The US has expressed its desire to conclude the free trade agreement (FTA) negotiations with Malaysia by early 2007, based on the encouraging progress made in the third round of talks held in Kuala Lumpur earlier this month.
The 19 negotiating groups met to discuss various issues to be covered under the FTA.
According to Assistant US Trade Representative Barbara Weisel, the US and Malaysia had discussed market access in goods, agriculture and textiles and planned to exchange initial offers next month.
"We exchanged views on our respective approaches, noting areas where they are similar and where they appear to diverge. While there was a convergence of views in many areas, the Malaysian government is still consulting internally," Weisel said.
Indeed, the negotiations are touching on issues that are of great political importance in Malaysia. The so-called Singapore Issues - investment, government procurement and competition policy - whose entry into the WTO agenda Malaysia opposed in 2003 - are set to be a persistent part of the US position in regard to the FTA.
Government procurement is one of the most sensitive areas in the talks; Malaysia has a preferential policy in this domain, tilted in favour of companies owned by ethnic Malays, or Bumiputras.
One head of an American company in Malaysia told OBG that this is not as big of an obstacle as it appears, as the motives for the US demand for access to tenders is primarily political. By allowing foreign companies to come into the tender process more easily, it is hoped that there will be a spill over effect, making the market more transparent and in line with international standards. "In terms of government tender, I think the aim is not so much to swarm the Malaysian market with US companies wanting access to [Malaysian] government projects, but to guarantee that the process is open," he said.
This is perhaps good news to those in Malaysia who fear that US access to Malaysian contracts will somehow undermine Bumiputra affirmative action programmes, or derail talks altogether.
For its part, the Malaysian government has been very clear that this policy will not change. Speaking in August, the Minister of International Trade and Industry, Rafidah Aziz, said "We have our own integral policies which are based on socio-economic development premises. There are some negotiated tenders and some international tenders and foreigners can come in where it is clear they can come in. If they want to come in for an F [Bumiputra] tender, they can't."
Meanwhile, during the most recent round of talks, US officials pointed to some $250m of US government tenders that would be opened up to Malaysia under a FTA, no doubt an appealing prospect for Malaysia's manufacturers.
However, the US itself has certain affirmative action policies in place that govern the awarding of federal government contracts. Sceptical Malaysian observers argue that the US has the tendency to negotiate primarily with American companies for contracts, and question how many such government tenders will actually go to Malaysian firms.
The liberalisation of the services sector provides another challenge for negotiators. The US is keen that Malaysia allows it greater access in services, particularly in finance. This is problematic not only because of Malaysia's persistent reluctance to allow foreign players into this area, but also because the government has its own timetables, governed by the Financial Services Master Plan, for market liberalisation.
But this challenge, like the others, is not necessarily a deal breaker. It is likely that the US will allow a certain adjustment period for Malaysia before mandating access to the country's service market, a period conforming to the Malaysian government's own plans.
In addition intellectual property protection is of concern to the American side, as patent laws particularly in the pharmaceutical and medical sector are considered not up to international standards. However, recent moves such as an IPR court and tougher laws enacted last year could be a sign that Malaysia's government is committed to creating an environment that is safe for the import of foreign know-how.
In spite of these issues, there would certainly be trade benefits to Malaysia. Yong Poh Kon, the president of the Federation of Malaysian Manufacturers, told OBG in an interview, that with an FTA, "more American manufacturers may be setting up operations in Malaysia, with the full knowledge that their products can enter back into the US free of duties." This is particularly important for the host of American electronics manufacturers in the country. "Employment will rise, technology transfer will increase, and there will be more spin-offs to the rest of the economy as well in the transport and service industries," he said.
