is that for only certain types of funds, Singapore would not be liable
to pay compensation if the restriction on outflow is less than a year and does not
substantially impede transfers. (This was explained by a Singapore negotiator
as meaning that a levy or tax can be imposed on funds leaving the country, but
not the prohibition of outflow).
15. The expropriation and dispute-settlement provisions open the government
to legal suits by both the US and its investors, including for indirect
expropriation, which can include measures taken by government on economic,
social, health or environmental grounds. The disadvantages include: (a)
Government not being able to undertake many policies which may be construed
to be expropriation; (b) Even if the government believes the measure is not
expropriation, there can be a chill effect of not wanting to be sued, and thus
a reluctance to introduce policies that are unpopular with the investors; (c)
Government opens itself to being liable for legal suits for compensation directly
from US investors and in international courts, with potential claims of many
millions or billions of dollars.
16. Intellectual property will also be listed as an investment. Thus, IPR
holders could make use of the investment chapter to file claims for compensation
on the grounds that their property is being expropriated.

9. TELECOMMUNICATIONS
The FTA with the US will have to contain a special chapter on
Telecommunications.
This chapter combines the issues of services and
investment, and it also has important aspects of competition policy. In fact it
is a model of how the US would like to make use of all three issues (services,
investment, competition) in each sector.
Regarding services and investment, the US demand is for liberalization and
national treatment for its firms to set up and operate in the local market.
Regarding competition, there are key elements regarding anti-competitive
business practices, designated monopolies and government-linked companies
(where the aim is to set rules that oblige the local companies/institutions to allow
American companies to make use of their facilities; and to prevent government
authorities to give assistance to local telecom GLCs or to be influenced by them.
In the chapter on telecommunications in the US-Singapore FTA, there are
provisions to ensure that enterprises of the other Party have access to and use of
any public telecommunications transport networks and services offered in the
country. There are other provisions with obligations on parties to ensure that
suppliers of telecom services provide interconnection with facilities of suppliers
of public telecommunications services of the other Party, and additional
obligations regarding treatment by major suppliers, competitive safeguards,
unbundling of network elements, co-location, resale, interconnection, pricing of
leased circuit services etc.
38

There are also provisions relating to independent regulation and privatization,

universal service, licensing process, allocation and use of scarce resources, etc.
To meet the requirements and obligations desired by the US in the financial
services and telecommunications chapters, Malaysia would have to very
significantly re-orientate its policies on these two key sectors, with also
significant consequences.
Below are some key elements of the Telecommunications chapter in the
Singapore-US FTA, which gives a picture of what is in store for the Malaysia-US
FTA.
SCOPE AND COVERAGE:
Covered are measures affecting trade in
telecommunications services. It does not apply to measures relating to cable or
broadcast distribution of radio or television programming.
ACCESS TO AND USE OF PUBLIC TELECOMMUNICATIONS TRANSPORT
NETWORKS AND SERVICES:
Each Party shall ensure that enterprises of the other Party have access to and use of
any public telecommunications transport network and service, including leased
circuits, offered in its territory or across its borders on reasonable, non-discriminatory
(including with respect to timeliness), and transparent terms and conditions.
Each Party shall ensure that such enterprises are permitted to: (a) purchase or lease,
and attach terminal or other equipment that interfaces with the public
telecommunications network;
(b) provide services to individual or multiple end-users over any leased or owned
circuit(s); (c) connect leased or owned circuits with public telecommunications
transport networks and services in the territory, or across the borders, of that Party, or
with circuits leased or owned by another enterprise; (d) perform switching, signaling,
processing, and conversion functions; and (e) use operating protocols of their choice.
Each Party shall ensure that enterprises of the other Party may use public
telecommunications transport networks and services for the movement of information
in its territory or across its borders and for access to information contained in data
bases or otherwise stored in machine-readable form in the territory of either Party.
INTERCONNECTION
WITH
SUPPLIERS
OF
PUBLIC
TELECOMMUNICATIONS SERVICES:
Each Party shall ensure that suppliers of public telecommunications services in its
territory provide, directly or indirectly, interconnection with the facilities and
equipment of suppliers of public telecommunications services of the other Party.
CONDUCT OF MAJOR SUPPLIERS
Treatment by Major Suppliers
1. Each Party shall ensure that any major supplier in its territory accords suppliers of
public telecommunications services of the other Party treatment no less favorable than

39

such major supplier accords to itself, its subsidiaries, its affiliates, or any nonaffiliated service supplier regarding:
(a) the availability, provisioning, rates, or quality of like public telecommunications
services; and
(b) the availability of technical interfaces necessary for interconnection.
A Party shall assess such treatment on the basis of whether such suppliers of public
telecommunications services, subsidiaries, affiliates, and non-affiliated service
suppliers are in like circumstances.
Competitive Safeguards
2. (a) Each Party shall maintain appropriate measures for the purpose of preventing
suppliers of public telecommunications services who, alone or together, are a major
supplier in its territory from engaging in or continuing anti-competitive practices.
(b) For purposes of subparagraph (a), anti-competitive practices include:
(i) engaging in anti-competitive cross-subsidization; (ii) using information obtained
from competitors with anti-competitive results; and (iii) not making available, on a
timely basis, to suppliers of public telecommunications services, technical
information about essential facilities and commercially relevant information that is
necessary for them to provide public telecommunications services.
Unbundling of Network Elements
3. (a) Recognizing that both Parties currently provide for access to unbundled network
elements, each Party shall provide its telecommunications regulatory body the
authority to require that major suppliers in its territory provide suppliers of public
telecommunications services of the other Party access to network elements on an
unbundled basis at terms, conditions, and cost-oriented rates, that are reasonable, nondiscriminatory (including with respect to timeliness), and transparent for the supply of
public telecommunications services.
(b) Which network elements will be required to be made available in the territory of a
Party, and which suppliers may obtain such elements, shall be determined in
accordance with national law and regulation.
(c) In determining the network elements to be made available, a Partys
telecommunications regulatory body shall consider, at a minimum, in accordance with
national law and regulation:
(i) whether access to such network elements as are proprietary in nature are necessary;
and whether the failure to provide access to such network elements would impair the
ability of suppliers of public telecommunications services of the other Party to
provide the services it seeks to offer; or
(ii) whether the network elements can be replicated or obtained from other sources at
reasonable rates, such that the unavailability of these network elements from the
major supplier will not impair the ability of other suppliers of public
telecommunications services to provide a competing service; or
(iii) whether the network elements are technically or operationally required for the
provision of a competing service; or
(iv) other factors as established in national law; as that body construes these factors.

40

Co-Location
4. (a) Each Party shall ensure that major suppliers in its territory provide to suppliers
of public telecommunications services of the other Party physical co-location, at
premises owned or controlled by the major supplier, of equipment necessary for
interconnection or access to unbundled network elements on terms and conditions,
and at cost-oriented rates, that are reasonable, non-discriminatory (including with
respect to timeliness), and transparent.
(b) Where physical co-location is not practical for technical reasons or because of
space limitations, each Party shall ensure that major suppliers in its territory provide
or facilitate virtual co-location on terms and conditions, and at costoriented rates, that
are reasonable, non-discriminatory (including with respect to timeliness), and
transparent.
(c) Each Party may determine, in accordance with national law and regulation, which
premises in its territory shall be subject to subparagraphs (a) and (b)
Resale
5. Each Party shall ensure that major suppliers in its territory:
(a) offer for resale, at reasonable rates, to suppliers of public telecommunications
services of the other Party, public telecommunications services that such major
supplier provides at retail to end-users; and
(b) do not impose unreasonable or discriminatory conditions or limitations on the
resale of such public telecommunications services.
Poles, Ducts, and Conduits
6. (a) Each Party shall ensure that major suppliers in its territory provide access to
poles, ducts, and conduits, owned or controlled by such major suppliers to suppliers of
public telecommunications services of the other Party, under terms, conditions, and
cost-oriented rates, that are reasonable, non-discriminatory (including with respect to
timeliness), and transparent.
(b) Nothing shall prevent a Party from determining, under its domestic law and
regulation, which particular structures owned or controlled by the major suppliers in
its territory, are required to be made available in accordance with paragraph (a)
provided that this is based on a determination that such structures cannot feasibly be
economically or technically substituted in order to provide a competing service.
Number Portability
7. Each Party shall ensure that major suppliers in its territory provide number
portability to the extent technically feasible, on a timely basis and on reasonable terms
and conditions.
Interconnection
8. (a) General Terms and Conditions
Each Party shall ensure that any major supplier in its territory provides
interconnection for the facilities and equipment of suppliers of public
telecommunications services of the other Party:
(i) at any technically feasible point in the major suppliers network;

41

(ii) under non-discriminatory terms, conditions (including technical standards and

specifications), and rates;
(iii) of a quality no less favorable than that provided by such major supplier for its
own like services or for like services of non-affiliated suppliers of public
telecommunications services or for its subsidiaries or other affiliates;
(iv) in a timely fashion, on terms, conditions, (including technical standards and
specifications), and cost-oriented rates, that are transparent, reasonable, having regard
to economic feasibility, and sufficiently unbundled so that the supplier need not pay
for network components or facilities that it does not require for the service to be
provided; and
(v) upon request, at points in addition to the network termination points offered to the
majority of suppliers of public telecommunications services, subject to charges that
reflect the cost of construction of necessary additional facilities.
(b) Options for Interconnecting with Major Suppliers
Each Party shall ensure that suppliers of public telecommunications services of the
other Party may interconnect their facilities and equipment with those of major
suppliers in its territory pursuant to at least one of the following options:
(i) a reference interconnection offer or another standard interconnection offer
containing the rates, terms, and conditions that the major supplier offers generally to
suppliers of public telecommunications services; or
(ii) the terms and conditions of an existing interconnection agreement or through
negotiation of a new interconnection agreement.
(c) Public Availability of Interconnection Offers
Each Party shall require each major supplier in its territory to make publicly available
either a reference interconnection offer or another standard interconnection offer
containing the rates, terms, and conditions that the major supplier offers generally to
suppliers of public telecommunications services.
(d) Public Availability of the Procedures for Interconnection Negotiations
Each Party shall make publicly available the applicable procedures for
interconnection negotiations with major suppliers in its territory.
(e) Public Availability of Interconnection Agreements Concluded with Major
Suppliers
(i) Each Party shall require major suppliers in its territory to file all interconnection
agreements to which they are party with its telecommunications regulatory body.
(ii) Each Party shall make available for inspection to suppliers of public
telecommunications services which are seeking interconnection, interconnection
agreements in force between a major supplier in its territory and any other supplier of
public telecommunications services in such territory, including interconnection
agreements concluded between a major supplier and its affiliates and subsidiaries.
(f) Resolution of Interconnection Disputes
Each Party shall ensure that suppliers of public telecommunications services of the
other Party, that have requested interconnection with a major supplier in the Partys
territory have recourse to a telecommunications regulatory body to resolve disputes
regarding the terms, conditions, and rates for interconnection within a reasonable and
publicly available period of time.

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Provisioning and Pricing of Leased Circuits Services

9. (a) Each Party shall ensure that major suppliers of leased circuits services in its
territory provide enterprises of the other Party leased circuits services that are public
telecommunications services, on terms and conditions under pricing structures, and at
rates that are reasonable, non-discriminatory (including with respect to timeliness),
and transparent.
(b) Each Party may determine whether rates for leased circuits services in its territory
are reasonable by taking into account the rates of like leased circuits services in
comparable markets in other countries.

SUBMARINE CABLE LANDING STATIONS

1. Where under national law and regulation, a Party has authorized a supplier of
public telecommunications services in its territory to operate a submarine cable
system (including the landing facilities and services) as a public telecommunications
service, that Party shall ensure that such supplier provides that public
telecommunications service to suppliers of public telecommunications services of the
other Party on reasonable terms, conditions, and rates that are no less favorable than
such supplier offers to any other supplier of public telecommunications services in
like circumstances.
2. Where submarine cable landing facilities and services cannot be economically or
technically substituted, and a major supplier of public international
telecommunication services that controls such cable landing facilities and services has
the ability to materially affect the price and supply for those facilities and services for
the provision of public telecommunications services in a Partys territory, the Party
shall ensure that such major supplier:
(a) permits suppliers of public telecommunications services of the other Party to:
(i) use the major suppliers cross-connect links in the submarine cable landing station
to connect their equipment to backhaul links and submarine cable capacity of any
supplier of telecommunications; and (ii) co-locate their transmission and routing
equipment used for accessing submarine cable capacity and backhaul links at the
submarine cable landing station at terms, conditions, and cost-oriented rates, that are
reasonable and non-discriminatory; and
(b) provides suppliers of telecommunications of the other Party submarine cable
capacity, backhaul links, and cross-connect links in the submarine cable landing
station at terms, conditions, and rates that are reasonable and non-discriminatory.
INDEPENDENT REGULATION AND PRIVATIZATION
1. Each Party shall ensure that its telecommunications regulatory body is separate
from, and not accountable to, any supplier of public telecommunications services. To
this end, each Party shall ensure that its telecommunications regulatory body does not
hold any financial interest or maintain an operating role in such a supplier.

43

2. Each Party shall ensure that the decisions of, and procedures used by its
telecommunications regulatory body are impartial with respect to all interested
persons. To this end, each Party shall ensure that any financial interest that it holds in
a supplier of public telecommunications services does not influence the decisions of
and procedures of its telecommunications regulatory body.
3. Where a Party has an ownership interest in a supplier of public telecommunications
services, it shall notify the other Party of any intention to eliminate such interest as
soon as feasible.
UNIVERSAL SERVICE
Each Party shall administer any universal service obligation that it maintains in a
transparent, nondiscriminatory, and competitively neutral manner and shall ensure
that its universal service obligation is not more burdensome than necessary for the
kind of universal service that it has defined.
LICENSING PROCESS
1. When a Party requires a supplier of public telecommunications services to have a
license, the Party shall make publicly available: (a) all the licensing criteria and
procedures it applies;
(b) the period of time normally required to reach a decision concerning an application
for a license; and (c) the terms and conditions of all licenses it has issued.
2. Each Party shall ensure that an applicant receives, upon request, the reasons for the
denial of a license.
ALLOCATION AND USE OF SCARCE RESOURCES
1. Each Party shall administer its procedures for the allocation and use of scarce
resources, including frequencies, numbers, and rights of way, in an objective, timely,
transparent, and nondiscriminatory fashion.
2. Each Party shall make publicly available the current state of allocated frequency
bands but shall not be required to provide detailed identification of frequencies
assigned or allocated by each government for specific government uses.
ENFORCEMENT
Each Party shall ensure that its telecommunications regulatory body maintains
appropriate procedures and authority to enforce domestic measures relating to the
obligations under Articles 9.2 to 9.5 on telecom transport networks; obligations
relating to telecom suppliers; additional obligations of major suppliers; submarine
cable landing stations. Such procedures and authority shall include the ability to
impose effective sanctions, which may include financial penalties, injunctive relief
(on an interim or final basis), or modification, suspension, and revocation of licenses.
RESOLUTION OF DOMESTIC TELECOMMUNICATIONS DISPUTES
Recourse to Telecommunications Regulatory Bodies
1. Each Party shall ensure that enterprises of the other Party have recourse (within a
reasonable period of time) to a telecommunications regulatory body or other relevant
body to resolve disputes arising under domestic measures addressing a matter set out
in Articles 9.2 through 9.5.

44

Reconsideration
2. Each Party shall ensure that any enterprise aggrieved or whose interests are
adversely affected by a determination or decision of the telecommunications
regulatory body may petition that body for reconsideration of that determination or
decision. Neither Party may permit such a petition to constitute grounds for noncompliance with such determination or decision of the telecommunications regulatory
body unless an appropriate authority stays such determination or decision.
Judicial Review
3. Each Party shall ensure that any enterprise aggrieved by a determination or decision
of the telecommunications regulatory body may obtain judicial review of such
determination or decision by an impartial and independent judicial authority.
TRANSPARENCY
Each Party shall ensure that:
1. rulemakings, including the basis for such rulemakings, of its telecommunications
regulatory body and end-user tariffs filed with its telecommunications regulatory body
are promptly published or otherwise made available to all interested persons;
2. interested persons are provided with adequate advance public notice of and the
opportunity to comment on any rulemaking proposed by the telecommunications
regulatory body;
3. its measures relating to public telecommunications services are made publicly
available, including: (a) tariffs and other terms and conditions of service; (b)
specifications of technical interfaces; (c) conditions applying to attachment of
terminal or other equipment to the public telecommunications transport network; and
(d) notification, permit, registration, or licensing requirements, if any; and
4. information on bodies responsible for preparing, amending, and adopting standards
related measures is made publicly available.
FLEXIBILITY IN THE CHOICE OF TECHNOLOGIES
A Party shall endeavor not to prevent suppliers of public telecommunications services
from having the flexibility to choose the technologies that they use to supply their
services, including commercial mobile services, subject to the ability of each Party to
take measures to ensure that end-users of different networks are able to communicate
with each other.
FORBEARANCE AND MINIMAL REGULATORY ENVIRONMENT
The Parties recognize the importance of relying on market forces to achieve wide
choice and efficient supply of telecommunications services. To this end, each Party
may forbear from applying regulation to a telecommunications service that such Party
classifies, under its laws and regulations, as a public telecommunications service upon
a determination by its telecommunications regulatory body that:
(a) enforcement of such regulation is not necessary to prevent unreasonable or
discriminatory practices;
(b) enforcement of such regulation is not necessary for the protection of consumers;
and
(c) forbearance is consistent with the public interest, including promoting and
enhancing competition among suppliers of public telecommunications services.

45

In a side letter from Singapores Trade Minister to the USTR, the Singapore
government states it is committed to privitisation of Sing Tel and ST Telemedia
aimed at reducing its stakes in these companies to zero. Singapore will establish
a plan to divest its majority share in these two companies; it understands the
USs interest in seeing such divestment completed as soon as possible. The
government exercises no control over the commercial policy of the companies,
and does not have veto rights. The companies do not get government subsidies
and are fully subject to independent regulatory oversight.

10. FINANCIAL SERVICES

In US FTAs with developing countries, there is usually a special chapter on financial
services. The FTA with Malaysia will not be an exception.
The financial services chapter in the US-Singapore FTA applies to investors and
investments as well as cross-border trade. Besides the usual principles of national
treatment and MFN, the market access clause states that measures by a Party shall not
impose limitations on the number of financial institutions, the total value of financial
service transactions, the total number of financial service operations and the total
number of natural persons employed; nor should the parties restrict or require specific
types of legal entity or joint venture. Each Party shall also permit a financial
institution of the other Party to supply any new financial service that is permitted to
its own institution. There are also liberalization clauses for cross-border trade and
senior management and boards of directors.
There are also annexes of non-conforming measures similar to the chapter on
services in general, as well as general exceptions.
There are generally similar clauses on financial services in the US-Chile agreement.
To meet the requirements and obligations desired by the US in the financial services,
Malaysia would have to very significantly re-orientate its policies on these two key
sectors, with also significant consequences.
Below are some key elements of the Financial Services chapter in the SingaporeUS FTA, which gives a picture of what is being demanded by the US for the
Malaysia-US FTA.
SCOPE AND COVERAGE: Measures relating to: (a) financial institutions of the
other Party;
(b) investors of the other Party, and investments of such investors, in financial
institutions in the Partys territory; and (c) cross-border trade in financial services.
Several provisions of the services and investment chapters also apply to this chapter,
including those on Expropriation, Transfers of funds, Investor-State Dispute
Settlement (for claims that a Party has breached Articles on Expropriation, Transfers,
Denial of Benefits, and Special Formalities and Information Requirements).
46

NATIONAL TREATMENT
1. Each Party shall accord to investors of the other Party treatment no less favorable
than that it accords to its own investors, in like circumstances, with respect to the
establishment, acquisition, expansion, management, conduct, operation, and sale or
other disposition of financial institutions and investments in financial institutions in
its territory.
2. Each Party shall accord to financial institutions of the other Party and to
investments of investors of the other Party in financial institutions treatment no less
favorable than that it accords to its own financial institutions, and to investments of its
own investors in financial institutions, in like circumstances, with respect to the
establishment, acquisition, expansion, management, conduct, operation, and sale or
other disposition of financial institutions and investments.
3. For purposes of the national treatment obligations, a Party shall accord to crossborder financial service suppliers of the other Party treatment no less favorable than
that it accords to its own financial service suppliers, in like circumstances, with
respect to the supply of the relevant service.
MOST-FAVORED-NATION TREATMENT
1. Each Party shall accord to investors of the other Party, financial institutions of the
other Party, investments of investors in financial institutions, and cross-border
financial service suppliers of the other Party treatment no less favorable than that it
accords to the investors, financial institutions, investments of investors in financial
institutions and cross-border financial service suppliers of a non-Party, in like
circumstances.
2. A Party may recognize prudential measures of the other Party or of a non-Party in
the application of measures covered by this Chapter.
3. A Party according recognition of prudential measures under paragraph 2 shall
provide adequate opportunity to the other Party to demonstrate that circumstances
exist in which there are or would be equivalent regulation, oversight, implementation
of regulation, and, if appropriate, procedures concerning the sharing of information
between the Parties.
MARKET ACCESS FOR FINANCIAL INSTITUTIONS
A Party shall not adopt or maintain, with respect to financial institutions of the other
Party measures that:
(a) impose limitations on (i) the number of financial institutions whether in the form
of numerical quotas, monopolies, exclusive service suppliers or the requirements of
an economic needs test;
(ii) the total value of financial service transactions or assets in the form of numerical
quotas or the requirement of an economic needs test;
(iii) the total number of financial service operations or the total quantity of financial
services output expressed in terms of designated numerical units in the form of quotas
or the requirement of an economic needs test; or
(iv) the total number of natural persons that may be employed in a particular financial
service sector or that a financial institution may employ and who are necessary for,

47

and directly related to, the supply of a specific financial service in the form of a
numerical quota or the requirement of an economic needs test; or
(b) restrict or require specific types of legal entity or joint venture through which a
financial institution may supply a service.
CROSS-BORDER TRADE IN FINANCIAL SERVICES
1. Each Party shall permit, under terms and conditions that accord national treatment,
cross-border financial service suppliers of the other Party to supply the services it has
specified in an Annex.
2. Each Party shall permit persons located in its territory, and its nationals wherever
located, to purchase financial services from cross-border financial service suppliers of
the other Party located in the territory of the other Party. This obligation does not
require a Party to permit such suppliers to do business or solicit in its territory.
NEW FINANCIAL SERVICES
Each Party shall permit a financial institution of the other Party to supply any new
financial service that the first Party would permit its own financial institutions, in like
circumstances, to supply without additional legislative action by the first Party. A
Party may determine the institutional and juridical form through which the new
financial service may be supplied and may require authorization for the supply of the
service. Where a Party requires such authorization of the new financial service, a
decision shall be made within a reasonable time and the authorization may only be
refused for prudential reasons.
SENIOR MANAGEMENT AND BOARDS OF DIRECTORS
1. A Party may not require financial institutions of the other Party to engage
individuals of any particular nationality as senior managerial or other essential
personnel.
2. A Party may not require that more than a simple majority of the board of directors
of a financial institution of the other Party be composed of nationals of the Party,
persons residing in the territory of the Party, or a combination thereof.
NON-CONFORMING MEASURES
Articles relating to national treatment, MFN treatment, market access, cross-border
trade, senior management/boards) that do not apply to:
(a) any existing non-conforming measure that is maintained by a Party listed in the
relevant Annex.
(b) the continuation or prompt renewal of any non-conforming measure referred to in
subparagraph (a);
(c) an amendment to any non-conforming measure referred to in subparagraph (a) to
the extent that the amendment does not decrease the conformity of the measure, as
it existed immediately before the amendment.
EXCEPTIONS
A Party shall not be prevented from adopting or maintaining measures for prudential
reasons.

48

Nothing in this Chapter applies to nondiscriminatory measures of general application

taken by any public entity in pursuit of monetary and related credit policies or
exchange rate policies. (However this paragraph shall not affect a Partys obligations
on Transfers and Payments (in the services chapter) and on Transfers and Performance
Requirements (in the investment chapter).
A Party may prevent or limit transfers by a financial institution to an affiliate through
measures relating to maintenance of the safety, soundness, integrity or financial
responsibility of financial institutions.
TRANSPARENCY
There are many clauses on transparency including: Each Party shall publish in
advance any regulations it proposes to adopt; and provide the other Party a reasonable
opportunity to comment on such proposed regulations;
A regulatory authority shall make an administrative decision on a completed
application of an investor in a financial institution, a financial institution or a crossborder financial service supplier of the other Party relating to the supply of a financial
service within 120 days, and shall promptly notify the applicant of the decision.;
At the time it adopts final regulations, a Party should, to the extent practicable,
address in writing substantive comments received from interested persons with
respect to the proposed regulations.
OTHER
Other provisions: (1) establish a FINANCIAL SERVICES COMMITTEE to
supervise the implementation of this Chapter and its further elaboration; and consider
issues referred to it by a Party; (2) deal with provisions on CONSULTATIONS
regarding any matter arising under this Agreement that affects financial services; and
DISPUTE SETTLEMENT.

11. LIBERALISATION OF GOVERNMENT PROCUREMENT.

A. Government Procurement in Trade Agreements
Government procurement is in some countries even more important than trade in
terms of the value and volume of goods and services involved. In some countries it
could account for 15 to 30 per cent of the GNP. It comprises the expenditures of
government on goods and services (including projects), excluding personnel costs. It
is a very important tool of government policy (economic, social and political). Most
governments have guidelines that favour the granting of projects to local companies
and people (for example by reserving some purchases or projects only for locals, or
by allowing local proposals to be up to 10 or 20 per cent higher in cost than foreign
ones).

49

Procurement has been excluded from the rules of the WTO, such as market access and
national treatment. There is only a plurilateral agreement on government procurement
in the WTO, which is not compulsory for WTO members to join, and almost no
developing country has signed up to it.
The developed countries tried very hard to introduce a multilateral agreement on
government procurement, which would make it mandatory for all WTO members to
join. The developing countries were extremely reluctant to agree, as they consider
this to be a subject of national policy and that the trade rules of WTO are unsuitable
for this subject. Developed countries then proposed that an agreement confined to
only transparency in government procurement be introduced, which would exclude
market access or national treatment. In other words, governments would only have to
introduce more transparent rules on what projects are up for tender, who is eligible to
apply, and the results, but would not have to open up the projects to foreigners. After
years of discussion, even this limited agreement was rejected in July 2004, and
remains outside the WTO arena.
As procurement is a trillion-dollar business, the developed countries are determined to
break into this business for their companies. They are thus now including a fullfledged procurement chapter (dealing with market access and national treatment) in
their FTAs.
B. Features of government procurement in FTAs involving USA
In the FTAs involving the US, the chapter on government procurement goes far
beyond what was being discussed in the WTO for many years (with the discussions
eventually suspended). The WTO working group had been given the mandate only to
discuss transparency in government procurement, with possible rules to be limited
to only the transparency aspects, and excluding market access aspects. However, the
FTA chapter on government procurement covers the market access aspects, i.e.
enabling foreign companies to bid on equal terms with local companies for
government contracts. This would drastically limit or eliminate policy space for the
developing-country government to give preferential treatment to local companies and
persons, and remove a crucial instrument for boosting the domestic economy.
The FTA chapter typically involves: (1) Market access for each party to the
government procurement market of the other party; (2) National treatment for the
foreign firms and products; (3) A wide definition of government procurement,
involving various levels of government (national, regional and municipal) and
various types of government business. (4) The chapter also contains threshold
levels representing monetary values; the agreement applies only if the contracts put
out by the governments are valued at the threshold levels or above.
The US-Chile FTA provides an example of such a government procurement chapter.
One of the objectives is to strive to provide comprehensive coverage of
procurement markets by eliminating market access barriers to the supply of goods
and services, including construction services.

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The scope and coverage applies to any measure relating to a procurement by any
contractual means, including purchase and rental or lease, with or without an option
to buy, build-operate-transfer contracts, and public works concession contracts.
Not included are non-contractual agreements or assistance provided by government,
such as grants, loans and subsidies; purchases funded by international grants; hiring
of government employees; and services for regulated financial institutions.
The agreement covers procurement carried out by entities listed in an annex. For
Chile, these include 20 federal Ministries, many regional governments and 341
municipalities.
For the US, they include 79 federal departments and many offices of state
governments.
The same annex, has also specified the same threshold levels for both countries.
The threshold levels are $56,190 for procurement of goods and services and $6.48
million for procurement of construction services for the central government level
and threshold levels of $460,000 and $6.48 million respectively for the sub-central
level.
The main general principles are National Treatment and Non-Discrimination. In any
measure governing government procurement, each Party shall give to the goods and
services of the other Party, and to the suppliers of the other Party, treatment no less
favourable than the most favourable treatment the Party accords to its own goods,
services and suppliers.
Also, neither Party may treat a locally established supplier less favourably than
another local supplier on the basis of degree of foreign affiliation or ownership, or
discriminate against a locally established supplier on the basis that the goods or
services offered by that supplier are goods and services of the other Party.
The major implications of this are that (1) The government must give the foreign
countrys companies treatment as good as or better than it gives its national
companies; (2) Preferential treatment to national companies in the award of
contracts will not be allowed in future; (3) If a local company is providing or
distributing the goods and services of the foreign country, it shall not be
discriminated against as compared to a local company supplying its own goods and
services that are locally made.
Another general principle is the prohibition of offsets. It says: An entity shall not
consider, seek or impose offsets at any stage of a procurement. Several developing
countries make use of offsets to reduce the net cost of purchase or payment for
goods and services procured.
The agreement includes a provision requiring the entities to publish in advance a
notice inviting interested suppliers to submit tenders for that procurement. The
notice will include a description of the procurement, conditions for suppliers to
fulfill, time limits to submit tenders and delivery dates for the goods to be procured.

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There are many detailed provisions on (1) publication of procurement measures (2)
publication of notice of intended procurement; (3) time limits for the tendering
process; (4) information on intended procurements; (4) technical specifications; (5)
conditions for participation; (6) tendering procedures; (7) awarding of contracts;
(8) information on awards; (9) ensuring integrity in procurement practices; (10)
domestic review of supplier challenges.
These provisions in effect formulate in detail what a countrys procurement policy
and practice should be. For example, under awarding of contracts, there is the
prescriptive provision that the government institution shall award the contract to
the supplier that the entity has determined to be fully capable of undertaking the
contract and whose tender is determined to be the most advantageous in terms of the
requirements and evaluation criteria set out in the tender documentation.
Under domestic review of supplier challenges, the companies applying for
government contracts can bring cases to an independent impartial administrative or
judicial authority. The authority must be given the opportunity to take prompt
interim measures to preserve the suppliers opportunity to participate in the
procurement and to ensure the country complies with measures in the procurement
chapter. This includes suspending the contract award or the performance of a
contract that has already been awarded.
Also the country has to ensure that all documents related to a challenge to a
procurement are made available to the review authority. The authority must allow
the supplier to review relevant documents and to be heard in a timely manner, and
the entity complained against must respond in writing to the suppliers challenge,
and the authority must give prompt decisions in writing with an explanation of the
grounds for each decision.
The country can also modify its coverage only if it offers acceptable compensatory
adjustments to the other party to maintain a level of coverage comparable to th that
existing before the adjustment, within 30 days.
A procurement committee shall also be set up, including to consider further
negotiations to broaden the coverage including with respect to sub-federal entities
and state-owned enterprises.
In terms of the treatment of which goods and services are covered by the agreement,
the US FTAs seem to take the following approach. Firstly, there are thresholds for
the value of goods, services and construction services; only those projects valued at
the threshold levels or above are covered. Each country lists the departments in the
federal and sub-federal level, and the other covered entities under which the
thresholds apply. Secondly, for goods, each country lists down the government
departments that will be covered by the agreement. Thirdly, for services, each
country indicates the departments that are excluded from coverage.

C. National policy changes needed due to FTA

52

To implement the obligations, a developing country would have to undertake

reforms and new procedures.
Most developing countries provide preferential treatment to local suppliers in
government procurement. Thus, the most important reform would be to give up this
preferential treatment, and to give equal (or superior) treatment to foreign suppliers,
in accordance with the FTA. There are many consequences for such a significant
change in policy.
There are also many new procedures that have to be followed. For instance, the
FTA specifies what kind of conditions can or cannot be imposed on suppliers
interested in participating in a procurement. It specifies what kind of tendering
procedures should be followed. Importantly, it obliges the country to set up
independent review institutions and processes to enable a supplier to challenge the
decision on granting of procurement contracts.
D. Erosion of policy space and in the role of government procurement
There is a significant role of government procurement in socio-economic
development and national policy. This role would be much eroded by the FTA.
A large part of an average developing countrys income is made up of the spending of
its federal government, on the purchase of goods, payment for all kinds of services,
and a variety of projects, from the building of schools and roads to billion-dollar
mega-dams and industrial complexes.
Add also the expenditure of state and municipal governments, statutory bodies and
state-run enterprises, and the total amount of money spent by the public sector
becomes enormous; for many countries, much larger even than their total imports or
exports. For example, in some countries, public sector expenditure may comprise 30
to 50 percent of GNP, while imports may comprise 10 to 30 percent of GNP. Even if
the salaries of government employees are excluded, government expenditure is often
higher than imports.
So far, governments have been able to decide for themselves how this money is to be
spent, the system of procuring goods and services, and the tendering, scrutiny of
applications and award of projects, subject of course to each countrys laws and
procedures.
The system of government procurement has been taken for granted as very much a
matter of national prerogative, often challenged in some countries by Parliaments,
opposition parties or public interest groups, but seldom or never questioned as an
issue that lies within the sovereign right of a country to determine.
Because of the sensitive nature of government procurement, government procurement
has so far been excluded from the rules (such as national treatment and most favoured
nation) of the WTO, including the GATT, agriculture agreement and the services
agreement. There is a plurilateral agreement on government procurement; however

53

members can choose whether or not to join it, and most developing countries have
chosen not to do so.
Government procurement and policies related to it have very important economic,
social and even political roles in developing countries:
--- The level of expenditure, and the attempt to direct the expenditure to locally
produced materials, is a major macroeconomic instrument, especially during
recessionary periods, to counter economic downturn. Governments often change
the level of expenditure as the major tool of fiscal policy to steer the level of
demand and growth in the economy.
--- In many developing countries, there are national policies to give preference to
local firms, suppliers and contractors, in order to boost the domestic economy and
participation of locals in economic development and benefits. In fact, government
procurement is a major policy tool for putting into effect a policy of increasing the
opportunities for local enterprises to increase their share of the economy.
--- Also in several developing countries, there are policies aimed at providing
preferences for certain groups or communities, especially those that are underrepresented in economic standing. Procurement policy is a major policy tool for
attaining greater balance in the participation shares among various communities
within a nation. Similarly, it can be used to redress regional imbalances, for
instance by specifying that certain provinces be allocated a particular share of
procurement business.
--- For procurement or concessions where foreign firms are invited to bid, there
could be a preference to give the award to firms from particular countries (eg other
developing countries, or particular developed countries, with which there is a
special commercial or political relationship).
E. Effects of government procurement liberalization under FTA
There would be serious effects from a FTAs government procurement chapter on
developing countries
Countries that sign on to FTAs containing a chapter on government procurement in
future will not be allowed to give preferences to local companies for the supply of
goods and services and for the granting of or concessions for implementing
projects. (There is however a positive list approach where parties state what
sectors they are offering, and thresholds). The effects on developing countries
would be severe.
Should government procurement be opened up through the national treatment and
MFN principles, the scope and space for a government to use procurement as an
instrument for development would be severely curtailed. For example:

If the foreign share increases, there would be a leakage in

government attempts to boost the economy through increased spending, during a
54

downturn. This is because an increased part of any expansion in government

expenditure would be spent on imported products, thus decreasing the multiplier
effects of public spending on the domestic economy.

The ability to assist local companies, and particular socioeconomic groups or ethnic communities, or underdeveloped regions, would be
seriously curtailed. This is because national treatment would have to be given to
foreign firms to bid for supplying goods and services as well as development
projects.

The ability to give preferences to certain foreign countries

would similarly be curtailed, under the most-favoured-nation clause. [This would
be the case if government procurement became a multilateral agreement in the
WTO].
Given the great importance of government procurement policy as an important
tool required for economic and social development and nation building, it is
imperative that developing countries retain the right to have full autonomy and
flexibility over its procurement policy.
Therefore, it is important to avoid government procurement as an item in a
bilateral trade or economic agreement. This is especially so because the
developing countries have fought such a controversial battle to exclude this as
a negotiating issue within the current Doha work programme in the WTO. At
the least, there should be national debates about the ramifications of having a
government procurement clause within an FTA.
In an FTA involving a developed and a developing country, it is more likely that
the developed country can take advantage of a government procurement market
access chapter as it has the supply capacity. Most developing countries will not be
able to take advantage, or at least to the same degree, because they lack the supply
capacity. Thus there is an inherent imbalance in including this in an FTA.
F. GOVERNMENT PROCUREMENT:
MALAYSIA

IMPLICATIONS OF MUFTA FOR

A government procurement chapter in an FTA with the USA will have

especially serious effects on Malaysia, including the loss of policy space to make
use of government procurement as a main instrument for national economic,
social and political goals.
In Malaysia, government procurement and expenditure have been major
instruments for economic management and for socio-economic planning, as
well as political stability among ethnic communities.
The FTA will oblige Malaysia to give market access and national treatment to
US companies in its government procurement business. Present policies that
reserve contracts to supply goods and services to only local firms, and that give
preference to locals in other projects, will have to be changed.

55

The levels of procurement, especially if state and local authorities are also
included, and if government-related enterprises are included, are very large.
According to estimates by the WTO, the Malaysian government procurement
market was worth RM 92.7 billion or 20.6% of GDP in 2004, of which over
RM 49 billion was federal government expenditure on supplies and services,
and development. A further RM 33.5 billion was expenditure by non-financial
public enterprises (GLCs). The estimates are based on budget allocations. The
WTO itself says that: The scale of government procurement in Malaysia
provides a great deal of scope for its use as an instrument of economic policy.

Malaysian Government procurement, 2001-04

(RM million)
Federal Government expenditure
on supplies and services
Federal
Government
development expenditure
State Government development
expenditure
Local Government expenditure
Statutory bodies development
expenditure
Non-financial public enterprises
Total

2001

2002

2003

2004

10,703

11,269

13,968

18,133

35,235

35,977

39,353

31,131

4,704

3,772

3,817

4,710

2,176
3,088

2,322
3,841

2,482
4,180

1,931
3,374

24,033
79,939

32,297
89,478

40,160
103,960

33,454
92,733

Source:World Trade Organisation (2005), Trade Policy Review Malaysia. Estimated

from Ministry of Finance, Economic Report 2004/2005, Annex tables 4.4, 4.6,
4.10, 4.11, 4.12 and 4.13. Available at: http://www.treasury.gov.my/le2005/le05.htm.
The WTO report says that:
Malaysia's government procurement policy is consistent with the national
policy of nation-building. It is used to support national objectives such as
encouraging greater participation of the bumiputeras (indigenous Malays), in
the economy, transfer of technology to local industries, reducing the outflow
of foreign exchange, creating opportunities for local service-oriented
companies, and enhancing export capabilities.
It intends to maintain its requirement for all government agencies to procure
supplies and services from local sources. International tenders will be invited
only if goods and services are not available locally. Bumiputera tenders
receive preferential treatment, which varies from 10% for contracts of
56

RM 100,000 to 2.5% for contracts of over RM 15 million. Locally produced

goods receive a preference of 10% for contracts below RM 10 million and up
to 3% above this value. The Malaysian authorities have pointed out that
tenders will be invited only from local manufacturers and therefore
Bumiputera manufacturers will not be competing with international bidders.
Where local contractors do not have the requisite expertise and capability,
agencies may call for joint-venture bids (between local and foreign
contractors) to encourage the transfer of technology. For projects funded by
foreign sources, procedures for tenders are as stipulated by the respective
sources.
The Ministry of Finance has main responsibility for government procurement
issues. The Ministry's government procurement management division
undertakes open local tenders for items such as office supplies. Government
agencies, both federal and state, are then required to purchase those goods
from the successful bidder. All goods and services tenders in excess of RM 30
million and works (such as construction or engineering services) over RM 50
million must be referred to the Ministry of Finance for decision. Tenders
below these thresholds can be considered by Tender Boards in each federal
government ministry.
Government-linked companies (GLCs) require government approval for
purchases exceeding defined limits and, for example, Petronas, Telecom
Malaysia, Tenaga Nasional have to refer to the Ministry of Finance when
procuring goods and services valued at or exceeding RM 100 million. The
Government encourages GLCs to follow government policies on procurement
as far as possible.
Regarding the legal and regulatory framework, the Government Contract Act
1949 provides legal validity for the ministries to represent the Government in
engaging contracts and the Financial Procedure Act 1957 outlines the mode of
control and management of public finances. The latter lays out procedures for
the collection and payment of public monies as well as procedures for the
purchase, custody and disposal of public property. In addition, government
procurement is regulated by treasury instructions, treasury circulars, and
central contract circulars.
Malaysia aims to achieve a high standard of transparency in its procurement
policies and practices; it subscribes to the elements agreed upon in the NonBinding Principles and to the APEC Transparency Standards. All agencies are
required to procure all supplies, services and works above RM 200,000
through open tenders. To ensure transparency, tenders must be advertised
widely in local daily newspapers, agencies' websites and on the
myGovernment Portal. In 2000, the Government introduced an electronic
procurement (eP) system, an on-line system designed to encourage
competition among contractors and to expedite the procurement processes.
The eP system also aims to reduce bidding costs and make the process more
efficient and transparent; it is in the second phase of implementation. In
2004, the Treasury launched quotation and tendering modules in 14 selected
ministries on a pilot basis.

57

The following functions have been made use of by Malaysia as a key policy tool:

Malaysia has made use of the level of government expenditure as a

means to influence the level and growth of economic output, for example
by boosting public-sector spending during recessionary conditions, thus
reducing economic instability.
Procurement has been used to expand the opportunities for local
enterprises. For example, the use of local banks in government business
was a major method of increasing the share of local banks in total
banking business, after Independence.
Procurement policy has also been a major instrument in increasing the
opportunities for the Bumiputra community, for instance in construction
projects, within the context of the New Economic Policy and its
subsequent variations.
Procurement policies have in other ways been used to meet national
goals. For example, government has been encouraging the use of opensource software in government departments, in order to save costs
(commercial proprietary software is expensive and costs will increase)
and to gain a certain degree of non-dependence on one or a few
companies that own proprietary software.

If MUFTA is along the lines of other US FTAs, then it would result in Malaysia
having to change its procurement policies in many ways, and with many effects
(especially for departments whose procurement is offered):

For a large part of contracts and projects, the use Malaysian policy
can no longer be used as they have to be opened up to American firms.
The FTAs procurement chapters main provision is that in any measure
governing government procurement, each Party shall give to the goods
and services of the other Party, and to the suppliers of the other Party,
treatment no less favourable than the most favourable treatment the
Party accords to its own goods, services and suppliers.

This will result in greater leakage away from the national economy, as
the contracts won by American firms will have much less multiplier
effect on the domestic economy, thus limiting the use of government
expenditure as a tool to boost economic growth.

The present policy that tenders are only open to local firms will have to
be changed, to allow American firms to apply on terms that are as
favourable or more favourable than local firms, except for small projects
below the threshold levels.

The policy of giving up to 10% preference margin for Bumiputra firms

will also have to be changed, except for small contracts below the
threshold level.

58

These policies providing national treatment to Americans will also

have to apply to government-linked companies, which will not be able to
give preference to local firms to supply good or services.

The new policies will also apply to sub-federal entities, which include
state governments and probably municipal councils as well.

Another FTA provision would be that Malaysia cannot treat a locallybased supplier (who has more foreign affiliation or ownership) less
favourably than another local supplier (who has no or lesws foreign
affiliation and ownership). Malaysia also cannot discriminate against a
locally established supplier on the basis that the goods or services
offered by that supplier are goods and services of the other Party.

The major implications of this are that (1) The government must give
the foreign countrys companies treatment as good as or better than it
gives its national companies; (2) Preferential treatment to national
companies in the award of contracts will not be allowed in future; (3) If
a local company is providing or distributing the goods and services of
the foreign country, it shall not be discriminated against as compared to
a local company supplying its own goods and services that are locally
made.

Another general principle is the prohibition of offsets. It says: An

entity shall not consider, seek or impose offsets at any stage of a
procurement. Several developing countries make use of offsets to
reduce the net cost of purchase or payment for goods and services
procured.

One reason why the procurement chapter will have such a large effect is
that its scope and coverage is very broad, i.e. many levels of government
and many projects and contracts will be affected. In the US-Chile FTA,
one objective of the procuremnent chapter is to strive to provide
comprehensive coverage of procurement markets by eliminating market
access barriers to the supply of goods and services, including
construction services. The scope and coverage applies to any measure
relating to a procurement by any contractual means, including
purchase and rental or lease, with or without an option to buy, buildoperate-transfer contracts, and public works concession contracts.
Not included are non-contractual agreements or assistance provided by
government, such as grants, loans and subsidies; purchases funded by
international grants; hiring of government employees; and services for
regulated financial institutions.

The agreement covers procurement carried out by entities listed in an

annex, including federal Ministries, state governments and
municipalities. Government-linked companies and other entities could

59

also be covered. It can be expected that the US will insist on a

comprehensive list of government departments. Malaysia can list down
certain services to be exempted; however, it will be under pressure to
keep these to a minimum. In its FTA with the US, Singapore excluded
only a few services (such as research and development; police and
security, radio and TV, urban planning, asset management for managing
official foreign reserves, water supply; government printing).

Given the experience of some previous US FTAs, we can expect

threshold levels to be set at around US$56,190 for procurement of goods
and services and US $6.48 million for procurement of construction
services for the central government level and threshold levels of
$460,000 and $6.48 million respectively for the sub-central level.
Contracts and projects above the threshold levels will be covered.

The methods and procedures governing procurement would have to be

changed, including in (1) publication of procurement measures (2)
publication of notice of intended procurement; (3) time limits for the
tendering process; (4) information on intended procurements; (4)
technical specifications; (5) conditions for participation; (6) tendering
procedures; (7) awarding of contracts; (8) information on awards; (9)
ensuring integrity in procurement practices; (10) domestic review of
supplier challenges.

These FTA provisions in effect formulate in detail what Malaysias

procurement policy and practice should be. For example, under
awarding of contracts, there is the prescriptive provision that the
government institution shall award the contract to the supplier that the
entity has determined to be fully capable of undertaking the contract
and whose tender is determined to be the most advantageous in terms of
the requirements and evaluation criteria set out in the tender
documentation. Should an American (or even local) company not
agree that its application has been fairly treated, it can take the
government to court, demand that the documents and basis for decision
be revealed, and ask for a revision.

The court is called an independent impartial administrative or judicial

authority in the FTA. . The authority must be able to preserve the
opportunity of the supplier (who has made the complaint) to participate
in the procurement, including suspending the contract award or the
performance of a contract that has already been awarded. Malaysia
has to ensure that all documents related to a challenge to a
procurement are made available to the review authority. The authority
must allow the supplier to review relevant documents and to be heard in
a timely manner, and the entity complained against must respond in
writing to the suppliers challenge, and the authority must give prompt
decisions in writing with an explanation of the grounds for each
decision.

60

Malaysia can modify its coverage (of government procurement that falls
under the FTA) only if it offers acceptable compensatory adjustments
to the other party to maintain a level of coverage comparable to th that
existing before the adjustment, within 30 days.

A procurement committee shall also be set up, including to consider

further negotiations to broaden the coverage including with respect to
sub-federal entities and state-owned enterprises.
Thus there can be continuous pressure, even after the FTA is signed, to
extend further the coverage of the procurement that is to fall under the
FTA, and pressure on enforecement.

It is no exaggeration to state that the serious limits and conditions placed on

government policy should government procurement be integrated into the
WTO, would have very serious social, economic and political ramifications.
The main instrument for re-structuring Malaysian economy and society so as to
give more opportunities to local firms, especially Bumiputra firms, would be
very seriously eroded.
It was because of its awareness of the dangers of a procurement agreement that
Malaysia took a leading role to reject proposals by the developed countries to
introduce an agreement on transparency in government procurement at the
WTO. The Minister of Trade Rafidah Aziz played the leading role in putting
this subject off the table at the WTOs Cancun Ministerial conference in 2003.
The proposal only involved having greater transparency and did not include
market access or national treatment, yet it was considered too dangerous.
Malaysia has also not signed on to the plurilateral agreement on government
procurement at the WTO (which includes market access).
If it were to sign on to an FTA with the USA, Malaysia would have to undertake
the most strict market access/ national treatment rules far beyond what it had
rejected at the WTO. The US has made it clear it would not agree to an FTA
without a government procurement chapter, and it normally has a common
template for such a chapter.
The FTA also theoretically gives Malaysian firms the opportunity to have greater
access to the United States procurement market. However, in reality, the
opportunities and benefits are limited.
According to a press report: The US government will open approximately
US$250 billion worth of procurement to Malaysia under the US-Malaysia Free
Trade Agreement.
How much of this US$250billion are Malaysian companies likely to be able to
access if a Malaysia-USFTA is signed? In the WTO Secretariats 2006 trade
policy review for the USA (WT/TPR/S/160/Rev.1), it mentioned the US
Governments Federal Procurement Data System (FPDS), the upgraded version
of which is now at https://www.fpds.gov/.

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Based on a very quick analysis of the data in the FPDS database, it seems that
for the year 1/1/2005-31/12/2005:
94% of the action obligation (payments made or initial contract value)
went to companies located in the USA.
The remaining 6% was split between companies located in 170 countries
and territories. (WT/TPR/S/160/Rev.1 explains how so many countries
are eligible to supply to the US Government (countries who have signed
the WTO Government Procurement Agreement, bilateral/regional trade
agreements which include government procurement, the WTO
plurilateral Agreement on Trade in Civil Aircraft, the 50 least developed
countries, countries eligible under the Caribbean Basin Economic
Recovery Act, defence equipment produced in countries with an MOU
and other exceptions to the Buy American Act, eg if it is determined that
domestic preference is inconsistent with the public interest, in case of U.S.
non-availability of a supply or material, or for reasonableness of cost)).
99.1% of that 6% went to: unspecified, Kuwait, Canada, South Korea,
Germany, UK, Australia, Switzerland, Netherlands, Russia, Japan (in
order of most to least). Of course this may change from year to year
(although the 94% to companies located in the USA seemed to be about
the same for the few years checked).
A preliminary examination of the changes in the US government procurement
market access that Chile achieved after their USFTAs were signed found that
for Chile, contracts signed between 1/1/2003 and 31/12/2003 had an action
obligation of US$32,090. Chiles USFTA came into force on 1/1/2004. Contracts
signed between 1/1/2004 and 31/12/2004 had an action obligation of US$635,516.
Contracts signed between 1/1/2005 and 31/12/2005 had an action obligation of
US$233,570
Note: The information on the procurement chapter of a typical US FTA is taken
from the US-Chile and US-Singapore FTAs.

12. COMPETITION POLICY

A. BACKGROUND TO THE ISSUE
Competition policy is a complex subject, especially when put in the context of trade
agreements. At first glance, competition policy is taken to mean restricting the
power and scope of activities of the large corporations, especially transnational
companies.
However, competition is usually taken to mean something different by trade
officials of developed countries. They have been trying to make use of competition
policy as a concept linked to market access, in which foreign firms and their
products and services should have the right to free competition vis--vis local firms
in markets of developing countries. Free competition would, in their approach,
mean that the preferences given to local firms, and any advantages or assistance they

62

enjoy, should be curtailed or eliminated, so that the foreign firms can compete on a
level playing field.
In this paradigm, the transnational corporations of the US, Europe, Japan, etc, would
be able to compete on equal ground as local companies in the local markets. In
actual fact, these TNCs already enjoy great advantages, including big size, large
financial resources, high technology, marketing networks, and brand names. Thus
there is no level playing field to begin with. Without some assistance, preferential
treatmnent, or home-ground advantages (such as being familiar with the local
language and customs, and having a distribution system built over generations), the
local companies of developing countries will not be able to survive the competition
from foreign firms.
A few years ago, the EU backed by Japan and the US tried introduce a competition
agreement in the WTO that would enable foreign firms and their goods and services
to compete equally with local firms, through the removal of preference and
subsidization of local firms. Later, the proposal was narrowed down to initial topics
such as principles of non-discrimination, transparency and procedural fairness, as well
as hard core cartels and modalities for voluntary cooperation. This did not preclude
the later full-scale introduction of the initial broad proposal.
The FTAs that involve the US typically require the developing country to establish
competition legislation.
Development economists have questioned whether the
framework of competition policy and framework now in place in the US and other
developed countries are appropriate for developing countries which are now in their
developmental stage. Their concern is that this framework, which the FTA promotes,
may hinder the growth of local firms and make them even less able to compete or
survive against the large foreign companies especially in the face of globalization.
The competition issue in FTAs is thus extremely complex.
These economists argue that developing countries should have competition policy and
law, but that these must be tailored to their development needs. Ajit Singh, for
example, concludes that the kind of competition policy adopted by Japan in its
developmental period (1960s-1970s) is more suitable for developing countries. In this
model, competition policy and law were formulated that prevented the full onslaught
of large foreign firms that were anti-competitive because of their size and
monopolitistic characteristics, but local firms were able to develop end expand.
In the typical US FTAs there are also typically competition policy elements in some
chapters, beside the chapter on competition itself. For example there are competition
elements in the telecommunications chapter in the FTA with Singapore in which the
parties are obliged that if there is a government linked company involved in telecoms
activity, it should not be able to influence government policy-making; and that the
companies of the FTA partner should have access to certain telecom infrastructure in
the country.
The aim of the US is apparently to make use of the competition principle to erode the
ability of local firms to have a market advantage or to have preferential treatment or
to be promoted by the national government, on the ground that this discriminates
against the foreign firms. Another aim is to limit or reduce the influence and position

63

of government-linked companies by arguing that it would be anti-competitive for

government to assist a company (even if it is owned by government) in its market
operations.
Competition law and policy, in appropriate forms, are beneficial to the country.
However each country must have full flexibility to choose a model which is suitable,
and which can also change through time to suit changing conditions. Having an
appropriate model is especially important in the context of globalisation and
liberalisation where local firms are already facing intense foreign competition
The developed countries approach, that competition policy should provide effective
opportunity for competition in the local market for foreign firms, and thus to apply
the WTO core principles to competition law/policy would affect the needed
flexibility for the country to have its own appropriate model or models of competition
law/policy.
What is required is a paradigm to view competition from a development perspective.
Competition law/policy should complement other national objectives, eg industrial
policy, or the need for local sectors to compete in the context of liberalisation.
Therefore the traditional or the UK and US models of competition may not be
appropriate for a developing country. On the other hand the Japan model of the
1950s-70s may be more appropriate but may not be allowed under the US-EU
framework of applying WTO or national treatment and market access principles
to competition policy.
Along the same lines, in a development perspective, a competition and development
framework requires that local firms and farms must build up the capacity to become
more and more capable of competing successfully, starting with the local market, and
then if possible internationally. This requires a long time frame, and cannot be done
in a short while. It also requires a vital role for the state, which has to play the role of
nurturing, subsidising, encouraging the local firms. The build up of local capacity to
remain competitive and become more competitive also requires protection from the
"free" and full force of the world market for the time it takes for the local capacity to
build up. This means that development strategy has to be at the centre, and
competition as well as competition policy has to be approached to meet the central
development needs and strategy.
At present, there is hardly any common understanding let alone agreement among
countries on what the competition concept and issue means in the WTO context,
especially in terms of its "interaction" with trade and its relationship with
development. The whole set of issues of competition, competition law and
competition policy and their relation to trade and to development is extremely
complex. The proposal of the proponents of a WTO agreement (especially the EU) is
to have multilateral rules that discipline Members to establish national competition
law and policy. According to the advocates, these laws/policies should incorporate
the core principles of WTO, defined as transparency, non-discrimination (MFN and
national treatment.) Thus, the location of the venue of the competition issue and the
agreement within the WTO would bias the manner in which the subject and the
agreement is to be treated. In this case, the "core WTO principles" would be applied
to competition.

64

Competition law and policy, in appropriate forms, are beneficial, including to

developing countries. However each country must have full flexibility to choose a
model which is suitable, and which can also change through time to suit changing
conditions. Having an appropriate model is especially important in the context of
globalisation and liberalisation where local firms are already facing intense foreign
competition. In particular, developing countries must have the flexibility to choose
the paradigm of competition and competition policy/law that is deemed to be more
suitable to their level of development and their development interests.
B. TOWARDS A DEVELOPMENT FRAMEWORK ON COMPETITION FOR
DEVELOPING COUNTRIES
The developed countries conceptual and negotiating framework can be challenged
through a different framework that looks at competition through the lens of
development. Developing countries can argue that only if local firms and agencies
are given certain advantages can they remain viable. If these smaller enterprises are
treated on par with the huge foreign conglomerates, most of them would not be able to
survive. Perhaps some would remain because over the years (or generations) they
have built up distribution systems based on their intimate knowledge of the local
scene that give them an edge over the better-endowed foreign firms. But the
operation of such local distribution channels could also come under attack from a
competition policy in the WTO ort the FTAs as the developed countries are likely to
pressure the local firms to also open their marketing channels to their foreign
competitors.
At present, many developing countries would argue that giving favourable treatment
to locals is in fact pro-competitive, in that the smaller local firms are given some
advantages to withstand the might of foreign giants, which otherwise would
monopolise the local market. Providing the giant international firms equal rights
would overwhelm the local enterprises which are small- and medium-sized in global
terms.
However, such arguments will not be accepted by the developed countries, which will
insist that their giant firms be provided a level playing field to compete equally
with the smaller local firms. They would like their interpretation of competition
(which, ironically, would likely lead to foreign monopolisation of developing-country
markets) to be enshrined in WTO law or in the FTAs.
Competition can be viewed from many perspectives. From the developing countries'
perspective, it is important to curb the mega-mergers and acquisitions taking place
which threaten the competitive position of local firms in developing countries. Also,
the abuse of anti-dumping actions in the developed countries is anti-competitive
against developing countries' products. The restrictive business practices of large
firms also hinders competition. However these issues are unlikely to find favour with
the major countries, especially the US, which wants to continue its use of antidumping actions as a protectionist device. In the FTA, the need for foreign firms to
have national treatment and a free competition environment in the host country, could
well prevail, especially given the unequal negotiating strength which works against
65

the developing countries. The likely result is that developing countries would have to
establish national competition laws and policies that are inappropriate for their
conditions. This would curb the right of governments to provide advantages to local
firms, and local firms themselves may be restricted from practices which are to their
advantage.
What is required is a conceptual framework or paradigm to view competition from a
development perspective. Competition law/policy should complement other national
objectives and policies (such as industrial policy) and the need for local firms and
sectors to be able to successfully compete, including in the context of increased
liberalisation.
From a development perspective, a competition and development framework should
have the following elements:

An understanding that local industrial and services firms and agricultural

farms must build up the capacity to become more and more capable of
competing successfully, starting with the local market, and then if possible
internationally. This requires a long time frame, and cannot be done in a short
while.

A vital role for the state is required, to play the role of nurturing, subsidising,
encouraging the local firms.
The build up of local capacity to remain
competitive and become more competitive also requires protection from the
"free" and full force of the world market for the time it takes for the local
capacity to build up. This means that development strategy has to be at the
centre, and competition as well as competition policy has to be formulated as
a means to meet the central development needs and strategy.

Therefore some of the conventional models of competition may not be

appropriate for a developing country. On the other hand other models may
be more appropriate, but their adoption may be hindered or prohibited by a
WTO agreement on competition that is based on the "core principles of
WTO."

For example, the Cambridge University Professor of Economics, Ajit Singh,

has pointed out that: (1) The US and European models of competition law
and policy are inappropriate and can cause harm to the development efforts of
developing countries; (2) More suitable is the Japanese model of the 1950s
and 1960s, when Japan was at its developmental stage. The Japanese
government enacted competition law which was a tool to prevent the intrusion
of large foreign firms and their products, whilst at the same time used
industrial policy to nurture and strengthen Japanese firms so that they could
develop and eventually successfully compete with the foreign giant
companies. The kind of model represented by the Japanese example, in
which competition policy is complemented and indeed subsumed under
industrial policy, would not be allowed in the kind of competition agreement
being propounded in the FTAs. Indeed, they would precisely seek to outlaw
the kind of Japanese-style model that developing countries may find
consistent with their development needs.
66

There is no convincing case for competition policy to be a subject of an FTA

(which should be about trade). If it is in an FTA, then the FTA would create a
set of binding rules to govern the competition policies and laws of developing
countries. Given the market access and national treatment principles in
the FTA, a competition chapter in the FTA is likely to be skewed in a way that
is inappropriate for the development interests of developing countries.

If there is to be a discussion on competition in trade talks, including in

FTAs, developing countries could give their own interpretation of this issue
and put forward their own ideas for the discussion (in an attempt not to have a
competition chapter in the FTA). The trade expert, B.L. Das has suggested
that the following issues could be put forward:
-- Obligations of the foreign firms to the host country.
-- Obligation of the home government to ensure the foreign firms
fulfil their obligations.
-- Competitiveness of domestic firms: to consider measures to be
undertaken by domestic firms, government and a possible
multilateral framework to enable local firms (especially small firms)
to remain or to be competitive and to grow.
-- Competition impeded by government action (for example, antidumping action).
-- Competition impeded by IPR protection
--Global monopolies and oligopolies and their effect on local firms in
developing countries.
--Big mergers and acquisitions (by transnational companies) and
their effects on developing countries.

C. What the US Proposes on Competition in its FTA: Anti-Competitive Business

Conduct, Designated Monopolies and Government Enterprises
A typical competition chapter in a US FTA can be seen in the FTA with Singapore.
The chapter comprises three subjects: (1) Anticompetitive business conduct, (2)
Designated Monopolies, and (3) government enterprises. These topics give an idea
already of the disciplines the FTA seeks to impose on the operation of national
companies.
The objective of the chapter states: Recognizing that the conduct subject to this
Chapter has the potential to restrict bilateral trade and investment, the Parties believe
proscribing such conduct, implementing economically sound competition policies,
and engaging in cooperation will help secure the benefits of this Agreement. The
point being put forward is that the subject (i.e. anti-competitive business conduct,
monopolies designated by government, and government-linked companies or GLCs)
can restrict the benefits of trade and investment sought by the FTA, and thus both
countries have to proscribe or discipline such conduct and have economically cound
competition policies.

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On ANTICOMPETITIVE BUSINESS CONDUCT, the countries commit:

(a) To having measures to proscribe anticompetitive business conduct and to take
action on such conduct. This is taken to mean that the country will introduce a
competition law; a footnote in the Singapore-US FTA says Singapore shall enact
general competition legislation by January 2005 (just a year after the FTA was
signed).
(b) To establish an authority to enforce its measures to proscribe anticompetitive
business conduct.
(c) That the enforcement policy of the national authority includes not discriminating
on the basis of the nationality of the subjects of their proceedings.
(d) That a court will give opportunity to a person charged to be heard and to review
the sanction.
On DESIGNATED MONOPOLIES
The countries commit that:
(a) Where a country designates a monopoly that may affect the other countrys
interests, the country shall: introduce such conditions on the operation of the
monopoly as will minimize or eliminate any nullification or impairment of benefits;
and (ii) provide written notification to the other Party of the designation and any
such conditions.
(b) A general competition law will be enacted by a certain date and it shall not exclude
government enterprises.
(c) They ensure that any privately-owned monopoly that it designates after the
agreement is signed and any designated government monopoly:
(i) acts in a manner that is not inconsistent with the Partys obligations under this
Agreement wherever such a monopoly exercises any regulatory, administrative, or
other governmental authority that the Party has delegated to it, such as the power to
grant import or export licenses, approve commercial transactions, or impose quotas,
fees or other charges;
(ii) acts solely in accordance with commercial considerations in its purchase or sale of
the monopoly good or service in the relevant market, including with regard to price,
quality, availability, marketability, transportation, etc.
(iii) provides non-discriminatory treatment to covered investments, to goods of the
other Party, and to service suppliers of the other Party in its purchase or sale of the
monopoly good or service in the relevant market; and

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(iv) does not use its monopoly position to engage directly or indirectly including
through its dealings with its parent, subsidiaries, or other enterprises with common
ownership, in anticompetitive practices in a non-monopolized market in its territory
that adversely affect covered investments.
On GOVERNMENT ENTERPRISES, the commitments in the Singapore-US FTA are
that:
(a) Each Party shall ensure that any government enterprise acts in a manner consistent
with the Partys obligations under this Agreement wherever such enterprise exercises
any regulatory, administrative, or other governmental authority that the Party has
delegated to it, such as the power to expropriate, grant licenses, approve commercial
transactions, or impose quotas, fees, or other charges.
(b) The United States shall ensure that any government enterprise accords nondiscriminatory treatment in the sale of its goods or services to covered investments.
(c) Singapore shall ensure that any government enterprise:
(i) acts solely in accordance with commercial considerations in its purchase or sale of
goods or services, such as with regard to price, quality, availability, marketability,
transportation, and other terms and conditions of purchase or sale, and provides nondiscriminatory treatment to covered investments, to goods of the United States, and to
service suppliers of the United States, including with respect to its purchases or sales;
(ii) does not, either directly or indirectly, including through its dealings with its
parent, subsidiaries, or other enterprises with common ownership: (a) enter into
agreements among competitors that restrain competition on price or output or allocate
customers for which there is no plausible efficiency justification, or (b) engage in
exclusionary practices that substantially lessen competition in a market in Singapore
to the detriment of consumers.
(d) Singapore shall take no action or attempt in any way, directly or indirectly, to
influence or direct decisions of its government enterprises, including through the
exercise of any rights or interests conferring effective influence over such enterprises,
except in a manner consistent with this Agreement. However, Singapore may exercise
its voting rights in government enterprises.
(e) Singapore shall continue reducing, with a goal of substantially eliminating, its
aggregate ownership and other interests that confer effective influence in entities.
(f) Singapore shall at least annually, make public a consolidated report that details for
each covered entity: (A) the percentage of shares and the percentage of voting rights
that Singapore and its government enterprises cumulatively own; (B) a description of
any special shares or special voting or other rights that Singapore or its government
enterprises hold; (C) the name and government title(s) of any government official
serving as an officer or member of the board of directors; and (D) its annual revenue
or total assets, or both, depending on the basis on which the enterprise qualifies as a
covered entity.

69

(g) Singapore shall also, on receipt from the US of a request regarding a specific
enterprise, provide to the US the information listed above, for any enterprise that is
not a covered entity or an excluded enterprise, with the understanding that the
information may be made public.
There are also provisions on TRANSPARENCY AND INFORMATION REQUESTS.
Each Party, at the request of the other Party shall make available public information
concerning (a) the enforcement of its measures proscribing anticompetitive business
conduct; (b) government enterprises, and designated monopolies, public or private.
The requests shall indicate the entities involved, specify the particular products and
markets concerned, and include some indicia that these entities may be engaging in
practices that may hinder trade or investment between the Parties. (c) exemptions to
its measures proscribing anticompetitive business conduct. Requests for such
information shall specify the particular products and markets of concern and include
some indicia that the exemption might hinder trade or investment between the Parties.
An article on CONSULTATIONS states that to address specific matters that arise
under this Chapter, the parties shall enter into consultations regarding representations
made by a Party. In its request, the Party shall indicate how the matter affects trade or
investment between the Parties.
D. COMPETITION POLICY: IMPLICATIONS FOR MALAYSIA OF MUFTA
Acceptance of the competition chapter would have serious implications for
Malaysia in restricting the policy space that now exists in the operations and
management of companies, both in the private and public sectors. Among the
implications are the following.
1. Given the template of US FTAs, the competition chapter will contain
disciplines on (1) Anticompetitive business conduct, (2) Designated Monopolies,
and (3) government enterprises. These are very important areas affecting the
structure of Malaysian companies in both private and public sectors. The FTA
will thus have important effects on the structure and operations of Malaysian
enterprises. There is a similar aim in these three topics: to mould the structure
and behaviour and influence of local enterprises so that they do not block the full
benefits of the FTA to be reaped by American companies.
2. Malaysia would have to enact a competition law within a short span of time.
(Singapore committed to have a general legislation on competition just over a
year after the FTA was completed). In itself having a competition law is not
negative and can have positive effects, if it is properly formulated. However it is
a complex exercise to formulate a competition law that is appropriate for
development, in that it assists rather than undermines a national industrial
policy, and that it does not hamper the expansion of domestic enterprises.
Malaysia has been grappling with the dilemmas of establishing such an
appropriate competition policy and law, and the law has yet to be finalized.
However the FTA will commit Malaysia to enact a competition law and in a short
period, i.e. it will fast track the process. Rushing into such a law is not wise; it
70

should be introduced only when the appropriate elements are found.

3. The importance placed by the US on Malaysias competition law (and that it
is in the US interest) is highlighted by the comment in the USTR report on trade
barriers 2006: Some U.S. companies have indicated a desire for measures
regarding perceived anticompetitive practices in Malaysia. For example, the
Malaysian government has not provided details of its proposed competition
policy to local and foreign industry and has not sought public comments, despite
U.S. government and industry requests for the opportunity to provide input on
this proposed policy. With the FTA, it will be easier for the US to provide
inputs on how the competition law should be shaped.
3. The competition policy and law that Malaysia may have to adopt due to the
FTA is likely to be inappropriate because the objective of the competition
chapter biases the law towards the narrow goal of proscribing anti-competitive
business practices that restrict bilateral trade and investment and prevent the
benefits of the FTA (i.e. that would otherwise go to the US firms). The meaning
of this is that certain Malaysian business practices and certain characteristics
and activities of monopolies designated by the state and of government linked
companies (GLCs) may hinder the ability of US companies to reap the full
benefits of market access to Malaysia that they expect fom the FTA. The aim of
the competition chapter is to have rules to discipline the business practices, the
monopolies and the GLCs so that their freedom and powers are curbed, and that
US companies can take full advantage of market access to Malaysia. In actual
fact, this turns reality upside down. Because the US companies are so large and
powerful, Malaysian companies require assistance and protection to enable them
to survive and compete. Ironically, by removing the assistance and protection,
the competition policy in the FTA will facilitate greater monopolization by the
large foreign companies, thus eventually resulting in less competition and the
weakening of the competitive position of local companies.
4. The competition law to be introduced by Malaysia will also be constrained by
the conditions in the FTA that (a) government enterprises cannot be exempted;
and (b) enforcement policy cannot discriminate on the basis of nationality. This
has serious implications because (a) certain activities of government enterprises
may be seen as anti-competitive from one angle but may be useful for
development or social purposes from another angle, yet this policy space to
have such activities or policies will now be eroded; (b) It may be beneficial to
national policy and domestic enterprise growth to have a distinction between
local and foreign firms in certain aspects of competition policy; this may now be
difficult due to the FTA.
5. Regarding Designated Monopolies, Malaysia will be obliged to introduce
conditions on the operation of the monopolies so as to minimize or eliminate
any nullification or impairment of benefits. Another section of the FTA (on
administration and dispute settlement) explains this phrase in context, that a
Party can take the other Party to a dispute case if a benefit the Party could
reasonably have expected to accrue to it under the Chapters on National
Treatment and Market Access for Goods, on Rules of Origin, on Services or on
Intellectual Property Rights is being nullified or impaired as a result of a

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measure that is not inconsistent with this Agreement. This is a provision with
serious implications: it means that even if the government maintains a policy
measure that is consistent with (i.e. does not violate) the rules of the FTA, that
measure could also be challenged in a dispute case by the US if that measure
nullifies or impairs the benefits of the FTA expected to be gained by an American
company.
Malaysia would have to impose conditions on the designated
monopolies so that their operations do not nullify or impair the benefits that
would accrue to American companies.
6. Private or government monopolies designated by the government would also
have to abide by many disciplines. The government will have to ensure these
monopolies (a) act in ways that are not inconsistent with the FTA obligations
when the monopoly exercises regulatory and administrative authority such as
granting import or export licenses, approving commercial transactions, or
imposing quotas, fees or other charges;
(b) act solely in accordance with commercial considerations in its purchase or
sale of the monopoly good or service in the relevant market, including with
regard to price, quality, availability, marketability, transportation, etc.
(c) provide non-discriminatory treatment to covered investments, to goods of the
other Party, and to service suppliers of the other Party in its purchase or sale of
the monopoly good or service in the relevant market; and
(iv) do not use its monopoly position to engage directly or indirectly in
anticompetitive practices in a non-monopolized market in its territory that
adversely affect covered investments.
7. Malaysia would also have to adopt disciplines on government enterprises or
Government Linked Companies (GLCs). The government would have to ensure
that government enterprises: (a) act in a manner consistent with its FTA
obligations when they exercise any governmental authority such as the power to
expropriate, grant licenses, approve commercial transactions, or impose quotas,
fees, or other charges;
(b) act solely in accordance with commercial
considerations in their purchase or sale of goods or services, such as with regard
to price, quality, availability, marketability, transportation, and other terms and
conditions of purchase or sale, and provides non-discriminatory treatment to
covered investments, to goods of the United States, and to service suppliers of the
United States, including with respect to its purchases or sales; (c) do not, either
directly or indirectly, including through its dealings with its parent, subsidiaries,
or other enterprises with common ownership enter into agreements among
competitors that restrain competition on price or output or allocate customers;
or engage in exclusionary practices that substantially lessen competition in a
local market.
8. If the competition chapter is similar to the one in the Singapore-US FTA, the
Malaysia would also be obliged to take no action or attempt in any way to
influence or direct decisions of its government enterprises, including through the
exercise of any rights or interests conferring effective influence over such
enterprises. Malaysia would also be asked to commit to reducing, with a goal of
substantially eliminating, its aggregate ownership and other interests that confer
effective influence in entities.

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9. Malaysia can also expect to be asked to make an annual report of details of

each covered entity including: (a) the percentage of shares and the percentage of
voting rights that Malaysia and its government enterprises cumulatively own;
(b) a description of any special shares or special voting or other rights that
Malaysia or its government enterprises hold; (c) the name and government
title(s) of any government official serving as an officer or member of the board of
directors; and (d) its annual revenue or total assets, or both. On top of this,
Malaysia shall also Singapore shall also provide to the US (on request) the
information listed above, for any enterprise that is not a covered entity or an
excluded enterprise, and the information may be made public.
10.
All these obligations will place heavy obligations on Malaysia and its
enterprises. It is beneficial for companies, especially monopolies and GLCs to be
more efficient, transparent and accountable. However this should be a
nationally initiated and based process, to meet national goals. The obligations
placed in the FTA have the goal of ensuring that American companies can reap
the full benefits promised by the formal opening of market access, by (a)
disciplining the business practices of Malaysian companies, (b) ensuring the
monopolies and GLCs give non-discriminatory treatment (i.e. national
treatment) to American investments, goods and service suppliers; (c) preventing
GLCs from having relationships or agreements with their parent companies or
subsidiaries that restrain competition or engage in exclusionary practices.
Although in an ideal situation Malaysian companies would be able to withstand
and thrive in a totally free global environment, in reality the time for this is not
yet ripe, as Malaysian companies are too small and not yet advanced in
technology, management and marketing that can take on the full might of
American companies.
The companies receive certain advantages and
preferential treatment from government, and government in return has some
influence over the companies.
The competition chapters provisions, if
implemented, would cause many problems to private as well as governmentlinked companies.
11. This is not an argument for complacency, as there is a great need for greater
efficiency, transparency and accountability of Malaysian companies, whether in
the private or public sector. However this process of corporate reform should be
a national exercise with the aim of benefiting consumers, the public welfare as
well as the companies themselves which should operate more efficiently and
competitively, while expanding their social functions and responsibilities as well.
However it would be a mistake to place such a comprehensive competition
policy within an FTA where the main objective is to benefit the American
companies that want to enjoy the advantages of market access and national
treatment. Placing competition policy in this context would skew this policy in
the wrong direction, and in ways that are likely to undermine rather than
enhance the growth of Malaysian enterprises and to foster greater
competitiveness.
12. The manifestation of the US approach to competition can be seen in the FTA
chapter on telecommunications, which spells out how American firms should be
granted not only market access but telecom facilities, and rules on the
relationship between GLCs and government authorities.

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14. ENVIRONMENT, BIOSAFETY AND FOOD SAFETY

A.

BIOSAFETY AND LABELLING OF GENETICALLY MODIFIED

ORGANISMS

Malaysia can expect demands from the US in the MUFTA negotiations that it
prohibit policies or laws that food and other products containing genetically
modified organisms (GMOs) be labelled as such. This demand has been made in
some other FTAs. Such a demand would affect at least two laws/regulations that
Malaysia is enacting the Biosafety Bill and the Food Act that require
mandatory labelling for GMO products.
Malaysia has a Biosafety Bill that has been presented to Parliament, which regulates
activities related to genetically modified organisms (GMOs) and their products, given
their potential environmental as well as health impacts. It is underpinned by a
precautionary approach, in keeping with Malaysias obligations under the Cartagena
Protocol on Biosafety. Malaysia has also been active in the international discussions
under the Cartagena Protocol, including the on-going negotiations for an international
regime on liability and redress for damage resulting from GMOs.
The US is not a party to the Cartagena Protocol.
The Biosafety Bill has an enabling clause that provides for the identification and
labeling of GMOs and items containing GMOs.
The Ministry of Health has also drafted regulations under the Food Act 1983 requiring
the labelling of genetically modified foods. The proposed regulations are intended to
give consumers proper information via labelling, as to whether a package contains
genetically modified food or ingredients where the GM content is more than 3% of
the total.
There are several reasons why such labelling is important:
1) Labelling is important for consumer choice, so that consumers can choose whether
or not they want to eat GM food.
2) There may be unintended effects of GMOs, such as potential allergenic effects (i.e.
they can cause certain people to have allergies). Labelling would let consumers know
of the GMO content of the food, and would serve to warn those who have legitimate
health concerns. For example, a gene from a nut may be used in a GMO; since many
people have potentially fatal nut allergies, they need to know the content of the food
and labelling could meet this need.
3) Labelling informs consumers about GMO content, particularly those who may have
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religious, ethical or moral concerns. For example, if a pig gene was used in the
making of a GM food, Muslim consumers could be informed by an appropriate label.
Likewise, if there are fish genes in GM tomatoes, vegetarians would need a label
informing them that a food has a non-vegetarian GM gene.
4) Labelling would also push GMO exporting countries to segregate their GM and
non-GM crops, shifting the burden to exporter countries, rather than to importing
countries like Malaysia to detect and identify GMO shipments.
More than 40 countries around the world, including China, Japan, Australia and most
European nations, already require mandatory labelling of GM foods. Under the Codex
Alimentarius Commission, the joint WHO/FAO body regulating international food
standards, the Committee on Food Labelling has been discussing a global standard for
mandatory GM food labelling. The draft standard on GM labelling has support from a
majority of the Committee, including Malaysia.
The US Bipartisan Trade Promotion Authority Act 2002 which grants the US Trade
Representative negotiating authority (ie the fast track legislation) in Section 2102
Trade Negotiation Objectives clearly states that
The principal negotiating objective of the United States with respect to
agriculture is to obtain competitive opportunities for United States exports of
agricultural commodities. by(viii) developing, strengthening, and clarifying
rules and effective dispute settlement mechanisms to eliminate practices that
unfairly decrease United States market access opportunities or distort agricultural
markets to the detriment of the United States, particularly with respect to importsensitive products, including (II) unjustified trade restrictions or commercial
requirements, such as labeling, that affect new technologies, including
biotechnology; (emphasis added).
Besides the above law which mandates the USTR to oppose GMO labeling, US
companies have also urged the USTR to use the FTA against the Malaysian measures.
The Biotechnology Industry Organization (BIO) and the AMCHAM Malaysia/US
Chamber of Commerce, in their public submissions to the USTR are against the
mandatory labelling for genetically modified (GM) products or foods. They urge the
USTR to take advantage of the FTA negotiations to forward their position against
labelling of GM products or foods.
The US biotech industry says that labelling of biotech foods will often mislead
consumers by implying biotech foods are either different from conventional foods or
present a potential risk. (see Amcham Malaysia/US.Chamber of Commerce
submission on MUFTA, pg 95, May 19,2006). Consequently, the US biotech industry
has asked the US government to oppose such labelling in the MUFTA. The paper
also make inappropriate comments on Malaysias national positions at the
negotiations of the Cartagena Protocol on Biosafety.
Given that some BIO members are also members of the USTRs Advisory
Committees, which are explicitly tasked to ensure that US trade policy and trade
negotiation objectives adequately reflect US commercial and economic interests, there
are grave concerns that the BIO industry interests will be reflected in the USTRs FTA
demands.

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Malaysian consumer and other public health interested groups have supported the
Malaysian government in having GM mandatory labelling provisions in the interest of
consumer welfare and public health.
Indeed, it is well established among concerned scientists that GM foods are not the
same as conventional foods and are not devoid of risks to health and safety.
Consumers have a right to know both for ethical and health reasons and must be given
a choice as to whether they want to consume GM foods or not.
It should be noted that Australia has signed an FTA with the US, yet it still has a
mandatory labelling law in place.
Thus Malaysia can demand that it be allowed to maintain its policies and laws on GM
labeling (i.e. in the Biosafety Bill and the Food Act) and its position in international
fora such as the Cartegna Protocol and the Convention on Biological Diversity.
B. OTHER ENVIRONMENT ISSUES
The MUFTA presents several other concerns in relation to the environment. Below
are some of these concerns.
1. Convention on Biological Diversity
Malaysia is a party to the Convention on Biological Diversity (CBD) and is a
megadiverse country. The US is not a party to the CBD. Malaysia has been a strong
advocate of international measures to counter bio-piracy and to ensure fair benefits to
countries possessing biodiversity and traditional knowledge.
To ensure that Malaysias biological resources are not taken, commericalised and
patented outside of Malaysia, and to ensure that equitable benefits flow back to the
country and to the indigenous people and local communities, Malaysias position has
been that a strong international regime on access and benefit sharing is required. This
is currently being negotiated under the CBD.
Countries such as Peru and Colombia (which are megadiverse countries that were
strongly in favour of an international legal framework to regulate access to genetic
resources and ensure equitable benefit sharing) have had to sign a side letter as part of
their USFTAs which reverses their position and agrees that mere contracts (instead of
a global treaty) are sufficient to address access and benefit sharing concerns.
Contracts between unequal parties have not proven to be sufficient to stop biopiracy
or ensure equitable benefit sharing, and Malaysia should not change its stance on this
issue because of a similar potential side letter in MUFTA.

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2. Environmental implications in relation to the Investment chapter

All US FTAs have certain provisions in the investment chapter which have serious
implications for environmental policy and measures. These provisions and their
implications will also apply to MUFTA. As a result, environmental measures taken
by the Malaysian government to protect the environment may be challenged as
expropriation, which is defined broadly, leading to an obligation to
compensate US investors and/or change Malaysian laws, regulations, measures
etc.
US companies will be given the right to sue the Malaysian government directly, and if
the Malaysian government does not pay the compensation due, then the US
government can impose tariffs on any Malaysian export.
Many cases involving environmental measures have been taken against Canada,
mexico and the US under their North American Free Trade Agreement (NAFTA).
Cases such as these can be expected against countries like Malaysia signing on to
FTAs with the US.
Among the environment-related cases under NAFTA are the following:

The United States has been sued by Methanex, a Canadian corporation, as the
state of California had phased out a chemical additive that contaminates the
ground water. The company is seeking damages of USD 970 million.
(Methanex case)
Canadas environmental regulation that banned a chemical that causes global
warming and is a neurotoxin was challenged by US corporation Ethyl, which
sought compensation of USD 250 million. The case was settled and Ethyl was
paid USD 13 million. (Ethyl case)
US chemical company Crompton has challenged a voluntary agreement
established by Canada to restrict production of the chemical lindane (a
pesticide that is a possible carcinogen). Crompton is seeking damages of USD
100 million. (Crompton case)
Canadian company Galmis Gold is seeking compensation of USD 50 million
from the United States for a California regulation that requires backfilling and
restoration of open pit mines that would damage Native American sacred sites.
(Glamis Gold case)
US firm Metalcald sued Mexico for USD 90 million, challenging a Mexican
municipalitys refusal to grant a construction permit for a toxic waste dump
and the governors declaration of an ecological preserve surrounding the site.
Metalclad won and USD 15.6 million was paid in compensation (Metalclad
case)
A Canadian temporary ban on hazardous PCB exports was challenged by US
waste treatment company, S.D. Myers. The temporary ban was put in place
while Canada was considering its obligations under the Basel Convention on
the Control of Transboundary Movements of Hazardous Wastes and Their

77

Disposal. S.D. Myers sued for USD 20 million, won the case and was paid
USD 4.8 million. (Myers case)
Not all these cases have been decided in favour of the foreign investor yet, but it
indicates the possible ways that companies may use the investment chapter to
challenge environmental measures. Even if the company does not sue, the mere threat
of legal action may be enough to prevent governments from carrying out policies that
are put in place to protect the environment.
When investors have such strong rights, we are concerned about Malaysias ability to
fulfill its obligations under multilateral environment agreements (MEAs) such as the
CBD, the Cartagena Protocol on Biosafety, the Kyoto Protocol to the United Nations
Framework Convention on Climate Change and the Basel Convention on the Control
of Transboundary Movements of Hazardous Wastes and Their Disposal, none of
which the US is a Party to.
If Malaysias obligation under an MEA constitutes expropriation, Malaysia will face
the invidious choice of violating its MEA obligation or having to pay compensation at
fair market value, including interest at a commercially reasonable rate. Nothing in
existing USFTAs allays these fears because USFTA provisions still require
environmental measures to be consistent with the investment chapter.
3. Government procurement and implications for the environment
There are also legitimate concerns about the restrictions the government procurement
chapter of USFTAs puts on the ability to specify environmentally-friendly products or
processes.
For example it may prevent Malaysia from being able to specify that:
food for Malaysian Government canteens, hospitals or schools comes from local
farmers (to reduce transport miles, the amount of preservatives and the amount of
packaging)
food procured by the Malaysian Government is not genetically modified,
notwithstanding any Malaysian biosafety laws or decisions made under them
products supplied to the Malaysian Government should be made of recycled
materials, e.g. paper, or materials that are less ozone-depleting.

15. INTELLECTUAL PROPERTY RIGHTS (IPRS)

A. BACKGROUND
1. WTOs TRIPS Agreement
The introduction of IPRs as an issue with binding rules within a trade agreement was
very controversial, and remains so, after the TRIPS Agreement was incorporated
within the WTO. Since then, many economists ranging from Joseph Stiglitz to
Jagdish Bhagwati have decried the inclusion of IPRs and TRIPS in the WTO.
78

There is a growing realisation that high IPR standards, promoted by TRIPS to

developing countries, are inappropriate to the development needs of developing
countries. In particular, the former head of the World Banks trade research
department, Michael Finger, estimated that the cost to developing countries of
implementing their TRIPS obligations amounts to US$60 billion annually, and that
this more than offsets the gains they may expect to benefit from expanded market
access in agriculture and textiles in the Uruguay Round. (Khor 2005).
There is now a movement by developing countries to clarify some aspects of TRIPS
or to amend them, to reduce the more developmentally-negative aspects.
For
instance the Doha Declaration on TRIPS and Public Health has clarified that
developing countries can make use of flexibilities such as compulsory licenses to
offset the monopoly privileges of patent holders.
Developing countries are also trying to have TRIPS amended to deal with the problem
of biopiracy, by requiring that patent applications involving biological resources be
accompanied by disclosure of the countries of origin and evidence of benefit-sharing
arrangements with these countries. Moreover, TRIPS requires some life forms to be
patented (microorganisms and micro-biological processes) but allows the prohibition
of patenting of other lifeforms (plants and animals), and gives countries the leeway to
define what is an invention and thus what is patentable.
The TRIPS agreement requires that IP protection be granted to plant breeders for plant
varieties, while previously this was an issue for each country to decide on. However,
TRIPS allows countries flexibility to define their own sui generis system of
protection for plant varieties. Countries can provide for farmers rights to save and
use seeds.
2. IPR negotiations shift to FTAs
As WTO negotiators have become more aware of the development dimensions of
IPRs, the developed countries have tried to introduce even higher standards of IP
globally through the WIPO. However, many developing countries have now started a
movement to establish a development agenda within WIPO. They have also
resisted attempts at harmonizing patent and copyright laws at even higher standards.
Thus, there is now an attempt by the developed countries to seek the forum of
the FTA to: (a) remove or reduce the flexibilities in the TRIPS agreement and
(b) establish even higher standards of IPRs in developing countries. IP is thus a
major item in bilateral FTAs, and countries like the US and Japan are keen to
have their interests furthered, beyond what is in the WTO-TRIPS agreement.
The FTAs threaten the use of TRIPS flexibilities in relation to (a) patents and
access to medicines; (b) IP protection of plant varieties with respect to the sui
generis system, and the rights of farmers; biodiversity; (c) the ability to ban
patenting of some lifeforms.
There may also be a potential for FTAs to make it more difficult for countries to
have disclosure requirements with respect to patent applications involving
biological resources. Some FTAs also oblige developing countries to have tighter
79

copyright legislation, with adverse effects on technology transfer or access to

information and information technology.
Prior to TRIPS, countries were able to tailor their level of IP protection to suit their
level of development. Many of todays industrialised countries such as the USA,
Europe,5 Japan, South Korea and Taiwan did not have high levels of IP protection
until it suited them. For example Switzerland did not allow patents on chemicals until
1978; Italy, Sweden and Switzerland did not allow patents on medicines until 1978 6
and Spain did not allow patents on chemicals or medicines until 1992 because it said
it could not afford the higher medicine prices as a result of patents.
According to the Commission on Intellectual Property Rights, development
objectives need to be integrated into the making of policy on intellectual property
rights7 and there should be wide-ranging consultations before any changes to IP laws
are made to ensure they are in line with development objectives in agriculture, health
and industry.8 In addition, it emphasizes that developing countries will incur
significant costs if they rush to establish an IP regime that is inappropriate to their
level of development.9
According to the 9th Malaysia Plan, in 2005 there was already estimated to be a
net outflow of royalties of RM5.7billion.10 This is not surprising given that 98%
of patents granted in Malaysia are to foreigners (see below).
This is not unusual, almost without exception, developing countries are net importers
of technology.11 Even in an industrialized country like Australia 90% of patents are
granted to foreigners according to government statistics. 12 Most countries in the world
are net intellectual property importers, except those such as the USA and European
Union.
If Malaysia broadens and lengthens its intellectual property protection while it
still has less capacity to generate its own intellectual property, it can expect to see
the royalty outflow increase.

Commission on Intellectual Property Rights, Study Paper 1a, Intellectual Property and Economic
Development: Lessons from American and European History, B Zorina Khan.
6
Human Development Report 2001, United Nations Development Programme.
7
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page i.
8
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 161.
9
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 162.
10
Page 264.
11
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm.
12
http://www.ipaustralia.gov.au/about/statistics.shtml

80

While the US insists that the intellectual property (IP) chapter of the MUFTA
negotiations, like all chapters, is kept secret, it is possible to ascertain the likely US
demands based on existing USFTAs.
The USA is a net IP exporter 13 and so if it can obtain broader and longer periods of IP
protection, the profits of its companies will increase.
Apart from the costs to users of IP listed below, implementing and enforcing an IP
regime is costly.14 In developing countries, where human and financial resources
are scarce, and legal systems not well developed, the opportunity costs of operating
the system effectively are high. Those costs include the costs of scrutinising the
validity of claims to patent rights (both at the application stage and in the courts) and
adjudicating upon actions for infringement. Considerable costs are generated by the
inherent uncertainties of litigation.15
3. Industry influence
The USTR has long promoted the interests of its industries that have heavy IP
protection such as pharmaceuticals, software and films and television. The USTR is
advised by these private sector industries via committees whose role according to the
USTR is to ensure that U.S. trade policy and trade negotiation objectives adequately
reflect U.S. commercial and economic interests.16
These committees include the pharmaceutical companies, chemical companies,
Biotechnology Industry Organization, copyright owners such as Time Warner,
International Intellectual Property Alliance, Recording Industry Association of
America, Intellectual Property Owners Association, Motion Picture Association of
America.17
The pharmaceutical industry spent US$91.4million on 675 lobbyists to engage
members of the US Congress and Administration. 18 This is seven lobbyists per US

13

Between 1991 and 2001, the net US surplus of royalties and fees (which mainly relate to IP
transactions) increased from $14 billion to over $22 billion. In 1999, figures from the World Bank
indicate a deficit for developing countries for which figures are available of $7.5 billion on royalties
and licence fees. Integrating Intellectual Property Rights and Development Policy, report of the
Commission on Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 21
14
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 15.
15
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 15.
16
http://www.ustr.gov/Who_We_Are/Mission_of_the_USTR.html
17

http://www.ustr.gov/assets/Who_We_Are/Advisory_Committee_Lists/asset_upload_file936_5742.pdf
and
http://www.ustr.gov/assets/Who_We_Are/Advisory_Committee_Lists/asset_upload_file232_5754.pdf
18
Third World Resurgence 167/168, page 17.

81

Senator.19 It also makes contributions to US election campaigns. For example the top
25 pharmaceutical firms donated US$48.6million from 1997-2002.20
By contrast, the Commission on Intellectual Property Rights states that the imperative
is for developed countries to ensure that their policy objectives for IP standards in
regional/bilateral trade agreements are demonstrably consistent with their broader
objectives for promoting international development and poverty reduction
Negotiators for developed countries need to take account of the costs to developing
countries of higher IP standards, as well as the benefits to their own industries.21
Given development objectives, it goes on to say that it would be unwise to let IP
policy be influenced by domestic industrial and commercial interest groups in
developed countries.22
B.

MUFTA WILL OBLIGE MALAYSIA TO SIGN UP TO MANY

INTERNATIONAL IP TREATIES

One of the key aspects of the IPR chapter in US FTAs is that the parties have to sign
up to many international intellectual property treaties, some of them under the World
Intellectual Property Organization (WIPO). Malaysia is a member of WIPO, but it
has signed only some of the treaties. In the MUFTA negotiations, the US will most
likely insist that Malaysia join many treaties which are beneficial to the US but may
not be for Malaysia. These treaties include:

The Patent Cooperation Treaty (WIPO).

The WIPO Copyright Treaty (WIPO)

The WIPO Performances and Phonograms Treaty

International Union for the Protection of New Varieties of Plants (UPOV

1991).

Budapest Treaty on the International Recognition of the Deposit of

Microorganisms for the Purposes of Patent Procedure

Malaysia is a member of the Patent Cooperation Treaty but not of the other four.
There are good reasons for Malaysias reluctance to join many of the treaties located
in or administered by WIPO. For example, the Commission on Intellectual Property
Rights in its report stated: Developing countries should think very carefully before
joining the WIPO Copyright Treaty.23
19

Third World Resurgence 167/168, page 17.

Third World Resurgence 167/168, page 17.
21
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 162-3.
22
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 163.
23
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 109
20

82

WIPO is a firm advocate of stronger IP protection in developing countries. Indeed,

the analyses in WIPOs various published policy documents pay little attention to the
possible adverse consequences of such protection.24 Furthermore, depending on the
year, about 90% of its funding comes from patent applicants. 25 According to the
Commission on Intellectual Property Rights, WIPO has always been responsive to
the needs of the industrial sectors which make intensive use of IP. We are less
persuaded that it is as responsive to the interests of consumers or users of IP-protected
products.26
Due to a perceived bias towards stronger intellectual property protection in a way that
undermined the work of other United Nations agencies such as the World Health
Organization and the United Nations Development Programme, developing country
governments are trying to reform WIPO to make it more development oriented via a
Development Agenda. This has been echoed by the Commission on Intellectual
Property Rights established by the British Government.
Given the concerns above about the impact of stronger IP protection on development,
including access to knowledge, Malaysia should be very cautious about entering any
treaties that require stronger IP protection and cross-sectoral consultations and
detailed cost-benefit analyses should be conducted before any decision is made.
Analysis of the nature and effects of the above treaties are made in this report in
various sections below.
C. IMPACT OF MUFTA ON ACCESS TO MEDICINES
Before the WTOs TRIPS Agreement, countries were allowed to exempt medicines
from being granted patents. This made it easier for these countries to make or import
generic drugs (i.e. drugs made by generic producers rather than the brand-name drugs
made by originator companies) that are usually much cheaper. After the TRIPS
agreement, it was compulsory to allow for patents for medicines. This made it more
difficult to promote the generics. But there are many flexibilities in TRIPS which
countries can use (such as compulsory license). However the FTAs with the US
erodes or removes many of these flexibilities.
Generic medicines are chemically the same as branded medicines. For example the
branded version of paracetamol is called Panadol and is made by GlaxoSmithKline
(who once had a patent on it) but the generic version of paracetamol could be made by
a Malaysian generic medicine company such as Hovid Berhad. Generic medicines
24

Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 157.
25
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 157.
26
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 159.

83

have been tested by the Malaysian Government to ensure they are just as safe and
effective as the branded version.
Malaysian academics found that patented medicines can be 1,044% more expensive
than their generic equivalents in Malaysia.27 Malaysia has generic medicine
manufacturers that can manufacture more than 80% of the product categories in the
National Essential Drugs List of Malaysia.28
Based on previous US FTAs which are all very similar, if the Malaysia-US free trade
agreement (MUFTA) is signed, Malaysia will have to make a number of changes to its
laws including to allow: patents on more medicines, the patents to last for longer and
monopolies for a number of years even when there are no patents via data
exclusivity, none of which are required by TRIPS.
In the WTO Doha Ministerial, developing countries had their rights under the WTOs
TRIPS agreement reconfirmed that they are able to offset patents through compulsory
licences, government use and parallel importing, including for medicines. The
flexibilities available for policy measures to promote access to cheap medicines were
spelt out.
However, US bilateral FTAs with several countries or groupings are limiting the
flexibilities or measures that are permitted in WTO. The result is that the developing
country in the FTA would now find it more difficult or impossible to undertake
measures such as compulsory licensing or government use to provide cheaper
generic drugs to patients.
Examples of this include the following (the first four listed below are from the
Mdecins Sans Frontires paper, Access to Medicines at Risk Across the Globe)
include:
(a) Data exclusivity. The WTO does not require data exclusivity, i.e. that data
submitted by a patent holder to drug regulatory authorities (to obtain marketing
approval for safety) cannot be made use of as part of the drug regulatory approval
process undertaken by other applicants. Thus, a generic producer (which is given
permission, for example under a compulsory license, to sell or produce a generic
version of a patented drug) can make use of that data when it seeks safety approval
from the drug regulatory authority. However, in bilateral FTAs the US seeks to
establish or expand exclusive rights over test data provided by the originator
companies to prevent generic companies from registering an equivalent generic
version of the drug, thus preventing or making it difficult for a compulsory licence to
take effect, and effectively curbing the supply of generic drugs. It should be noted
that this data exclusivity applies even to generic versions of drugs that are not
patented. If this provision is adopted in MUFTA, it would seriously harm the
Malaysian generic drug industry; and also severely affect the Malaysian consumers
ability to make use of imported generic drugs. [This limitation is in the US-Singapore
agreement and all other recent US FTAs].
27

TRIPS, Patents, Technology Transfer, Foreign Direct Investment and the Pharmaceutical Industry in
Malaysia, Ida Madieha Azmi and Rokiah Alavi, Journal of World Intellectual Property, Vol 4 No. 6,
November 2001.
28
http://www.mopi.org.my/home.html

84

(b) Extending patent life span. Patents on drugs last 20 years from date of filing in
most countries. This is the WTO requirement; before the TRIPS agreement, many
countries granted drug patents for fewer years Through the FTA, the US is seeking
extend the life of the patent beyond the 20 year period. It says that drug companies
need to be compensates for any unreasonable time a national drug authority or
patent office takes to examine or approve an application. The life of the patent would
be extended by the unreasonable time taken. This extension measure is in all the
US FTAs since NAFTA.
(c) Evergreening the patent. Drug companies try to renew patents after they expire
by applying for new patents for new uses of the same product. This practice has
ben descriobed as evergreening the patent. Under WTO, members are not obliged
to grant patents on new uses of existing substances. The US wants provisions in
FTAs to allow companies to apply for new patents for each new use of a product,
thus allowing the patent protection to continue beyond the expiry date of the patent.
Patents on new uses are required by several USFTAs.
(d) Limitation to conditions for compulsory license. TRIPS allows countries to
issue compulsory licenses (to companies or government agencies to produce or import
generic versions of a drug that has been patented) and does not restrict conditions for
their use. The Doha Declaration on TRIPs and Public Health confirms that countries
have the freedom to determine the ground upon which such licenses are granted.
However, the United States FTAs seek to limit the circumstances under which
compulsory licenses on drugs are issued. For example, the US-Singapore FTA allows
compulsory licenses only for remedying anti-competitive practice by the patent
holder; for public non-commercial use; and in the case of national emergency or
circumstances of extreme urgency. Such limitations erodes the policy space
available to the government to issue compulsory licenses. Limitations on compulsory
licensing grounds are required by several USFTAs.
(e) Linkage or making the drug regulatory authority play the role of a patent
police. Before medicines can be sold, they need marketing approval from the
Health Ministrys drug regulatory authority to confirm that the drug is safe and
beneficial. The drug authority does not normally have jurisdiction over patents or the
patent status of the drug. However, many FTAs with the US have changed the role of
the drug authority by making them part of the patent police. Some FTAs require
that the DRA shall not grant marketing approval to any third party prior to the
expiration of the patent term unless by consent of the patent owner. This is not
required by TRIPS.
This effectively prevents generic products from being available through the whole
patent term. This means any compulsory licence or government use order would be
ineffective for the whole patent term as any generic medicine produced or imported
under such a licence/order could not be registered and so could not reach patients.
This drastically curtails the ability of governments to ensure the health of their
citizens, particularly in emergencies such as bird flu or SARS.
Furthermore, these provisions significantly alter the role of the DRA by requiring the
DRA on receiving a registration application for a generic version, to enquire: (1)

85

whether there is a patent claimed in the developing country for that generic product,
(2) whether that the developing country patent is in force (ie the fees have been paid),
(3) whether the patent actually covers the generic medicine as generic manufacturers
usually change their version enough to avoid infringing the patent. Ascertaining this
can take the courts up to 10 years, expert witnesses, thousands of documents and
millions of dollars. It is not an easy question which the DRA with no patent expertise
can determine; and (4) whether consent has been granted by the patent owner if all of
the above occur.
Historically, the duty of the DRA has been to ensure that a drug is safe, effective and
of sufficient quality before it registers the drug. It is the patent offices task to ensure
that patents meet the criteria of patentability and ultimately the courts are the only
authority that can determine if a patent is valid and has been infringed by a generic
product.
This linkage of marketing approval to the patent term has been so controversial that
countries such as the Philippines, i the European Union and Australia have explicitly
refused to do it. Australia was eventually pressured to do it in the FTA it signed with
the USA. The European Unions DRA argues that it does not have the training, skills,
expertise or capacity to determine such questions of patent status. In fact the US Food
and Drug Administration, which is required by law to do linkage, has also admitted
that it does not have the capacity to do it. [This linkage is required by all recent
USFTAs].
(f) Effective prevention of parallel importation. Parallel importation is one of the
key methods of keeping medicines affordable. It involves legitimately importing the
branded product from another country where it is sold more cheaply (for example
because of price controls in that other country). TRIPS allows parallel importation as
developing countries fought to retain that right.
Some US FTAs have effectively prevented parallel importation by requiring countries
to prevent it if the patent holder has not consented to it. Since patent holders in
practice will never consent, parallel importation will be made impossible.
However, the US Congress has recently refused to fund the inclusion in any new
FTAs of the provisions restricting parallel importation that are found in some existing
US FTAs. This decision by Congress should allow Malaysia to reject any proposed
restrictions on parallel importation in US FTA negotiations.
The Effects
The above FTA provisions result in the government taking on IPR obligations more
than what the WTO requires, which are often termed TRIP-Plus. The World Health
Organization has an economic model of the impact of these TRIPS-Plus provisions
on medicine consumption and a countrys generic medicine manufacturers. The model
predicts that the full impact of medicine price rises will not be felt until about 15 years
after the USFTA begins because the stronger IP protection only applies to each new
medicine so it will not affect all medicines in a country and the overall medicine price
until about 15 years has passed.
86

The extension to patent terms has been calculated by the Korean National Health
Insurance Corporation to cost 504.5 billion won (US$529 million) for having to
extend drug patents for 3 years and 722.5 billion won (US$757 million) if it has to
agree to a four year extension in its USFTA negotiations.29
It was recently estimated that eight years of data exclusivity alone in Canada would
have added $600 million to prescription medicine costs alone in the last five years.30
Malaysia was considered a world leader when it issued a type of compulsory licence
to import the cheaper generic version of patented medicines for people with AIDS. It
reduced the average cost of treatment per patient per month by 81% and more than
doubled the number of patients who could be treated.31
Many other countries saw Malaysia as a role model. If this USFTA is signed, there
will be significant restrictions on Malaysias ability to issue compulsory licences in
future. The Thai Government recently issued compulsory licences for 3 types of
medicines and estimates that it could save it up to US$24million each year.32
Many have expressed their concerns about the way the intellectual property
provisions found in USFTAs make medicines more expensive, including the United
Nations Special Rapporteur on the Right to Health,33 the World Health Assembly,34 the
WHOs Commission on Intellectual Property Rights, Innovation and Public Health, 35
Ministers of Health from ten Latin American countries, 36 the Ministers of Health37 of
the African Union, the African Unions Ministers of Trade 38, the UK Governments

29

http://english.hani.co.kr/arti/english_edition/e_business/165065.html
http://www.canadiangenerics.ca/en/news/nov_14_06.shtml
31
Malaysias experience in increasing access to antiretroviral drugs: exercising the government use
option, Chee Yoke Ling, Intellectual Property Rights Series No. 9, Third World Network, 2006. Earlier
version available from
http://www.twnside.org.sg/title2/FTAs/Intellectual_Property/IP_and_Access_to_Medicines/Malaysia's
ExperienceInIncreasingAccessToAntiretroviralDrugs-CheeYokeLing%5BOct05%5D.docs
32
http://www.bangkokpost.net/breaking_news/breakingnews.php?id=116803
33
Press Release, 5 July 2004,
http://www.unhchr.ch/huricane/huricane.nsf/view01/35C240E546171AC1C1256EC800308A37?
opendocument
34
WHA56.27, May 2003, http://www.who.int/gb/ebwha/pdf_files/WHA56/ea56r27.pdf
35
Public health, Innovation and Intellectual Property Rights, World Health Organization, April 2006.
For example recommendation 4.21.
36
Declaration of Ministers of South America over Intellectual Property, Access to Medicines and
Public Health, Geneva, 23 May 2006. The Ministers of Health were from Argentina, Bolivia, Brazil,
Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay and Venezuela,
http://lists.essential.org/pipermail/ip-health/2006-May/009594.html.
37
Gaborone Declaration, 2nd Ordinary Session of the Conference of African Ministers of Health,
Gaborone, Botswana, 10-14 October 2005, CAMH/Decl.1(II), http://lists.essential.org/pipermail/iphealth/2005-October/008440.html.
38
AUs Ministerial Declaration on EPA Negotiations, AU Conference of Ministers of Trade, 3rd
Ordinary Session, 5-9 June 2005, Cairo, Egypt, AU/TI/MIN//DECL.(III),
www.twnside.org.sg/title2/FTAs/General/AFRICAN_UNION.Cairo_Decl.doc.
30

87

Commission on Intellectual Property Rights39 and Nobel Peace Prize winning Doctors
Without Borders40.
There have also been many expressions of concern by Malaysians, including the
Malaysian generic drug industry, Malaysians living with HIV/AIDS, consumer
organisations and health organisations.
The government of the state of Western Australia was concerned about the impact of
the Australia-USFTA on medicine prices in Australia. They noted that PBS data
indicates that the prices of brand name (patented) drugs fall by an average of more
than 30 per cent after patent expiration and the entry of generic medicines. Delays to
the availability of generic pharmaceuticals will therefore significantly increase
pharmaceutical expenditures in Australia over time particularly in hospitals where
generic brands are used extensively A rise in medicine costs through the PBS and
any delays in the availability of generic equivalent medicines will have a direct
impact upon the cost of medicines purchased by the public sector. Medicines are the
second most expensive item after salaries in the health budget and a small increase in
costs in addition to the implementation of new medicines in the market will have a
significant impact upon the health budget.41
Significant damage to the local generic medicine industry from USFTAs has also been
predicted. For example Korean Health and Welfare Minister Yoo Si-min said, Under
free trade talks, the damage to the South Korean pharmaceutical industry may total
between 600 billion won to 1 trillion won (US$629 million-1.05 billion) if the U.S.
proposal is accepted.42 The World Health Organizations model predicted that the
Colombia-USFTA would cause the Colombian generic industry to lose 71% of its
market share.
If Malaysia wishes to encourage more research and development and innovation, the
evidence is not clear that stronger intellectual property protection will achieve this.
If Malaysia wants more foreign direct investment, again the evidence does not
indicate that weak IP protection discourages investment. 43 Indeed International Trade
and Industry Minister Datuk Seri Rafidah Aziz said that Malaysias existing
regulations on intellectual property protection provide adequate protection for US
investors to encourage them to come to Malaysia. 44 The Federation of Malaysian
Manufacturers has also taken the position that Malaysias current level of intellectual
property protection is strong enough and should not be increased in MUFTA
negotiations.45
39

Integrating Intellectual Property Rights and Development Policy: Report of the Commission on
Intellectual Property Rights, Commission on Intellectual Property Rights, London, 2002. For example,
pages 39, 49, 113.
40
Access to Medicines at Risk Across the Globe, Briefing Note, MSF Campaign for Access to
Essential Medicines, May 2004, www.accessmed-msf.org/documents/ftabriefingenglish.pdf.
41
Western Australian Government Submission to Senate Select Committee on the Free Trade
Agreement between Australia and the United States of America
42
http://english.hani.co.kr/arti/english_edition/e_business/165065.html
43
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 23.
44
Business Times 21 July 2006
45
See its position paper available from http://www.fmm.org.my/p_ne_it.asp?
NewsID=986&ThemeID=300&From=ThemeNews

88

In conclusion, the following can be expected to be the results of MUFTA on

access to medicines:
1. There will be severe curtailment on the supply and availability of cheaper
generic medicines. The biggest victims will be Malaysian patients suffering from
a wide range of ailments, who will have to pay much more. If the prices are too
high, this has a tremendous effect on access to medicine and to the peoples
health.
2. The Malaysian generic industry will be affected by the clauses on data
exclusivity and linkage (rejecting the generic drugs marketing approval if
the drugs are patented). At least one company has announced shifting its
operations to India because of the damaging effects that an FTA with the US
would entail.
3. The Ministry of Health will have to pay for the higher costs of medicines as a
result of the FTA.
4. As 98% of the patents granted in Malaysia belong to foreign firms, there are
already tremendous amounts of royalty that flow out of the country. According
to the 9th Malaysia Plan, in 2005 there was already estimated to be a net outflow
of royalties of RM5.7billion.46 This is not surprising given that 98% of patents
granted in Malaysia are to foreigners (see below). If Malaysia broadens and
lengthens its intellectual property protection while it still has less capacity to
generate its own intellectual property, it can expect to see the royalty outflow
increase.
D.

EFFECTS ON PATENTING OF LIFE, BIODIVERSITY, GENETIC

RESOURCES, AGRICULTURE AND FARMERS

1. Background
The FTA will have serious effects on an inter-related set of issues: patenting of lifeforms (especially micro-organisms), biodiversity and traditional knowledge,
agriculture and the income and interests of farmers (especially the saving, control and
use of seeds). This is because:
1. At present, the WTOs TRIPS agreement allows countries to exclude the patenting
of plants and animals. However some US FTAs (for example with Chile) oblige the
country to make available patent protection for plants that are new, involve an
inventive step and are capable of industrial application.
2. The TRIPS agreement makes it mandatory for WTO members to patent microorganisms and certain microbiological processes. However it is left to members to
determine what types of micro-organisms to allow for patenting. For example, some
countries do not allow patenting of naturally-occurring micro-oragnisms. Malaysias
Patent Act only allows for the patenting of man-made microorganisms. Malaysia,
like many developing countries, interprets this to exclude naturally-occurring
46

Page 264.

89

microorganisms. The US FTAs usually require the parties to sign up to the Budapest
Treaty on the International Recognition of the Deposit of Microorganisms for the
Purposes of Patent Procedure, which increases patenting of micro-organisms.
3. The TRIPS agreement allows WTO members the choice of patenting plant
varieties or establishing a sui generis system of intellectual protection for plant
varieties. This gives countries the freedom to chose their own system, and some
countries have stressed the right of farmers to save and re-use their seed. However
the US FTAs oblige countries to be members of the UPOV 1991 treaty, which
provides a lot of rights to plant breeders and companies, while the rights of farmers to
save and re-use seeds are very limited.
Malaysia has been a leading part of developing countries striving to use international
conventions such as the Biodiversity Convention (CBD) to establish the sovereign
right of countries to their genetic resources and to prevent the misappropriation of
their biological resources (bio-piracy) through patenting. However, the FTA will
eliminate or greatly reduce the ability of the country to protect its rights.
2. UPOV 1991, Plant Varieties protection and Effect on Farmers Rights
The US FTA obligation to protect new plant varieties (NPV) also raises concerns. The
WTO TRIPS Agreement leaves it to Members to protect NPV by patents or a sui
generis system or a combination of both. Exercising that right, Malaysia enacted in
2004 a sui generis law to protect NPV that balances the protection of commercial
plant breeders with the protection of traditional farmers who also breed NPV.
Biosafety concerns are also incorporated in the Malaysian law.
On the other hand, the US is a party to the International Convention for the Protection
of New Varieties of Plants which set up the International Union for the Protection of
New Varieties of Plants (UPOV). Adopted in 1961, and revised in 1972, 1978 and
1991 each revision of this agreement has led to more benefits for
institutional/commercial plant breeders by according them higher and higher IP
protection. The majority of developing countries have chosen not to be a party to
UPOV and so of the current 63 UPOV Members, only a few are from developing
countries and most of these are members of UPOV 1978. New members can only
adopt UPOV 1991 which would disadvantage small farmers, which constitute the vast
majority of farmers in developing countries. Pressures are increasing via bilateral
FTAs with the US to join UPOV 1991. All the US FTAs since NAFTA (including the
one with Singapore) oblige the parties to be members of UPOV 1991.
Plant varieties are types of the same plant, for example D24 is a durian variety. Plant
varieties are often developed by multinational agriculture companies such as
Monsanto. These plant breeders in laboratories want to maximize their profits by
restricting what farmers can do with the plant varieties they develop. This means that
like any other intellectual property (IP) legislation, plant variety protection has to find
the appropriate balance between the user (in this case the farmer) and the creator
(plant breeder) of the IP. Even among plant breeders, there is a need to balance
between public researchers in developing countries such as Malaysia and foreign

90

researchers in order to ensure that the fruits of research and the use of materials from
those developing countries will primarily benefit the countries concerned.
The strongest type of IP protection would be a patent on the plant and/or plant variety
as this would stop or restrict the farmer from being able to save seed from one crop to
re-plant or exchange it with another farmer, as well as prevent or restrict the use of the
patented materials for further research by others. TRIPS does not require WTO
member countries to allow patents on: plants, animals or plant varieties. However
some FTAs with the US (e.g. Chile) require the parties to allow patenting of plants.
The second strongest form of intellectual property protection for plant varieties is via
a 1991 version of a treaty on plant variety protection called the International
Convention for the Protection of New Varieties of Plants (UPOV). TRIPS does not
require countries to join UPOV 1991. UPOV was designed with the commercialised
farming systems of the developed countries in mind.47 UPOV 1991 favours formal
plant breeders (in laboratories) and does not sufficiently safeguard the right of small
farmers to breed and develop new plant varieties. The balance between farmers and
formal plant breeders is more in favour of farmers in UPOV 1978, but Malaysia can
no longer join UPOV 1978.
As it is allowed to by TRIPS, Malaysia has a sui generis law to protect new plant
varieties called the Protection of New Plant Varieties Act 2004. So far Malaysia
has decided against joining UPOV 1991 and this is appropriate because at
Malaysias current stage of research and development in agriculture, in practice
UPOV 1991 would allow breeders rights to be claimed by foreign researchers
rather than local farmers or researchers. Malaysias sui generis law has been
regarded as a model for other countries because of the protection it offers
farmers and its better balance that could build local research capacity.
However every country signing a USFTA since the North American Free Trade
Agreement (NAFTA) in 1994 has had to sign UPOV 1991. Malaysia is not a party
to UPOV 1991, but the USA is. If Malaysia has to join UPOV 1991, some of the
changes it would have to make to its tailor-made sui generis regime would be:
a) To remove the protection Malaysias law currently gives to farmers and
indigenous people who have developed varieties themselves over the
millennia in the field. This 15 years of protection helps to prevent
biopiracy (where others take their plant resources and make profits
without their prior informed consent or providing them with a fair and
equitable share of the benefits). UPOV 1991 essentially only gives legal
protection to formal laboratory techniques.
b) The deletion of the Malaysian laws provisions that allow: small farmers
to exchange seeds amongst themselves and to sell the farmers farm-saved
seeds if the farmer cannot make use of them because of natural disaster,
emergency or other factors beyond the farmers control. UPOV 1991
would instead require a compulsory licence to be applied for if farmers
wanted to sell their farm-saved seed in this situation. This is more
47

Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 61.

91

difficult, time consuming and not an automatic right the way Malaysias
Act allows.
c) To reduce the situations in which a compulsory licence can be issued (to
overcome plant variety protection).
d) The deletion of Malaysias right to prohibit the registration of plant
varieties that may cause a negative impact on the environment.
e) The deletion of Malaysias protections against biopiracy. (Malaysias Act
requires applications for plant variety protection to include items such as
the source of the genetic resource, prior written consent of the indigenous
people or local community if they developed it from traditional varieties
and evidence that it has complied with any law regulating genetically
modified organisms if the plant variety was developed via genetic
engineering).
f) The deletion of Malaysias safeguards to ensure plant varieties developed
from Malaysian samples are available in Malaysia for example for local
researchers to work on.
3. Budapest Treaty on the International Recognition of the Deposit of
Microorganisms for the Purposes of Patent Procedure
The Budapest Treaty on the International Recognition of the Deposit of
Microorganisms for the Purposes of Patent Procedure (Budapest Treaty) is about
microorganisms. Microorganisms are not defined in TRIPS and so could be bacteria,
cells, enzymes, proteins, genes etc.
TRIPS does not require countries to join the Budapest Treaty. Malaysia is not
currently a party to the Budapest Treaty, but the USA is. Almost all USFTAs have
required the countries signing them to join the Budapest Treaty.
The Budapest Treaty aims to make it easier for people to get patents in multiple
countries, in this case for microorganisms. Countries may want to require people who
apply for patents on microorganisms to deposit a sample of the microorganism with
them. This is because microorganisms can be difficult to adequately describe on a
paper patent application.48 Part of the quid pro quo underlying the patent system is
that a monopoly is granted (for 20 years for WTO members) to the inventor in return
for the inventor disclosing how to make the invention so that at the end of 20 years,
anyone can make the invention.49 This disclosure occurs in the patent application. To
ensure there is adequate disclosure to justify getting a patent, countries can require the
patent applicant to deposit a sample of the microorganism at a storage facility in the
country.
Patent applicants say the cost and effort of posting microorganism samples to each
country they want a patent in makes it procedurally more difficult for them to get
patents in multiple countries. If countries have signed the Budapest Treaty, people
48

UNCTAD-ICTSD Resource Book (2005), available online at

http://www.iprsonline.org/unctadictsd/ResourceBookIndex_update.htm
49
UNCTAD-ICTSD Resource Book (2005), available online at
http://www.iprsonline.org/unctadictsd/ResourceBookIndex_update.htm

92

seeking to get a patent in those countries only have to give a microorganism sample to
an international depositary authority. As of March 2006 there were 37 such
authorities: seven in the United Kingdom, three in the Russian Federation and in the
Republic of Korea, two each in China, Italy, Japan, Poland, Spain and the United
States of America, and one each in Australia, Belgium, Bulgaria, Canada, the Czech
Republic, France, Germany, Hungary, Latvia, India, the Netherlands and Slovakia.
The majority of the depositories are in developed countries and these hold the bulk of
the deposits.
Implications for Malaysia
If Malaysia signs the Budapest Treaty, as most USFTAs have required, it is likely to
receive more microorganism patent applications due to the easier application
procedure and if these are granted at the same rate, more microorganisms will be
patented in Malaysia. This is likely to raise the cost of inputs for the food, medical
and agricultural industries50 in Malaysia, including the biotechnology industry.
For example Thai industries rely on imported micro-organisms costing an average of
RM5.2billion-RM6.2billion per year.51 In the context of the Japan-Thailand Economic
Partnership Agreement Khao-Kwan Foundation chairman Day-cha Siripatra said the
country would lose several hundred billion baht a year if the government allowed
Japan to patent micro-organisms, because Thailand relied on Effective Microorganism (EM) imports from Japan to support many industries and solve the
environment problem.52
As 98% of patents in Malaysia are granted to foreigners and this has been constant for
the last five years (see above), it is likely to increase the outflow of royalties,
contributing to greater foreign exchange losses.
There are also concerns that international depositary authorities may not be properly
managed so it would be difficult for the country of origin or providing country to
safeguard its interests and rights over the samples. Malaysia has significant
biodiversity, including in microorganisms and this may lead to biopiracy.
Furthermore, the international depositary authority may deal with the sample in a way
the country does not desire. For example Indonesia freely gave samples of its bird flu
virus to the World Health Organization who then passed it onto an Australian
company who developed a vaccine and would not give it free to Indonesia but insisted
on Indonesia paying commercially for it.53

4. Data exclusivity and farmers

The data exclusivity requirements in USFTAs also apply to agricultural chemicals.
This prevents suppliers of generic versions of these chemicals from being able to
make use of the test data of the companies that first received registration of the
50

http://nationmultimedia.com/2007/02/17/business/business_30027112.php
http://nationmultimedia.com/2007/02/17/business/business_30027112.php
52
http://nationmultimedia.com/2007/02/17/business/business_30027112.php
53
http://www.thejakartapost.com/detailheadlines.asp?fileid=20070212.A07&irec=6
51

93

chemicals in order to get the safety approval to market their generic products.Data
exclusivity is not required by TRIPS.54
Based on other USFTAs, this would mean that no generic version of a herbicide or
pesticide can be registered and therefore used in Malaysia for ten years.
When ten years of data exclusivity for agricultural chemicals was introduced in
Australia as part of the Australia-USFTA, Australian farmers said These changes will
have a devastating effect on the independent generic chemical companies which
provide competitively priced chemicals to farmers In the context of this submission
we ask that the Senate Committee to consider taking the important issue of data
protection out of the FTA agreement or set aside Chapter 17 [on intellectual property]
of the FTA from the broader agreement. This will allow Australia to set our own laws
which best serve our market and stakeholders.55
Generic versions of agricultural chemicals are two to three times cheaper than their
counterparts that are patented or have data exclusivity and the agricultural chemicals
make up 10%-14% of total input costs for Australian farmers.56
Therefore the Australian farmers concluded that Australian farmers have no subsidies
to aid payment for input costs like chemicals, they survive in a distorted world market
by keeping their input costs minimal. The competitive generic chemical market has
evolved to meet the Australian farmers requirements and needs to remain for
Australian farmers to stay internationally competitive these laws if implemented in
Australia, they have the potential destroy the generic companies that exist in Australia
and the beneficial competition that goes along with their presence in the market.57
The farmers asked that data protection be taken out of the Intellectual Property
Chapter or the entire Chapter be set aside for re-negotiation.58
Some pertinent questions arise. Has the Malaysian Government calculated whether
data exclusivity on agricultural chemicals will also lead to a rise in input costs for
Malaysian farmers of 10%-20% from data exclusivity alone? If so, will the farmers be
compensated for the duration of MUFTA? The increase in costs will add to the other
problems facing the farmers as a result of MUFTA, such as higher competition from
54

Protection of Data Submitted for the Registration of Pharmaceuticals: Implementing the Standards of
the TRIPS Agreement, Carlos Correa, South Centre (from: www.southcentre.org/publications/
protection/protection.pdf).
55
Submission to the Senate Select Committee on the Free Trade Agreement between Australia and the
United States of America by the Pastoralists and Graziers Association of W.A. (Inc) And Generic
Agricultural Chemical Association. (The members of the Pastoralists Association grow 2 million tonnes
of wheat).
56
Submission to the Senate Select Committee on the Free Trade Agreement between Australia and the
United States of America by the Pastoralists and Graziers Association of W.A. (Inc) And Generic
Agricultural Chemical Association.
57
Submission to the Senate Select Committee on the Free Trade Agreement between Australia and the
United States of America by the Pastoralists and Graziers Association of W.A. (Inc) And Generic
Agricultural Chemical Association.
58
Submission to the Senate Select Committee on the Free Trade Agreement between Australia and the
United States of America by the Pastoralists and Graziers Association of W.A. (Inc) And Generic
Agricultural Chemical Association.

94

(often subsidized) imports as tariffs are reduced or eliminated, and higher costs of
seeds due to the strict IP to be introduced for plant varieties.
E. PATENT COOPERATION TREATY
TRIPS does not require countries to join the Patent Cooperation Treaty (PCT).
However, all recent US Free Trade Agreements have required the countries signing
them to join the PCT.59
Patents are national. It is not possible to apply for a worldwide patent. The PCT is
designed to enable people to apply for a patent in multiple countries more easily. It
does this by standardizing the application procedures and requiring Parties to the PCT
to accept the standardised procedure. Applications can then be sent to multiple
countries by basically ticking a box.
The PCT is more beneficial for countries with inventors who wish to apply for patents
in other countries. 98% of patents granted in Malaysia are to foreigners and this has
been constant for the last five years according to Malaysian Government statistics.60
Malaysia became a party to the PCT last year. As this makes it easier for foreigners to
apply for patents in Malaysia by lowering the procedural hurdles, Malaysia can expect
more patent applications. This was the experience of all other countries joining the
PCT except one according to WIPOs data. For example Chinas patent applications
increased five-fold, Icelands increased 12-fold and Vietnams increased 15-fold.61
61 countries62 are still not PCT members. Some of the countries that are not yet PCT
Members are fellow ASEAN members (Brunei, Cambodia, Myanmar and Thailand),
and/or those with higher incomes per capita than Malaysia (such as Saudi Arabia,
Kuwait, Lebanon and Malta).
If it turns out that the PCT has caused a flood of patent applications causing the
Intellectual Property Corporation to fall behind in its examinations, or causing more
medicines to be under patent monopolies, it is possible for Malaysia to unilaterally
withdraw from the PCT,63 without penalty, if the Malaysia-USFTA has not been
signed. Countries have reversed their levels of intellectual property protection in the
past, e.g. the Netherlands used to allow patents, then it abolished its patent law (before
later reinstating it).64
However, Malaysia is likely to have to commit to remaining in the PCT if it signs a
MUFTA because all recent USFTAs have had this obligation. This (and other
59

www.ustr.gov.
http://www.mipc.gov.my/index.php?option=com_content&task=view&id=3&Itemid=10
61
The other countries registering significant increases in patent applications were Canada, Croatia,
Israel, Mexico, New Zealand, Serbia and Montenegro and Turkey. Of the countries with sufficient data,
only Algeria did not register a significant increase in patent applications when it joined the PCT.
62
United Nations has 191 Members and PCT has 130 Members (from
http://www.wipo.int/treaties/en/ShowResults.jsp?lang=en&treaty_id=6 accessed on 28 April 2006).
63
Art 66.
64
Schiff, E. (1971) Industrialisation Without National Patents: The Netherlands 1869-1919,
Switzerland, 1850 1907, Princeton University Press, Princeton.
60

95

provisions such as non-violation complaints and the investment chapter) may make it
harder to withdraw from the PCT or other WIPO treaties.
The rapid increase in patents in Malaysia will have several effects.
examples are given below.

A few

Effects on the 9th Malaysia Plan

Health/quality of life
The 9th Malaysia Plan emphasizes the importance of improving quality of life
including achieving better health in Chapter 20. As a greater proportion of medicines
in Malaysia will be patented if it signs the PCT, this means Malaysians will have to
pay the higher monopoly price for all these patented medicines. For example, a World
Health Organization funded study found that for a family of 3 with some minor health
problems, it would take the lowest level Malaysian government official 2 months of
salary to afford one month of medicines if generics were not available.65
Moving up the value chain
According to Thrust One of the 9 th Malaysia Plan, Malaysia should move up the value
chain. However in higher technology industries, the inputs are also technology. If a
greater proportion of machinery etc is patented in Malaysia because it joins the PCT,
this will increase the cost of inputs (as more royalties will have to be paid) and make
it harder for Malaysia to move up the value chain. (This would be exacerbated under a
USFTA which, based on existing USFTAs, would require all Malaysias tariffs to be
bound at 0% making it very difficult to start new industries higher up the value chain
as they are exposed to competition from day 1).
Biotechnology
Biotechnology is a focus of Chapter 6 of the 9 th Malaysia Plan. As explained above,
to foster a biotechnology industry in Malaysia, Malaysia actually needs to grant as
few patents as possible in Malaysia. The main thing is that patents continue to be
granted in the main markets for the products of a Malaysian biotechnology industry,
i.e. the USA and European Union.
Malaysias economic growth is affected if Malaysians are sicker
The World Health Organizations Commission on Macroeconomics and Health found
that a 10% increase in life expectancy at birth is associated with a rise in economic
growth of at least 0.3-0.4% of economic growth per year (all else being held
constant).66 Conversely, a high malaria prevalence is associated with a reduction in
economic growth of more than 1% per year.67

F. SCOPE OF PATENTABILITY

65

A survey of medicine prices, availability, affordability and price components in Malaysia using the
WHO/HAI methodology, Research Report, University College Sedaya International & University
Sains Malaysia in collaboration with the World Health Organization, October 2005.
66
www.cmhealth.org.
67
www.cmhealth.org

96

TRIPS allows countries to decide not to give patents on: plants, animals or diagnostic,
therapeutic and surgical methods.68 There can be ethical and cultural objections to
patenting life.69 Furthermore, medicines such as the last remaining effective malaria
treatment in some areas are plants. Allowing patents on plants would grant
monopolies on them and so make these medicines unaffordable.
However, US FTAs can require countries to allow patents on some or all of these
things.
One reason for this is that US national patent law already allows for patents for some
of these things. For example: (1) There were 600 patents relating to rice issued in the
US in 2000 and the rate of patenting is rapidly rising.70
(2) The US has introduced patents for surgical procedures. When the introduction
was made, a blizzard of lawsuits followed. This unhealthy circumstance was halted
in 1996 by the American Medical Association and Congress, which decided that
doctors couldn't sue other doctors for using patented surgical procedures.71
(3) USFTAs can also require countries to give patents for new uses of old medicines. 72
This is dangerous because not many brand new medicines are being invented. Instead,
computerized testing now allows pharmaceutical companies who have thousands of
existing medicines on the shelf to test them against different diseases very quickly.
This is cheaper and faster than building a new medicine from scratch so is preferred
by pharmaceutical companies. If patents on new uses are allowed, a medicine such as
AZT which was used to treat cancer and received a 20 year patent for that, would get
a second, consecutive, 20 year patent when it was found to be effective for
HIV/AIDS. This delays generic competition and keeps medicine prices high.
The Commission on IPR recommends that maximum use be made of the possibilities
under TRIPS of excluding such inventions from patent protection.73
Software patents
TRIPS does not require patents on software either 74 and many countries do not allow
patents on software. However the USA allows patents on software and some
information technology lawyers are concerned that certain provisions in USFTAs
68

Art 27.3.
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 59.
70
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 64.
71
http://www.nytimes.com/2006/03/19/opinion/19crichton.html?
ex=1172379600&en=66dcde5df677af77&ei=5070. Congress added subsection (C) to 35 USC 287 to
fix the problem.
72
For example Art 15.8.1 (b) Oman-USFTA.
73
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 66
74
UNCTAD-ICTSD Resource Book (2005), available online at
http://www.iprsonline.org/unctadictsd/ResourceBookIndex_update.htm
69

97

could eventually lead to software patents.75 For a table that details the many
provisions
in
the
Australia-USFTA
that
affect
software,
see
http://linux.org.au/projects/fta/fta_comparison_table_040322.pdf.
As for the effect on the vibrant open source software community in Malaysia, the
possible implications can be seen by how it is playing out in the USA. A single
patent can ruin an Open Source project With the USPTO granting an estimated
45,000 software patents in 2003 and rising, it is not possible to audit software against
the hundreds of thousands of patents.76 Alleged infringement of one software patent
alone resulted in the US court awarding damages of US$521million.77

G. COPYRIGHT
1. .Background
USFTAs require stronger copyright protection than TRIPS in several ways, some of
which are discussed below.
The text of several insightful remarks on copyright and FTAs are given below.
According to a UNESCO report: Copyright has emerged as one of the most
important means of regulating the international flow of ideas and knowledge-based
products, and will be a central instrument for the knowledge industries of the twentyfirst century.
Those who control copyright have a significant advantage in the emerging,
knowledge-based global economy. The fact is that copyright ownership is largely in
the hands of the major industrialized nations and of the major multimedia
corporations placing low per capita income countries as well as smaller economies at
a significant disadvantage.78
Copyright-based industries including publishing, film, television, radio, music and
computer software supply the intellectual raw material for science and innovation,
as well as for education and instruction in general, and they have helped bring about
dramatic increases in productivity through aiding the creation of information-based
products like desk-top publishing software, electronic mail or sophisticated scientific
computer databases.79
75

http://www.ilaw.com.au/public/softwarepatents.html citing Art 17.9.14 of the Australia-USFTA

Each Party shall endeavour to reduce differences in law and practice between their respective systems,
including in respect of differences in determining the rights to an invention, the prior art effect of
applications for patents, and the division of an application containing multiple inventions. In addition,
each Party shall endeavour to participate in international patent harmonisation efforts, including the
WIPO fora addressing reform and development of the international patent system as something that
could lead to harmonization with the US and therefore allowing software patents in Australia.
76
Submission to Senate Select Committee on the Free Trade Agreement between Australia and the
United States of America from
http://www.aph.gov.au/Senate/committee/freetrade_ctte/submissions/sub164.pdf
77
http://www.imakenews.com/bakerbotts/index000036038.cfm
78
UNESCO (1998) World Information Report 1997/98, UNESCO, Paris, p.320.
Source: http://www.unesco.org/webworld/com_inf_reports/wirenglish/chap23.pdf

98

Access to computer software is a pre-requisite for access to information and for

competitiveness in the global economy. . . In the knowledge-based global economy,
computer technologies are an essential requirement for accessing and using
information, accelerating technology transfer and boosting the growth of productivity
according to the Commission.80
Software, textbooks, and academic journals are key items where copyright is a
determining factor in pricing and access, and which are also essential ingredients in
education and other spheres crucial to the development process. For instance, a
reasonable selection of academic journals is far beyond the purchasing budgets of
university libraries in most developing countries, and increasingly in developed
countries as well.81
As a result of the successful lobbying of powerful US copyright markets, the U.S.
copyright regime sets one of the highest standards of copyright protection in the world
but one which is not recognised as providing a balance between the interests of users
and copyright owners It is apparent however that many of the FTA provisions
closely mirror those provisions already in the U.S. Digital Millenium Copyright Act
1998 (DMCA) so that harmonisation equates to unilateral action to amend Australian
copyright legislation to U.S. legislation.82
The IP chapter (Chapter 17) of the AUSFTA creates obligations to amend the
Australian copyright regime in ways that will reduce access to materials, increase
costs for institutions which provide public access to knowledge, and ultimately curb
innovation. This neglect is disturbing and unsatisfactory given that a balanced
intellectual property regime forms the research and resource base upon which our
knowledge and creative industries depend. Overall, the provisions in Chapter 17 fail
to provide a satisfactory level of balance. The ADA does not believe that the
provisions pertaining to copyright serve the interests of Australians and does not
support the ratification of the FTA on that basis.83
Most developing countries are net importers of copyrighted material (and
technology).84 75% of global book exports were from the US (20%), UK (17%), other
European countries, Canada and Singapore.85
79

Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 95.
80
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 100 and 104.
81
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 17
82
Australian Digital Alliance (a coalition of IT companies, scientific and research organizations,
schools, universities, consumer groups, cultural institutions, libraries and individuals) submission from
http://www.aph.gov.au/Senate/committee/freetrade_ctte/submissions/sublist.htm.
83
Australian Digital Alliance (a coalition of IT companies, scientific and research organizations,
schools, universities, consumer groups, cultural institutions, libraries and individuals) submission from
http://www.aph.gov.au/Senate/committee/freetrade_ctte/submissions/sublist.htm.
84
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 17

99

If Malaysia is seeking to encourage innovation, it should be noted that countries such

as Benin and Chad which joined the Berne Convention many years ago have not seen
significant increases in their national copyright-based industries or in the level of
copyright-protected works being created by their people.86
An Australian legal academic K. Weatherall found that the IP provisions of the
AUSFTA would mean that

Increased costs to users

As a net IP importer, more royalties will flow overseas.

No recognition of moral rights in the USA for creations by Aboriginal

Australians.

Some new works not created because of the increased costs to Australian
creators and researchers of using older material.

Transaction costs of searching for the author to ask permission to use the
material

Lost opportunities to create archives or digital collections of older works such

as Project Gutenberg.

Orphaned works where the author cannot be found to get permission and so it
is not available.87

The Australian Libraries Copyright Committee (ALCC) is the cross-sectoral body

acting on behalf of Australian libraries and archives on copyright and related matters.
It seeks to have the interests of users of libraries and archives recognised and reflected
in copyright legislation, and in so doing, help build and sustain a copyright regime
which promotes learning, culture and the free flow of information and ideas in the
interests of all Australians.88 In their Submission on the Australian-US FTA, they
state that:
The ALCC does not support the ratification of the FTA on the basis that the
provisions of Chapter 17 [intellectual property] will result in substantial
damage to our creative and innovative potential by restricting access to and
increasing the costs of access to knowledge.
It is ALCCs submission that overall, the obligations created by the FTA will
require change to Australias copyright regime that will fundamentally alter
the current balance in Australian law with detrimental impacts on our cultural,
85

Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 97
86
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 98
87
Kimberlee Weatheralls submission to the Senate Select Committee on the Free Trade Agreement
between Australia and the United States of America
88
Australian Libraries Copyright Committee submission to Senate Select Committee on the Free Trade
Agreement between Australia and the United States of America

100

educational and information environments The extension of copyright term

will place a significant burden on libraries which will ultimately be borne by
users and the Australian public
The ALCC is disappointed to note that the importance of maintaining a
balanced copyright regime is not properly reflected in the draft text of Chapter
17 of the FTA. Chapter 17 creates obligations to amend the Australian
copyright regime in ways that will reduce access to materials, increase costs
for libraries and archives which provide public access to knowledge and
ultimately impede the flow of information.
This neglect is disturbing given that a balanced copyright law forms the
necessary foundation for fulfilling Australian government policy goals in
building a clever country. Overall, the provisions in Chapter 17 fail to
provide a satisfactory level of balance. The ALCC does not believe that the
provisions pertaining to copyright serve the interests of Australians and does
not support the ratification of the FTA on that basis
As stated repeatedly by negotiators from Australia and the U.S., the overall
effect of Chapter 17 is the harmonisation of our respective copyright
regimes. It is apparent however that many of the FTA provisions closely
mirror those provisions already in the U.S. Digital Millennium Copyright Act
1998 (DMCA) so that harmonisation equates to unilateral action to amend
Australian copyright legislation to match U.S. legislation.
The alignment of our copyright legislation to meet obligations created by the
FTA has dangerous potential to create severe distortions within our domestic
regime. Although Australia and United States share a common law tradition,
some divergence has developed in recent years, marked by the emergence of
powerful U.S. copyright markets which have been extremely successful at
legislative lobbying. As a result, the U.S. copyright regime sets one of the
highest standards of copyright protection in the world but one which has not
been recognised as providing a balance between the interests of users and
copyright owners. This consequently leads to a great deal of expensive
litigation.89

2. Copyright term extensions

TRIPS requires copyright protection for a period of at least 50 years from publication
or making (when it is not calculated on the basis of the life of a natural person).90
By contrast, US free trade agreements (USFTAs) require copyright to last for 70, 95
or 120 years.91
89

Australian Libraries Copyright Committee submission to Senate Select Committee on the Free Trade
Agreement between Australia and the United States of America
90
Article 12 TRIPS.
91
The North American Free Trade Agreement was signed before TRIPS and it has a copyright term of
50 years. Jordans USFTA does not specify a copyright period as it is a different style of FTA. The
other USFTAs all have 70 years except for Omans which requires 70, 95 or 120 years of copyright
protection depending on which measurement system is used.

101

Malaysias copyright law provides protection for literary, musical or artistic

works during the authors lifetime plus a period of 50 years after the death of the
author. For protection for sound recordings, broadcasts, films, performers
rights, the period covered is 50 years after the recording or broadcast was first
made. It is likely that Malaysia will have to agree to copyright protection of at
least 70 years (after the death of author; or of date of recording etc.) if it signs
MUFTA. This 40% increase in copyright duration is likely to have significant
effects on Malaysias ability to increase its knowledge and innovation capacity.
Former Assistant Commissioner at the Australian Productivity Commission and trade
expert, now at the Australian National University in a report that was commissioned
by the Senate Committee, looking at the AUSFTA found that Australias net royalty
payments could be up to $88 million higher per year as a result of extending the term
of copyright [from 50 years to 70 years].92
In addition to the increased royalty payments, much of which flows overseas, there
are economic costs of seeking permission to reproduce a work when it is still
copyrighted. For example the Carnegie-Mellon study by US universities found that
the cost of seeking permission to copy an out-of-print or commercially unavailable
work is US$150-200, without guarantee of a response.93
In the context of the USAs decision to extend copyright from 50 to 70 years, US
Justice Breyer said the costs of obtaining permission, now perhaps ranging in the
millions of dollars, will multiply. 94 To get clearance for one work, consumed
approximately a dozen man-hours per work. The College Art Association says that the
costs of obtaining permission for use of single images, short excerpts, and other short
works can become prohibitively high. 95 Justice Breyer went on to state that the
economic effect of the Copyright Term Extension Act 1998 (US) is to make the
copyright term virtually perpetual. He observes that the legislation creates a
copyright term worth 99.8% of the value of a perpetual copyright: The economic
effect of this 20-year extension - the longest blanket extension since the Nations
founding - is to make the copyright term not limited, but virtually perpetual. Its
primary legal effect is to grant the extended term not to authors, but to their heirs,
estates, or corporate successors. And most importantly, its practical effect is not to
promote, but to inhibit, the progress of Science - by which word the Framers meant
learning or knowledge.96
Universities were also concerned about the impact of extending copyright term in
Australia. For example, the executive director of the Australian Vice-Chancellors
Committee, John Mullarvey, said that Australian universities now paid $20 million a
92

It is also in her The Australia-US Free Trade Agreement: An Assessment, Pacific Economic Papers
No. 345, 2005, Australian National University.
93
ALIA Submission to Senate Committee.
94
Dr Rimmers Submission to the Senate Select Committee on the Free Trade Agreement between
Australia and the United States of America
95
Dr Rimmers Submission to the Senate Select Committee on the Free Trade Agreement between
Australia and the United States of America
96
Dr Rimmers Submission to the Senate Select Committee on the Free Trade Agreement between
Australia and the United States of America

102

year in copyright fees and adding 20 years to the period of copyright protection would
add to that sum. How much I couldnt even guess.
For people in remote areas who would have been able to rely on electronic versions of
books via the internet such as via the free Project Gutenberg which uploads them once
they are out of copyright, this means waiting another 20 years before they can access
them.
Furthermore, copyright term extensions are unlikely to promote creativity, the basic
objective of copyright law because Milton Friedman and 17 other economists
(including 5 Nobel Prize winners) found that the economic benefit of 20 extra years to
copyright owners was less than US$0.01 per year per work and so was unsustainable
as an economic argument for extension.97
Expressions of concern in Australia about the extension of copyright duration to
70 years
Australian Federal Government concerns
The Australian Federal Government negotiated and signed the Australia-USFTA
which contained an extension of the copyright period to 70 years, despite earlier
having concluded that such an extension would not be advisable, for example in the
reports below.
The Minister for Communications, Information Technology and the Arts, The Hon
Darryl Williams, [informed the Media Entertainment and Arts Alliance] that the
Government would make no concessions to the US regarding extension of copyright
term. The Minister explained it was Government policy that copyright term not be
extended because of the negative financial impact doing so would have on Australia.
The Minister advised that his department, DCITA, had undertaken work on extension
of term and had concluded the cost to Australia would be so considerable that
reviewing Government policy could not be contemplated.98
Similarly, the Office of Regulation Review which is part of the Productivity
Commission which is the Australian Governments principal review and advisory
body on microeconomic policy and regulation 99 made a submission to a Committees
review of the Copyright Act and recommended against an extension of copyright term
saying that The ORR considers that a general extension of copyright protection
would have few (if any) tangible benefits and holds the risk of substantial costs:

it represents an unjustifiable redirection of funds (i.e. economic rents) from

Australian consumers and secondary producers without commensurate
benefits;

it would be likely to cause an increase in net royalty flows to overseas authors

and publishers;

97

ALIA Submission to Senate Committee.

Media Entertainment and Arts Alliance Supplementary Submission to the Senate Select Committee
on the Free Trade Agreement between Australia and the United States of America
99
http://www.pc.gov.au/commission/index.html
98

103

there is no evidence that it would provide a significant incentive to produce

works not already being produced100

State Government concerns

The NSW Government is concerned that the proposed extension of the period of
copyright protection from 50 to 70 years from the death of the author, will have a
significant financial impact on libraries, universities and schools The extension of
the copyright term would delay the entry of works into the public domain and restrict
the flow of creativity and knowledge into the public domain. It will impose greater
limits on access to information, which is a fundamental principle of library
services.101
Similarly, the The Queensland Government is concerned that this change would have
serious implications for large scale users of copyright material who will have to pay
significantly more in copyright fees, particularly government, libraries, universities
TAFEs and other education institutions. There are also significant concerns from
industry that the extension of copyright protection represents a barrier to innovation
by restricting access to intellectual property for longer periods. 102 The Queensland
Government thought consideration should be given to a funding mechanism to allow
educational and research institutions to accommodate the extra 20 years of copyright
protection.103
Librarians concerns
Librarians warn a free trade deal with the US may result in a massive transfer of
wealth from the Australian public and performers to US monopoly copyright holders.
Negotiations for the US Free Trade Agreementmay result in a tenfold increase in
licence fees for Australians performing original works by US artists, if overseas
experience is a guide.
Australian Library and Information Association copyright adviser Colette Ormonde
says in a recent case an Australian performer touring the US was denied the chance to
perform the works of Hungarian composer Bela Bartok because an extension to the
US copyright term had clawed Bartok's work back from the public domain. Bartok
died in 1945 and his works entered the public domain - where they could be
performed without paying licence royalties - in 1995. But under new US laws, the
Bartok estate retains control over his works until 2015.
Extension of the copyright term in the US benefited the publishing conglomerates
and film and record producers but disadvantaged copyright users. Amateur musicians,
for example, found that the licensed cost of a music score for a one-night performance
increased from $100 to $1000. The worst result for copyright users was that authors
100

Media Entertainment and Arts Alliance Supplementary Submission to the Senate Select Committee
on the Free Trade Agreement between Australia and the United States of America
101
NSW Government Submission to the Senate Select Committee on the Free Trade Agreement
between Australia and the United States of America.
102
Queensland Government Submission to the Senate Select Committee on the Free Trade Agreement
between Australia and the United States of America.
103
Queensland Government Submission to the Senate Select Committee on the Free Trade Agreement
between Australia and the United States of America.

104

and composers whose work was out of copyright became protected again Ormonde
says the cost to Australia - a net importer of copyrighted works [ 104] such as films,
music and books - will continue to grow as copyright terms are extended and won't be
compensated by the greater returns to Australian publishers of original works.
The rewards to Australian copyright owners in extending the term of protection are
minimal because they don't have the huge product of major European and US
publishers and never will have.
Project Gutenberg Australia, an online repository of works in the public domain, will
be among the first to feel the impact of any extension to copyright terms. Named after
the famous bible first printed by Johannes Gutenberg in 1454 with the then newly
invented printing press, Project Gutenberg was started by volunteers in the US 32
years ago to make available to the public works of cultural significance that are in the
public domain. Downloads are free.
Project Gutenberg Australia's maintainer, Col Choate, says if a new deal was to extend
the term of copyright it would just about wipe us out. He says works by authors such
as Virginia Wolfe, D.H. Lawrence and George Orwell now in the public domain
would be taken back into the hands of private copyright holders.
Copyright term extension undermines the foundation for creation of copyright. The
legal and economic basis for copyright is that creators should be protected and
rewarded for a set period in order to stimulate further creativity and innovation. Apart
from financial reward, the stimulation of creativity and further works depends on the
eventual entry of works into the public domain so that others can freely learn from
and draw from a collective pool of knowledge and creativity. The extension of
copyright term prejudices a generation of creators and users by denying access to a
rich public domain.
Term extension has generated fierce debate within the U.S. where numerous
successive extensions of copyright have effectively locked works out of the public
domain and displaced the intended cycle of creation and contribution upon which
copyright was originally justified. In the recent challenge posed to the U.S. Copyright
Term Extension Act 1998 (CTEA) in Eldred v Ashcroft, the strong arguments made to
the court for repealing the CTEA, such as the added costs to users, the minimal long
term awards to owners and the speculative nature of predictions on creative incentives
arising from extended monopoly were not disputed
The available reports on the topic such as the Allens report, Copyright Term
Extension: Australian Benefits and Costs (July 2003) provides no clear evidence of
any short or long term economic benefits of extension. No claims have been made
that the economic benefits of harmonisation with the U.S. is any more than marginal
and no data has been presented to substantiate even this weak assertion. Although the
benefits of harmonisation are theoretically plausible, the reality is that the
beneficiaries of harmonisation will be multinational companies, who are based mostly
in the U.S. and European Union No proponent of term extension has relied on an
argument that an extra 20 years of protection after the death of the author will have
any impact on the incentive of authors to produce more work.
104

The Victorian Government agrees with this in its submission to the Senate Select Committee.

105

In addition, Australia is a net importer of copyright materials from the U.S. by a

substantial margin; an extension of copyright term will, other things being equal, lead
to a reallocation of resources and adversely affect our balance of trade. An extension
of copyright term has serious consequences for libraries, cultural and educational
institutions in relation to raised costs of maintaining access to information and
increased costs associated with the already formidable and resource-intensive task of
tracing copyright owners and requesting permissions. The groups of people who will
be ultimately affected by the added burden of term extension include historians,
scholars, teachers, writers, artists and researchers of all kinds.
Overall the copyright provisions in Chapter 17 create obligations that will erode
public access to works and diminish the power of libraries and archives to carry out
their mandate to preserve and provide access to cultural, intellectual and creative
works. The obligations imposed by the FTA unilaterally raises the standard of
protection of copyright owners in Australia by adopting DMCA-like measures which
would fundamentally alter the balance struck in the Copyright Act.105
And again, This submission, expresses the serious concern of those responsible for
Australias research and academic information services at the copyright changes
identified in Chapter 17 of the Free Trade Agreement with the USA CAUL is
cognisant of the fact that Australia has developed a Copyright Act which, while
meeting Australias obligations to the WIPO treaties, also balances the needs of the
copyright creators and the users. The Act has received worldwide recognition as a
model of best practice.
US copyright legislation is significantly different to that in Australia. These
differences are due to a very different history and the fact that in the US copyright is
driven by sustained lobbying from large corporations and powerful industry
associations, especially the entertainment and media industries.
The balance of the Digital Millennium Copyright Act (DMCA) is tipped firmly in
favour of copyright owners, as demonstrated by the extension yet again of the term of
copyright, and continues to attract criticism as it is considered to be cumbersome,
punitive and highly supportive of big corporations in opposition to individual creators,
researchers, students and the general public.
In proposing to harmonise the well respected Australian copyright legislation with
that of the problematic US legislation under Chapter 17 of the FTA, the carefully
developed balance between the interest of copyright owners and users apparent in the
Australian legislation, will be destroyed and tipped firmly in favour of the owners.
This outcome will be to the disadvantage of writers, artists and filmmakers, as well as
the general public, who all depend on using copyright materials to create, to learn and
to participate in community life.
Specifically, the impact on higher education in Australia will be to raise the cost of
compliance on an annual basis. In addition, researchers, who - in Newtons words 105

Australian Libraries Copyright Committee submission to Senate Select Committee on the Free Trade
Agreement between Australia and the United States of America

106

stand on the shoulders of giants., will be required to pay for information which would
under current Australian law have come into the public domain.106
The Australian Library and Information Association (ALIA) in its submissions to
Senate Committees pointed out that the ALIA represents 900 library and information
organizations and the interests of 10.7million users of library and information
services. It is opposed to the copyright extension in the AUSFTA Australia is and
will be for the foreseeable future a net consumer of information Extensions of the
copyright term benefit producers and publishers of massive amounts of content. They
do not benefit the estates of individual creators or promote further creativity, the basic
objective of copyright law According to them, The extension of copyright terms
is an extension of corporate monopoly. It has no place in a free trade agreement, is
anti-competitive and burdens information consumers with escalating and
unpredictable costs and legal obligations.
Australias largest reference library, the National Library of Australia stated that
moves to increase the copyright term to 70 years would not be supported by the
National Library. We submit that this would have adverse consequences for the public
interest. The purpose of copyright is dual: to advance learning as well as to
recompense creators. The public domain is an integral part of the creative process and
allows the public access to the fruits of an artists labours after the expiry of the
copyright term. This is particularly true for creators of works such as reference books,
CD-ROMs, multimedia material, and documentary and educational films, all of which
draw heavily on public domain material. Because the copyright regime exists to serve
everyone, not just specialist interest groups, the National Library would regard any
extension of the copyright term, and the consequent reduced access to a large portion
of our common heritage, as detrimental to creativity and against the public benefit.

Application of Agreement to Existing Subject Matter

The AUSFTA specifically requires the copyright extensions to apply to material that is
currently under copyright.107
3. Anti-circumvention provisions
A technological protection measure (TPM) is a digital lock on digital material to stop
access or copying. This can prevent even legal copying, for example if the copyright
106

Council of Australian University Librarians (CAUL) submission to Senate Select Committee on the
Free Trade Agreement between Australia and the United States of America. According to their
Submission, The Council of Australian University Librarians (CAUL) represents all Australian
university libraries CAUL members operate in an educational environment which produces a
significant amount of copyright material, while their core business is the provision of access to
information. Consequently, copyright is integral to the work of university libraries and CAUL has an
abiding interest in the development of balanced and effective copyright legislation.
107
Article 17.1.9. There is an exception for things whose copyright have already expired (Article
17.1.10), for example if a books copyright expired in 2000 and the AUSFTA came into force on
1/1/2005, that book would not go back into copyright until 2020 because of the copyright extension to
70 years.

107

has already expired on a movie or book, a TPM could stop a digital copy of the book
from being able to be copied.108 This is therefore an extra, potentially infinite,
monopoly in addition to copyright. Other examples of legal copying could include a
blind person using the software to read aloud a computer file, 109 making a back-up
copy of legitimate software in case the computer breaks down and the software has to
be re-loaded, region coding for DVDs, anti-copying music CDs that will not play in a
PC, encrypted software requiring entry of a registration code before being installable,
passwords and encryption used to prevent unauthorised access to online databases110
TPMs can significantly restrict access to knowledge. For developing countries, where
Internet connectivity is limited and subscriptions to on-line resources unaffordable, it
may exclude access to these materials altogether and impose a heavy burden that will
delay the participation of those countries in the global knowledge-based society [and]
could be very harmful to the interests of developing countries in accessing
information and knowledge they require for their development. . . [therefore] it is
premature at the present time for developing countries to be required to go beyond
TRIPS standards in this area.111
A concrete example is that some scientific databases protected by TPMs can only be
accessed from one dedicated terminal in the library. This prevents students and
researchers who live long distances away and could otherwise use it online from
being able to access the information in that database. Similarly, if a Malaysian
Government Ministry bought a CD with a database on it that was not protected by
copyright, a TPM could nevertheless stop the Ministry from making legal copies to
educate its staff.
Circumvention devices can get around TPMs. Circumvention devices are allowed
under TRIPS. The WIPO Copyright Treaty (see above) has an anti-circumvention
provision112 but it allows room for national copyright exceptions, but USFTAs go
further than the WIPO Copyright Treaty.113 Malaysia is currently not even a party to
the WIPO Copyright Treaty.
All USFTAs since NAFTA have required countries to ban the act of
circumventing a TPM (i.e. penalizing the user, see below) and the manufacture,
108

Although the US Government says that TPMs are only supposed to protect copyrighted material,
things have not worked out this way in practice. For example, in 2003 when an exception was sought to
circumvent movies that were already out of copyright protection on a DVD, the exception was not
granted because it was joined to something that could be copyrighted such as a new introduction to the
old movie.
109
In the US, the publishing industry considers providing such software to be a violation of the anticircumvention provisions.
110
Australian Parliamentary Library Current Issues Brief No. 3 2004-5,
http://www.aph.gov.au/library/pubs/CIB/2004-05/05cib03.pdf
111
Integrating Intellectual Property Rights and Development Policy, report of the Commission on
Intellectual Property Rights established by the British Government,
http://www.iprcommission.org/graphic/documents/final_report.htm, page 106 and 108
112
Art 11 for copyright and Art 18 of the WIPO Performances and Phonograms Treaty for related
rights.
113
Assistant Secretary of Commerce and Commissioner of Patents and Trademarks, Bruce A. Lehman,
Electronic Frontier Foundation Briefing Paper On Technological Protection Measures Prepared For The
WIPO Inter-Sessional Intergovernmental Meeting On The Development Agenda Proposal & Fourth
Session Of The Permanent Committee On Cooperation Related To Intellectual Property Development,
April 2005. This is because the WIPO Treaty would still allow fair use exceptions.

108

importation and distribution of circumvention devices, even if they would be

legal under national copyright law for non-copyright-infringing uses, like the
examples given above.
Because USFTAs require a ban on circumvention by consumers, the end users of
a circumvention device may be liable even when s/he did not know they were
circumventing a TPM, for example when playing a DVD on a DVD player that
can play DVDs from multiple parts of the world. 114 This is because if the person
had reasonable grounds to know that they were circumventing a TPM, they can
be liable.115 The AUSFTA also makes distributors of circumvention devices liable
even if they did not know it was a circumvention device. Since circumvention
devices can be physical or computer programs, this was stated as being
inappropriate for Australians who do not understand the technology so cannot
be expected to know when they are circumventing a TPM. 116 If this is the case for
Australian consumers, it should be even more true for a developing country such
as Malaysia.
Although there is a provision which says that additional exceptions to the ban on the
act of circumvention may be allowed for users if they can credibly demonstrate in an
administrative/parliamentary review at least every four years that there is an adverse
impact on their non-infringing use,117 a similar system in the USA has been
problematic.118 The problems include:

The process only exempts the act of circumventing a technological measure,

but does not legalize the circumvention tools necessary to do so, so it only
applies to the limited number of technologically-savvy users who can make
their own circumvention tools. This means the blind would each have to write
their own computer programs to read things aloud as no one else can make or
distribute them, nor can anyone (including the blind person) import them or
share them to their blind colleagues or associations.119

Consumers without lawyers to represent them find they cannot use the process
because it is so complex

It is a costly and time consuming process, so it makes it particularly difficult

for the non-profit sector who are most likely to need such exceptions

114

http://www.eff.org/IP/FTAA/?f=tpm_implementation.html. Most films released on DVD now can

only be played in one region of the world,
http://www.eff.org/IP/DMCA/copyrightoffice/DMCA_rulemaking_broken.pdf
115
The Chile-USFTA at least limits the liability to when the user actually knew that s/he was
circumventing a TPM.
116
Kimberlee Weatheralls submission to the Senate Select Committee on the Free Trade Agreement
between Australia and the United States of America.
117
For example Article 17.4.7(e)(viii) of the AUSFTA.
118
Kimberlee Weatheralls submission to the Senate Select Committee on the Free Trade Agreement
between Australia and the United States of America and
http://www.eff.org/IP/DMCA/copyrightoffice/DMCA_rulemaking_broken.pdf.
119
The American Foundation for the Blinds request for an exemption can be found at
http://www.copyright.gov/1201/2006/comments/discipio_afb.pdf and the testimony transcript at
http://www.copyright.gov/1201/2006/hearings/transcript-mar29.pdf and the limited exception for blind
users that was obtained in 2003: http://www.copyright.gov/1201/2003/index.html

109

It is very difficult to credibly prove harm from copyright. For example of the
392 comments in one batch and 5 days of hearings in the 2003 inquiry, only
two exemptions were granted.

See http://www.eff.org/IP/DMCA/copyrightoffice/DMCA_rulemaking_broken.pdf for

more details of the very difficult things which are requested to prove to obtain one of
these exceptions.
If these provisions were in a Malaysia-USFTA (MUFTA) and the Malaysian
Ministry of Education distributed software to schools for the blind so it could
read aloud technologically protected electronic books, the Ministry of Education
may be liable under the laws implementing MUFTA. Similarly, if the schools or
libraries bought electronic books, these books may have technological protection
measures which limit the number of times it can be viewed (unlike a normal
book which can be borrowed from the library many times until it falls apart).
This limitation on the number of times it can be viewed is not required by
copyright law. If the library disabled the limitation on the number of times it can
be viewed so that it could be borrowed like an ordinary book by all the library
members, this would be a violation of the anti-circumvention laws required
under MUFTA because it is not allowed by one of the seven exceptions in the
AUSFTA.120
One of the seven exceptions is for reverse-engineering a computer program to make it
interoperable with another one. Unfortunately this does not necessarily cover
situations where data needs to be compatible with a program. For example for the
open source Open Office programs word processor to be able to read a Microsoft
Word file, it has to be able to interact with the data file, not with the computer
program Microsoft Word. Furthermore, the interoperability exception does not cover
device-program interoperability where the machine and the program need to be able
to work together.
The narrowness of the seven exceptions can be seen from their operation in the USA
where no one has ever successfully defended themselves because they used one of the
equivalent seven exceptions in a case where they have been sued for circumventing a
TPM.
These seven exceptions are further limited by Article 17.4.10 of the AUSFTA which
says that a) the exceptions have to be confined to special cases that do not conflict
with the normal exploitation of the copyrighted product and do not prejudice the
legitimate interests of the copyright owner; b) the exceptions cannot allow the
retransmission of TV on the internet for any reason; c) the rights under the TRIPS+
WIPO Treaties still apply.

When circumvention is needed

Those seeking to prohibit circumvention devices want a monopoly beyond copyright.
120

The exception for libraries is merely so they can choose whether to buy the e-book, not to allow its
members to read it once they have bought it, Art 17.4.7(e)(vii) AUSFTA.

110

Circumvention is needed to:

Make lawful uses under existing exceptions and limitations in Malaysian

copyright law

ensure that different computer programs can operate together121

Overcome artificial geographic market segmentation, for example to allow

material such as DVDs that is bought in one geographical region of the world
to be played in another. [Companies segregate the markets via region coding
of DVDs to allow differential pricing]. The Australian Government had a
policy to allow the parallel importation of some copyrighted items (i.e. buying
a legal copyrighted version in another country where it is cheaper and bringing
it to Australia) to avoid the price-inflating effects of market segmentation. 122
This was done to ensure that Australian consumers could access copyrighted
material more cheaply and was strongly supported by the Australian
Competition and Consumer Commission (the independent statutory authority
which protects consumers).123 The AUSFTA makes this type of parallel
importation impossible.124

To allow material to be made accessible for the blind

American rights holders have argued that circumvention device can include
someone pointing out a security flaw in software in an academic paper

To avoid being locked into buying the consumable parts, such as printer
cartridges from the maker of the machine (the printer).

Because of its potentially severe impact on the 54,000 blind and 464,000 people
with low vision in Malaysia,125 the effect of the anti-circumvention provisions of
the Malaysia-USFTA should be carefully studied including via detailed
consultations with the blind community, before anything is agreed to.
The possible impact on Malaysia can be seen from the cases that have occurred
under the US provision.
Threats to ability to make flaws public
An industry group (SDMI) in the US issued a public challenge for experts to try and
defeat certain digital watermarking technologies. Professor Felten from Princeton was
one of those who participated in the challenge and when he succeeded he tried to

121

There is an exception in the AUSFTA for this, but this exception mirrors that in the USAs Digital
Millennium Copyright Act which has still stopped the development of interoperable products,
Kimberlee Weatheralls submission to the Senate Select Committee on the Free Trade Agreement
between Australia and the United States of America.
122
Kimberlee Weatheralls submission to the Senate Select Committee on the Free Trade Agreement
between Australia and the United States of America.
123
Kimberlee Weatheralls submission to the Senate Select Committee on the Free Trade Agreement
between Australia and the United States of America.
124
Kimberlee Weatheralls submission to the Senate Select Committee on the Free Trade Agreement
between Australia and the United States of America.
125
Prevalence of blindness and low vision in Malaysian population: results from the National Eye
Survey 1996, British Journal of Ophthalmology 2002; 86: 951-956, conducted by the Malaysian
Ministry of Health et al.

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present his results at an academic conference. SDMI threatened to sue Professor

Felten claiming that presenting an academic paper could be a circumvention device.
Sony-BMG: Sony had put software on its CDs that installed itself on computers and
left computers vulnerable to malicious third parties. When a student discovered this,
he consulted lawyers for two weeks about whether publicly revealing the security
flaw would be illegal circumvention.
Similarly, a Russian programmer who visited the US to speak at a conference was
jailed and kept in the USA for five months for working on a program that others
might use to illegally copy products. Skylarov was ultimately acquitted.
Impeding innovation and competition
When RealNetworks developed technology designed to allow interoperability of their
music on Apple iPods, the threats of legal action from Apple made Real give up.
A company that reverse engineered a way to allow refilled ink cartridges to run in
Lexmark Printers was sued by Lexmark. Lexmark eventually lost but not because it
was an allowed circumvention.

4. MUFTA obliges Malaysia to join WIPO 1996 Internet Treaties

Many of the Free Trade Agreements signed between the US and other countries
require the ratification of the WIPO Internet Treaties (i.e the WIPO Copyright Treaty
(WCT) and the WIPO Performers and Phonograms Treaty (WPPT)) that came about
as a result of a Diplomatic Conference on Certain Copyright and Neighbouring Rights
Questions, proposed by the US and held in December 1996. [A Diplomatic
Conference launches negotiations.]
The treaties that entered into force in 1996 draw their texts upon studies submitted by
national governments, in particular the US, European Community and Japan, thus
reflecting the lobbies in those countries.
It has been suggested by some critics that the treaties came about as a way to
overcome domestic opposition in the US against strengthening the copyright law
domestically. With the existence of the internet treaties, there was then justification
for the US government to implement standards as part of their multilateral
obligations. It would also in addition ensure the worldwide implementation of strong
IP standards preferred by certain individuals and organizations in the US. The US, in
response to the WCT, legislated the Digital Millennium Copyright Act, which goes
beyond the WCT.126
The US-based digital civil rights organisation, Electronic Frontier Foundation,
documents how the anti-circumvention provisions of the DMCA have been used to
stifle a wide array of legitimate activities, rather than to stop copyright infringements.
126

Musungu, S, Dutfield, G., TRIPS plus Multilateral agreements and a TRIPS-plus world:
The World Intellectual Property Organisation (WIPO) available at
http://www.quno.org/geneva/pdf/economic/Issues/Multilateral-Agreements-in-TRIPS-plus-English.pdf

112

It illustrates how they are being invoked against consumers, scientists, and legitimate
competitors, rather than pirates.127
Of these two treaties, WCT has been very strongly criticised as it goes beyond what is
required under TRIPS and the Berne Convention for the Protection of Literary and
Artistic Works. It provides copyright holders exclusive rights over material in the online environment and specifically calls for countries to provide effective legal
remedies against the circumvention of the technological protection measures (TPMs).
Some of the concerns raised by the Electronic Information for Libraries (eIFL) is as
follows:
(i) TPMs cannot distinguish between legitimate and infringing uses. The same copycontrol mechanism which prevents a person from making infringing copies of a
copyright work, may also prevent a student or a visually impaired person from
making legitimate copies under fair use/fair dealing or a legal copyright exception.
(ii) Long-term preservation and archiving, essential to preserving cultural identities
and maintaining diversity of peoples, languages and cultures, must not be jeopardised
by TPMs/DRMs. The average life of a DRM is said to be between three and five
years. Obsolescent DRMs will distort the public record of the future, unless the
library has a circumvention right.
(iii) The public domain must be protected. TPMs do not cease to exist upon expiry of
the copyright term, so content will remain locked away even when no rights subsist,
thereby shrinking the public domain.
The UK Commission Report on IP and Development, in its report states that more
analysis needs to be undertaken about the best means of protecting digital content and
the interests of right holders whilst at the same time honouring the principles that
ensure adequate access and fair use for consumers. More specifically policy makers
need to gain a better understanding of the impacts of the trend towards on-line
distribution and technological protection of content on developing countries.
The report adds that it is not clear how reasonable requirements of fair use
will be guaranteed in such an environment. It goes on to caution Developing
countries should think carefully before joining the WIPO Copyright Treaty and
should not follow the lead of US and the EU by implementing legislation on the
lines of the DMCA.
Some may argue that the Malaysian Copyright Act already includes standards
found on in WCT such as TPMs, thus one need not worry about ratifying the
WCT. However it should be noted that standards that are implemented in the
national law, can at anytime be amended, if a negative impact on access to
knowledge or public interests is shown. When a country signs on to an

127

Digital Rights Management: A failure in the developed world, a danger to the developing
world, Cory Doctorow http://www.eff.org/IP/DRM/drm_paper.php
Electronic Frontier Foundation, Unintended Consequences: Seven Years under the DMCA
April 2006 http://www.eff.org/IP/DMCA/unintended_consequences.php

113

international treaty such as WCT and WPPT, it is bound by those minimum

obligations and it becomes difficult to take a step backwards.
More analysis needs to be done with the engagement of the various stakeholders,
such as libraries, open source initiatives, industry, internet service providers and
other relevant NGOs to have a discussion to understand better the costs and
benefits of signing on to the WIPO internet treaties.
However, given the US template in their FTAs, Malaysia would be obliged by
MUFTA to join these two WIPO treaties.

5. Some implications of Copyright section for Malaysian society

The following are some implications for Malaysian society:
1. MUFTA will oblige Malaysia to change its laws and policies on copyright in
many ways. Malaysia would have to:
(a) Extend the length of copyright from 50 to 70 years.
(b) Lock in technological protection measures through the FTA
(c) Join the WIPO internet treaties (copyright and performers/phonograms)
which would in turn lock the country into the treaties obligations.
(d) The balance between the privileges of the copyright holder and the public
interest would shift significantly away from the public interest. An important
point is that users of libraries will be much more constrained. There would be a
negative effect on access to knowledge.
(e) Implications for the 9th Malaysia Plan
Thrust Two of the Ninth Malaysia Plan is To raise the capacity for knowledge and
innovation and nurture first class mentality. In particular, Chapter 11 is entirely
about enhancing human capital.
Furthermore, Chapter 5 of the Ninth Malaysia Plan focuses on mainstreaming
technology and communications technology.
In addition, Chapters 4, 6, 8, 20 in the other Thrusts all place high priority on human
resource development.
Human resource development is heavily dependent on access to information and
USFTAs restrict access to knowledge in the ways outlined above.
(f) Human rights impact
Malaysia is a party to the United Nations Convention on the Rights of the Child
(CRC) and so is legally bound to implement its provisions. MUFTA could impact the

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rights of the child in a number of ways. The CRC contains a right to education. 128
Textbooks are key to students and the copyright term extension likely to be part of
any MUFTA (see above) will extend the monopoly on textbooks and other
educational materials to 70 or 95 years before they can be copied. This makes them
expensive for longer and potentially reduces the access of children to the materials
necessary for their education because parents (or the Malaysian Government through
the Textbook Loan Scheme129) can no longer afford to provide them.

H. TRADEMARKS
The AUSFTA chapter requires the countries to allow trademarks on sounds and
scents.130 The development implications of this need to be studied further.
The provisions relating to common names not being able to impair the effectiveness
of trademarks131 may reduce the ability of countries to require the international nonproprietary name of a medicine (e.g. paracetamol) to be placed in large letters on all
medicine packaging so consumers can more readily see that the different brands are
all the same chemical and so they can choose on the basis of price (i.e. the generic)
more easily.

I. ENFORCEMENT
1. General
The enforcement part of TRIPS very clearly states that It is understood that this Part
does not create any obligation to put in place a judicial system for the enforcement of
intellectual property rights distinct from that for the enforcement of law in general,
nor does it affect the capacity of Members to enforce their law in general. Nothing in
this Part creates any obligation with respect to the distribution of resources as between
enforcement of intellectual property rights and the enforcement of law in general. 132
This was added to TRIPS to address the concerns of developing countries.133
However, the enforcement chapter of USFTAs can specify that a decision that a
USFTA country makes on the distribution of enforcement resources shall not
excuse that Party from complying with the IP chapter.134
USFTAs can have 11 pages of detailed enforcement prescriptions. 135 Some of
these specify how a TRIPS level of enforcement should be carried out, others
involve much stronger levels of enforcement than TRIPs. The enforcement part
128

Article 28 CRC.
Malaysian Government Report to the Committee, Document CRC/C/MYS/1, 22 December 2006.
130
Art 17.2.2
131
Art17.2.3.
132
Art 41.5
133
UNCTAD-ICTSD Resource Book (2005), available online at
http://www.iprsonline.org/unctadictsd/ResourceBookIndex_update.htm
134
For example Art 16.9.4 Singapore-USFTA.
135
Such as the Australia-USFTA.
129

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of USFTA IP chapters are particularly detailed about internet service provider

liability.
2. Internet service provider liability
Internet service providers (ISPs) do various things. Some ISPs merely provide access
to the internet. Others provide people with space online to host their webpages. One
ISP (such as TM Net136) could host millions of webpages. People put things on these
webpages without getting permission from the ISP. So the webpages may contain
things that infringe copyright such as copyrighted books, articles, music or movies. In
many countries, ISPs are not liable for the copyright infringing material that people
have posted on the websites they host.
However, in the USA, there were conflicting court decisions about whether ISPs were
liable for copyright infringing behaviour by their end-users, including having
copyright-infringing items on the websites they host. 137 For this reason, ISPs wanted
legislation to give them safe harbours so that they could carry out their normal
business activities with only limited liability, if they complied with certain
conditions.138 These safe harbours have been criticized as being too narrow and
procedurally burdensome to use.139
TRIPS does not require internet service providers to be liable for copyright infringing
material put on websites they host by others.140
USFTAs contain these ISP safe harbours. USFTAs may create ISP liability in
countries where none previously existed because:

Recent USFTAs require temporary reproductions (for example in the memory

of the computer while accessing a webpage), to be a copyright infringement. 141
Since digital communication involves serial reproduction and distribution of
temporary reproductions of digital works, ISPs may face increased liability if

136

According to http://www.tm.com.my/business/small_medium/internet/smi_net_CASP.htm, TM Net

offers web hosting, domain hosting, server hosting, online storage service, media hosting and tmnet ebrowse.
137
Via two doctrines only used in the USA: vicarious copyright liability and contributory copyright
liability. In addition, a US report found that the temporary reproductions made by a computer in its
memory also infringed copyright and so ISPs could be liable for caching material.
138
http://www.eff.org/IP/FTAA/ISP_june05.pdf
139
For example http://www.eff.org/IP/FTAA/ISP_june05.pdf
140
This is because TRIPS does not require secondary liability or temporary reproductions to be
copyrightable. The only provision of TRIPS that could possibly be used to require secondary liability is
Art 41.1 effective action against any act of infringement. However this does not require secondary
liability laws and major WTO members do not allow secondary liability
(http://www.eff.org/IP/P2P/MGM_v_Grokster/20050301_sharman.pdf ) and yet have not been sued by
the USA for failure to comply with TRIPS as you would expect the US to do if it really were required
by TRIPS (http://www.wto.org/english/res_e/booksp_e/analytic_index_e/trips_03_e.htm#article41).
That TRIPS does not require temporary reproductions can also be seen in the fact that many countries
fail to allow temporary reproductions to be copyrightable and yet are not sued by the USA for noncompliance with TRIPS.
141
This is the case in all USFTAs since NAFTA, for example Art 16.4.1 of the Singapore-USFTA
which says Each Party shall provide that authors, performers, and producers of phonograms and their
successors in interest have the right to authorize or prohibit all reproductions, in any manner or
form, permanent or temporary (including temporary storage in electronic form).

116

temporary reproductions are considered infringing and there is no

corresponding limitation on copyright.

In addition, the existence of safe harbours may imply the existence of liability
where none previously existed in domestic law, and has been used to create a
de facto liability standard in the USA, where copyright owners have sued ISPs
for failure to comply with safe harbour conditions as evidence in itself of
copyright infringement (even though under US law failure to comply with safe
harbour conditions only means that infringement still has to be proven on
general principles).

The non-violation provision in the dispute settlement chapter of all USFTAs

applies to the intellectual property chapter and so may mean that even if the
USFTA does not require ISP liability to be created, if the USA reasonably
expected it to be and the country (M) which signed the USFTA does not make
ISPs liable, M may be sued at the international tribunal by the US
Government. If the USA wins the case and M does not change its law to make
ISPs liable, the US can raise tariffs on Ms exports to the USA.

How ISP liability works in USFTAs

To benefit from the safe harbour, in the Australia-USFTA, the person or company
must fall within the definition of internet service provider, must be involved in one
of the four activities listed below and the ISP has to comply with the conditions
attached to each activity.
If the ISP meets all of these requirements, courts cannot fine them for authorizing
copyright infringements on their networks in that category of activity. Courts can still
do things like order the ISP to remove or disable access to the copyright infringing
material or terminate the users account.
\
For Category A activities, courts can only order the ISP to terminate specified
accounts or take reasonable steps to block access to a specific online location that is
not in the ISPs country.
For activities in other Categories, the court can only order: access to the copyright
infringing material to be removed or disabled, specified accounts to be terminated and
other remedies the court finds necessary as long as they are the least burdensome to
the ISP compared to other forms of relief. Courts can basically only order these things
if the ISP has received notice and a chance to appear before the court.
Definition of ISP
The definition of ISP in the Australia-USFTA is broad enough142 to cause even
universities to be concerned that they will be considered to be ISPs, see below.
Activities143
142

Art 17.11.29(b)(xii).
Lawyer Leaellyn Rich writing in the March 2005 New South Wales Society For Computers and the
Law Journal, Issue 59, http://www.nswscl.org.au/journal/59/Rich.html
143

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Category A activities are known as conduits where the ISP transmits, routes or
provides connections: i.e. a transitory communication.
Category B activities, automatic caching, i.e. where ISPs store material
automatically, for example to make it faster to retrieve rather than the user having to
connect to the overseas site again.
Category C activities, hosting/storing, is where material is stored on the ISP
network/system at the users direction.
Category D activities, directing, is where users are directed to copyrighted material,
for example via links.
Conditions ISPs must comply with to get safe harbour protection
As Category A and B activities are seen as more passive, they gain almost automatic
safe harbour status with minimal conditions attached. 144 However for Categories C
and D where ISPs exercise greater control, there are more rigorous conditions to
qualify for safe harbour protection such as take-down notice procedures.145
The main conditions to qualify for the safe harbour protection are:
All Categories must have adopted and reasonably implemented a termination
policy for accounts of repeat infringers

Category A:
o ISPs must not have initiated transmission of copyrighted material and
o ISPs cannot have made substantive modifications to the content of the
transmitted material (it is ok to make technical modifications such as
format shifting)

Category B:
o ISPs must not have initiated transmission of copyrighted material and
o ISPs cannot have modified the original user access conditions for
significant parts of the cached material and
o ISPs must have expeditiously removed or disabled cached copyright
material when it has been removed or disabled at the originating site
and a notice of claimed infringement has been received
o ISPs cannot have made substantive modifications to the content of the
transmitted material (it is ok to make technical modifications such as
format shifting)

Category C:
o ISPs must not have initiated transmission of copyrighted material and
o The ISP cannot have received any directly attributable financial benefit
from the copyright infringing activity
o The ISP must have expeditiously removed/disabled material if it gets
actual knowledge of the infringement or becomes aware of

144

Lawyer Leaellyn Rich writing in the March 2005 New South Wales Society For Computers and the
Law Journal, Issue 59, http://www.nswscl.org.au/journal/59/Rich.html
145
Lawyer Leaellyn Rich writing in the March 2005 New South Wales Society For Computers and the
Law Journal, Issue 59, http://www.nswscl.org.au/journal/59/Rich.html

118

circumstances which make the infringement apparent such as a takedown notice claiming infringement.
o The ISP must publicly designate a representative to receive take-down
notices.

Category D:
o The ISP cannot have received any directly attributable financial benefit
from the copyright infringing activity
o The ISP must have expeditiously removed/disabled material if it gets
actual knowledge of the infringement or becomes aware of
circumstances which make the infringement apparent such as a takedown notice claiming infringement.
o The ISP must publicly designate a representative to receive take-down
notices.

Steps in a take-down procedure

1. Copyright owner (C) notifies the ISP that C thinks there is infringing
material on one of the websites the ISP hosts
2. ISP takes down the allegedly infringing material
3. ISP sends notice to person whose material was removed (D) (otherwise the
ISP could be sued by D)
4. D sends ISP counter-notification that not infringing
5. ISP promptly sends counter-notification to C and tells C will restore the
material unless C starts court case within 10 days to get injunction
6. ISP restores the material unless C gets injunction
7. ISP also has to provide identification of D to C
C usually does not have to have waited for the court to decide that Ds material is
infringing Cs copyright.
Problems with take-down procedure
If this procedure is required, then to minimize the burden on the ISP, the copyright
owners notice should identify all the copyright work(s) alleged to have been
infringed so the ISP can more easily find them and remove them. Furthermore, to
prevent abuse of the system by copyright owners, the notice should be accompanied
by a statutory declaration that is, a statement made on oath by someone with direct
knowledge of the facts of the matter [that it believes the material is infringing].
Otherwise many notices can be sent when the material is not infringing.
However the combination of the side letter and non-violation complaint in the
AUSFTA may mean these safeguards are not allowed.

119

The cost of ISP liability

According to the lawyer who is the Associate Director of the Intellectual Property
Research Institute of Australia, the ISP liability provisions in the AUSFTA will
impose significant costs on Australian ISPs.146
The impact on Malaysian ISPs (e.g. TM) of a standard USFTA can be seen from the
effect of this system in the USA. The enforcement agent of one copyright industry
association sent one ISP over 16,700 arguably invalid takedown notices. 147 One small
U.S. ISP had received over 20,000 notices in 2003 and all were invalid. 148 Another US
ISP received over 30,000 notices from January to April 2004 alone, only two of which
were legitimate takedown notices.149 In the previous 12 months, the same ISP received
over 90,000 invalid peer-to-peer notices.150 As the Vice President and Associate
General Counsel of Verizon Communications, Inc., Sarah Deutsch noted, copyright
owners can use automated programs to send out notices with no due diligence, but
each notice received requires human intervention by the ISP to see if they are valid or
not.151
More detailed information including about the subpoena system in the US and its cost
to ISPs can be found at http://www.eff.org/IP/FTAA/ISP_june05.pdf and more
examples
of
invalid
takedown
notices
at
http://www.eff.org/IP/P2P/20030926_unsafe_harbors.php.
This abuse of the take-down notices in the USA led a US Congressman to call for a
Congressional investigation into the practice.152
Given the concerns of all of the Vice-Chancellors of the universities in Australia about
the effect of the internet service provider provisions on them as they may be
considered to be ISPs,153 has the Malaysian Government consulted all Malaysian
Universities as to their ability to comply with any internet service provider provisions
in MUFTA?
Australias obligations under the AUSFTA with respect to internet service providers
closely parallel those in the USAs Digital Millennium Copyright Act 154 which has
been widely criticized and challenged. Submissions to the Australian Senate Inquiry
into the Australia-USFTA reiterated that recognition must be given to the realities of
resource limitations in managing networks155
146

Kimberlee Weatheralls submission to the Senate Select Committee on the Free Trade Agreement
between Australia and the United States of America.
147
Pacific Bell Internet Services v. Recording Industry Association of America, Inc et al, (U.S. District
Court, Northern District of California, San Francisco Division, Case No. C 03-3560 SI).
148
http://www.eff.org/IP/FTAA/ISP_june05.pdf
149
http://www.eff.org/IP/FTAA/ISP_june05.pdf
150
http://www.eff.org/IP/FTAA/ISP_june05.pdf
151
http://www.eff.org/IP/FTAA/ISP_june05.pdf
152
http://www.eff.org/IP/FTAA/ISP_june05.pdf.
153
Australian Vice-Chancellors Committee Submission to the Senate Select Committee on the Free
Trade Agreement between Australia and the United States of America
154
Protecting the messenger: carriage service providers liability for third party copyright
infringement, Jan Charbonneau, https://elaw.murdoch.edu.au/issues/2006/2/elaw_Protecting%20the
%20Messenger%20for%20Carriage%20Service%20Providers.pdf
155
Australian Digital Alliance (a coalition of IT companies, scientific and research organizations,
schools, universities, consumer groups, cultural institutions, libraries and individuals) submission from

120

J. IMPLEMENTATION
If countries think that they can sign a USFTA and then use loopholes during
implementation to mitigate the FTAs effects, they should be aware that the USTR
continues to press for stronger IP protection than the USFTA requires during
implementation, including during the drafting of implementing legislation.156
For example after Guatemala finalized its USFTA, the USTR gave it four pages of
detailed
comments
and
demands
which
can
be
seen
here
http://www.cptech.org/ip/health/trade/cafta/ustr11162005.pdf.
K. IPRS: SUMMARY ON EFFECTS OF MUFTA
The provisions in the intellectual property (IP) chapter of a Malaysia-US free trade
agreement (MUFTA) may have far-reaching consequences for a wide range of areas:
Malaysias culture; farmers; government-linked companies; students; the blind;
businesses; actors, directors, producers and all those involved in the Malaysian
audiovisual industry and any Malaysian who gets sick and needs medicine.
The IP provisions in USFTAs require much stronger levels of IP protection than
Malaysia is currently required to provide under the Agreement on Trade-Related
Aspects of Intellectual Property Rights (TRIPS) at the World Trade Organization
(WTO).
The TRIPS agreement has already been widely criticised as obliging developing
counties to adopt standards of IP higher than appropriate for their level of
development. There are negative effects such as higher medicine prices, obstacles to
industries to upgrade their technology, compulsory patenting of some life forms,
introducing IP to farm seeds (which in many countries were exempted before), and
facilitating bio-piracy (misappropriation by multinational companies of genetic
resources and traditional knowledge belonging to developing countries).
The developing countries increasingly realise that higher standards of IP can be
detrimental to development in many ways. There must be a balance between the IP
monopoly given to private individuals and companies, and the public interest. They
have thus initiated a movement inside WIPO to institute a Development Agenda, to
orientate IPR policies towards development needs and the public interest.
The FTA imposes even stricter standards of IP than even the TRIPS and thus makes
the present imbalance even worse.
Malaysias farmers will be affected by making their inputs (such as seeds and
agricultural chemicals) more expensive, and as they lose significant control over the
saving of their seeds. The data exclusivity clause for agricultural chemicals will also
make these more expensive and raise production costs.
http://www.aph.gov.au/Senate/committee/freetrade_ctte/submissions/sublist.htm.
156
Letter by some US Congress representatives to the USTR, available at
http://www.cptech.org/ip/health/trade/cafta/representatives04072006.pdf

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Malaysias national goal to promote biodiversity and traditional knowledge and the
fair sharing of benefits from their use will be affected by the probable demands of the
MUFTA that the country join the UPOV 1991 treaty, and the Budapest Treaty relating
to microorganisms.
Malaysian businesses may also face higher input costs from the IP chapter of a
MUFTA. In specific sectors such as Malaysias generic medicine manufacturing, one
of Malaysias largest generic companies, Hovid Berhad is already setting up
manufacturing in India because Once the FTA takes effect, many local
pharmaceutical companies such as Hovid would stand to lose out to US-based
multinational pharmaceutical companies.
Another sector that may be significantly affected is internet service providers. There
are Malaysian government-linked companies that make generic medicines (e.g.
Pharmaniaga) and provide internet services (e.g. TM Net).
The prospect of stronger intellectual property protection under a USFTA has also
caused many to fear increases in medicine prices in Malaysia. Malaysias patent law
will most likely have to change in many areas to accommodate the American FTA
demands. They potentially include: having a data exclusivity clause; extending the
term of drug patents; linkage between patents and marketing approval by the drug
regulatory authority; restricting the ground for compulsory licensing; and a possible
restriction on parallel importation.
Access to information and knowledge will be another major area to be affected, as
copyright laws will tighten, with extension of copyright term by 20 years, and with
the locking in of technological protection measures. Not only academics, students,
and scientists but also the blind may also be particularly disadvantaged by the
stronger copyright provisions.
The possible negative impacts due to the intellectual property chapter can be
exacerbated by other chapters in a USFTA such as the preamble and the investment
and dispute settlement chapters.
As the eminent Commission on Intellectual Property Rights states there are no
circumstances in which the most fundamental human rights should be subordinated to
the requirements of IP protection. IP rights are granted by states for limited times (at
least in the case of patents and copyrights) whereas human rights are inalienable and
universal Developing countries should not have to accept IP rights imposed by the
developed world, outside their existing commitments to international agreements.
16. NEED FOR POLICY FRAMEWORK AND ASSESSMENT OF COSTS
AND BENEFITS
Negotiating an FTA is a serious exercise as the outcome can have major implications
for development policy and for social, economic and development outcomes. While it
can result in some export gains, it can also: (a) result in increases in imports, with
implications for the trade balance and the debt position; (b) facilitate import surges as
tariffs decline or are eliminated, and this can adversely affect the local industries and
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farms; (c) reduce tariff revenue, with consequences for the government budget; (d)
restrict and in some cases remove policy space, or the options and instruments
available to a country to institute certain social, economic and development policies.
Thus, before negotiating an FTA, the country needs to have three things in place.
Firstly, a national development policy framework comprising an overall development
strategy, with sectoral national plans (for agriculture, industry and services) and issuebased plans (policy towards foreign investment, local participation in the economy,
intellectual property, etc).
The proposals put forward by the FTA partner or potential partner can then be
assessed within the context of such a framework. Similarly, the positions of the
country in the FTA negotiations can be formulated in light of the framework. In the
absence of such a framework, it would be difficult to determine the objectives of
entering an FTA negotiation, or of the advantages or otherwise of the proposed FTA.
Secondly, there should be a framework to assess the benefits and costs of the FTA, in
terms of its various components and of the various proposals and provisions, and the
overall balance.
The benefits and costs can be assessed in terms of: (a) gains and losses in trade terms:
eg. increase in exports, imports; (b) gains and losses in terms of jobs; (c) effects on
the degree of policy space and flexibilities available to the country as a result of the
FTA; (d) social effects: on access to health, to knowledge, food security etc; (e)
effects on technology transfer. Other items can be added.
The costs and benefits can be applied to the various aspects of the FTA, including
market access (to the other country, and the partner countrys access to ones own
market) in goods; services; intellectual property; investment, competition and
government procurement; and labour and environment standards. The cross-cutting
social and environmental costs can also be assessed.
In general, a developing country can expect (or hope) to benefit from some market
access in goods from an FTA with a developed country. This has to be weighed
against the market access to be gained by the partner to its own home market. If the
country lacks production and export capacity, or if the partner does not offer
significant concessions, then it is possible that there may be a net cost rather than
benefit, especially if the FTA is on a reciprocal basis (with no SDT for the developing
country).
The developing country can be expected to suffer costs in additional IPR obligations
beyond the already onerous obligations in TRIPS. These costs are losses to the nation
since most patents, copyright and other forms of IP are owned by foreigners. The
costs can be in terms of increased royalty and IP licence payments (with resulting loss
in foreign exchange) or higher prices of the protected products, and in terms of the
social costs of decreased access to medicines, decreased access to knowledge,
decrease in farmers rights to seeds and other resources, and decrease in food security
possibilities.

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Regarding investment, there can be expected to be major costs to the developing

country in terms of loss of policy space and the use of policy instruments such as
regulation of entry of foreign investment, performance requirements, regulation of the
flow of funds, etc. The threat of expropriation cases being taken by investors can also
have a real or chilling effect on national policies. The ability to use investment policy
as a means to increase local participation in the economy, or to nurture local firms and
farms, will also be severely restricted.
Regarding government procurement, the loss of policy space will be immense as
procurement policy is a major social and economic instrument for boosting the
domestic economy and to redress social imbalances. The requirement to give national
treatment for foreign goods, services and firms, can also result in loss of market share
of local firms, and loss of foreign exchange. There can be loss of effect of fiscal
policy, eg an increase in government spending to boost economic growth will have
reduced effect if there is higher leakage through increased imports of goods and
services procured by government.
There can also be considerable loss of policy space and options with regard to the
other non-trade issues such as competition policy, labour and environmental
standards, as well as in terms of effects on the competitive position of local
enterprises.
An example of a simple cost-benefit chart is given below. It can be made more
complex, reflecting the realities of the particular country concerned.

Example of FTA Cost-benefit Framework

Possible benefits
1. Market access in goods:
a. Agriculture
b. Industrial
2. Market access in services:
a. commercial services
b. labour
3. Possible concessions on
SPS and TBT?

Possible costs
1. Market access into country:
a. industrial goods
b. agriculture
2. Market access into country
Services

3. Intellectual property
(a)Access to medicines
(b) Lifeforms
4. Possible aid mechanisms?
(c) Plant varieties
(d) Biodiversity and disclosure
5. Possible investment and requirements
technology flows
(e) Copyright and access to
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information
(f) Broadcasting
4., Singapore Issues
(a) Investment
(b) Government procurement
(c) Competition policy
5 Labour, environment standards
6. Environmental costs

Thirdly, the country should establish or organize the resources and institutional base
for assessing whether or not to enter negotiations for the FTA; and if so, to organize
the negotiating teams, objectives, and conduct of the negotiations. As part of the
process, different agencies of the government should be consulted and should be part
of the process of the formulation of policy and positions. It is equally important to
involve stakeholders, such as local firms, trade unions, farmers, consumers, groups
representing patients and involved in health provision and environmental protection.
This is especially because the FTA can have such wide-ranging effect on society.
Eventually, national decisions have to be taken as to: (1) whether in principle to
enter negotiations in the FTA; (2) how to conduct the negotiations; (3) what issues to
include and exclude from the FTA; (4) putting positions forward; (5) assessing the
other partys position. (6) continuously assessing the costs and benefits of proposals
and provisions; (7) whether or not to conclude the negotiations, if there are many
sticking points and outstanding issues.

References
AMCHAM Malaysia (2006). Public submission for the proposed US-Malaysia Free
Trade Agreement. By AMCHAM Malaysia and US Chamber of Commerce.
Carlsen, Laura (2003). The Mexican experience and Lessons for WTO negotiations
on the agreement on agriculture. (Speech to European Parliament). Americas
Program, Interhemispheric Resource Centre.
Khor, Martin (2003). The WTO Singapore Issues: Whats at stake and why it
matters. (TWN briefing paper 16).
Khor, Martin (2005). Intellectual Property, Competition and Development. Paper
presented at the WTO symposium on intellectual property and development, May
2005.
Koh, Tommy and Chang Li Lin (editors) (2004). The United States Singapore Free
Trade Agreement: Highlights and Insights. Singapore
Mdecins Sans Frontires (2004). Access to Medicines at Risk Across the Globe
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Oxfam International (2005). Kicking down the door. Briefing paper no. 72.
Smith, Sanya (2007). Intellectual property chapter in United States FTAs.
Smith, Sanya (2005). Market access: wheres the beef? (Draft paper).
United States (2002). Trade Promotion Authority Act of 2002.
United States Trade Representative (2006). Foreign Trade Barriers.
United States Department of Agriculture (2007). Rice Outlook, 12 Feb. 2007.
U.S. Singapore Free Trade Agreement: Text of the Agreement
World Trade Organisation (1994). The results of the Uruguay Round of Multilateral
Trade Negotiations: The Legal Texts.
World Trade Organisation (2005). Trade Policy Review Malaysia: Report by the
Secretariat.

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