Malaysia must make changes to industrial policies to tackle limitations, impact of freer trade on SMEs 

THE Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was ratified on 29 November 2022, following years of negotiations, public consultation and amendments to domestic laws, binding Malaysia to the terms of the agreement.  

The CPTPP at its core is a free-trade agreement (FTA) between 11 countries around the Pacific Rim – Malaysia, Canada, Mexico, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Vietnam and Japan. 

Compared with previous FTAs, CPTPP not only opens a significant portion of the economy to globalisation but also ensures that government policies allow a level playing field between Malaysian and foreign companies.  

Due to the further liberalisation of trade and stronger investor protections, the partnership is expected to produce significant trade opportunities and encourage foreign and domestic investments. Meanwhile, the enforcement of its provisions helps promote public-private transparency, good governance and improve Malaysia’s international reputation. 

Higher ESG standards 

The agreement will encourage Malaysian businesses to adopt robust environmental, sustainability and governance (ESG) standards to facilitate their participation in the growing global ESG-investment market and expanded supply chains.  

The opportunities from CPTPP will justify the development of industrial policies that include investment-led initiatives for SMEs and more stringent ESG compliance for large players, coupled with a continued focus on G2G collaboration, maintaining openness to participation in global infrastructure projects and facilitating access to the global ESG bond market. 

Therefore, Malaysia’s ratification of the CPTPP will make it an indispensable part of greater economic integration, promoting sustainable global supply chains and enhanced cooperation in Asia-Pacific. 

In the services sector, CPTPP aims to provide greater mutual recognition of professional qualifications and licensing standards between member states, better positioning Malaysia as a hub for professional services, such as accountants, lawyers, engineers and consultants. The easing of cross-border mobility and visa grants due to the treaty’s heavy commitment to uphold free trade in services will provide a much-needed boost to service-sector competitiveness. 

In the context of international trade, the ratification of the agreement constitutes a key long-term policy objective. According to estimates from the International Trade and Investment Ministry, the increased opportunity is expected to boost GDP to the tune of US$56.5 billion (RM249 billion) between 2019 and 2030 over a no-CPTPP scenario.  

Meanwhile, total investment is estimated to increase by US$112.3 billion over the same period because of the investor-friendly environment. 

While CPTPP offers opportunities and advantages, there are also legitimate concerns and drawbacks highlighted by various public interest groups.  

More importantly, though opportunities are aplenty for exporters, industrial policy must consider the impact of freer trade on SMEs. According to an SME Corp input-output study in 2018, many suffer from weak forward industrial linkages with larger companies, where the latter procures less than 10% of their inputs from local SMEs but more than 25% from imports, despite policies, such as the vendor development programme (VDP). 

With the eventual full elimination of trade barriers, the increased level of market and product competition could disadvantage further SMEs if they are unable to scale up productivity and compete on an international footing. 

Subsidy limits  

CPTPP also limits the government’s policy space in direct economic interventionism, as it prohibits subsidies to favour domestic companies over foreign investors. Member states are required to notify formally all domestic subsidies, including details, such as amount, duration and purpose of a subsidy, to facilitate transparency.  

The limitation on subsidies may, therefore, impact on the government’s ability to provide support to SMEs, particularly if they are deemed discriminatory or non-transparent. However, certain sectors, such as public health and security, environment, oil & gas, automotives and distributional logistics, are afforded relatively more protection.  

Such issues necessitate the push towards a more SME-focused industrial policy. Adopting long-term policies focusing on international trade and credit facilitation, such as measures to support and promote the export of SME products and services, partial loan guarantees and stronger support for development banks, can aid SME expansion.  

The move away from direct subsidies could shift focus to mentorship and advisory, skills and capability development, supply chains and tax incentives.  

The opportunities created through the ratification of the CPTPP justify the development of industrial policies that include partially guaranteed non-discriminatory loans for ESG development among SMEs.  

SME graduation schemes, such as VDP, which link SMEs with large local companies, can be enhanced with stronger ESG requirements and regulatory compliance. These measures could be coupled with a continued focus on G2G collaboration, facilitating participation with global infrastructure projects and SME access to the global ESG investor market. 

The strong focus on ESG development among Malaysian SMEs is important to capture the growing demand for ESG-compliant supply chains from major global brands.  

Help for small-holders  

Besides SMEs, the CPTPP requires the government to consider the interests of small-hold farmers in greater depth. Intellectual property patent rules, such as UPOV 1991 and Budapest Treaty on the sharing of seeds and biomaterials, may impact on the ability of small-holders to continue their traditional practices of informal seed storing and sharing, intruding on their way of life and reducing crop biodiversity.  

While the UPOV 1991 maintains exceptions for informal seed farming practices, the Budapest Treaty will increase agriculture prices by limiting the sale and manufacture of patented biomaterials, making farmers pay royalties for their use. It’s important to note that such patents need not be registered in Malaysia to take effect, but with any organisation affiliated with the Budapest Treaty, having immediate repercussions on small farmers’ production costs.     

This is an area which certainly warrants more attention, including an impact study on how the above-mentioned treaties will affect the agro-food sector and offer solutions to ensure the wellbeing of small farmers. 

Lastly, another key area of concern is the investor-state dispute settlement (ISDS) mechanism, which allows investors to bring a legal claim against the government for policy actions that impact on their profitability. Fortunately for Malaysia, however, the ISDS mechanism can only be used for claims relating to the investment chapter, meaning that external violations, such as investment authorisation or private contracts with the government, are settled through the local court system.  

The government must still take note that should a legal case be brought forward, the ISDS operates on a confidential, closed-door and non-transparent basis. 

The trend of blurring trade boundaries across the world has manifested itself in the concepts, goals, and objectives of the CPTPP. While there are certainly many long-term benefits to the CPTPP, being a more inclusive and integrated trade framework, there are also drawbacks, especially on its potential to limit the effectiveness of industrial policy and how intellectual property issues will impact vulnerable groups.  

Policymakers should aim to address these limitations if Malaysia is to realise the potential of the framework in accelerating its future development. 

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