Malaysia takes stand on GSP

By David Chew

SINGAPORE (JP): Malaysia is bracing itself for a big drop in its trade with the United States when Washington withdraws its Generalized System of Preferences (GSP) status in January 1997. It has chosen this course rather than appeal to retain trading privileges, which it sees as having strings attached to them. But the country hopes to make up the shortfall by selling its manufactured products in other markets, just as some countries which had earlier lost their GSP status had done.

In disclosing his country's stand recently, Prime Minister Mahathir Mohamad said Malaysia would not want a GSP status that the U.S. tied to human rights, labor rights and other non- economic issues. Malaysia's sentiment, as expressed by Mahathir, appears to have found support among other Association of Southeast Asian Nations, who have always maintained at public forums that developed countries should separate economic aid from sociopolitical issues.

Annual Malaysia/U.S. trade exceeding US$20 billion has been in Malaysia's favor in recent years, mainly due to the GSP, which exempts Malaysian exports in the U.S. from levies or subjects them only to nominal duties. Statistics released by the United States Information Service revealed that last year's (1995) bilateral trade had reached an all-time high of $26.3 billion.

A breakdown of this figure shows that Malaysia exported $17.5 billion worth of goods -- mainly manufactured products such as electronic components, microchips, cellular telephones, rubber surgical gloves, two-way transistor radios and paper wrapping products -- to the U.S. About 44 percent or $7.72 billion of these exports come under the GSP program. In turn, Malaysia imported $8.8 billion worth of U.S. products, including machinery and aircraft.

Mahathir expects the present high level of Malaysia's trade with the U.S. to drop significantly when the GSP status is withdrawn in three months, because many U.S. multinational corporations currently benefiting from Malaysia's present GSP status would relocate their operations to neighboring countries which still retain their GSP privileges so as to minimize production costs and maximize profit margins. The overwhelming majority of Malaysia's GSP export are produced by these multinational corporations.

Mahathir based his predictions for Malaysia on the experience of Taiwan, South Korea, Hong Kong and Singapore, which had their GSP status removed in 1989 and saw a massive reduction in their trade with the U.S. Just as Malaysia eclipsed them as the top GSP nation, especially in 1993 and 1994, some other country still retaining the GSP would similarly outperform Malaysia, Mahathir calculated.

The impending withdrawal of the GSP status is a high price to pay for Malaysian pride, especially if the expected drop is significant and can slow down the country's aim to be a developed nation within the next 20 years. This cardinal objective is currently being pursued through Mahathir's agenda of "Vision 2020" which has a major role for international trade. The U.S. is a major partner of Malaysia, along with Japan, Singapore, Taiwan, South Korea and Britain.

But Mahathir is adamant that Malaysia, which joined the U.S. GSP program in 1971, could offset these potential trade losses by expanding its trade with Europe, East Asia, Latin America and Australia for its exports. Such a move, which involves more trade missions to these countries, was better for Malaysian pride than appealing to the U.S. to reconsider its decision, he said.

"If we were to insist on it (GSP), we will be placing ourselves under obligations ... We do not want obligations. When some countries want to use their markets to exert pressure, we should seek other markets. We know that even if we were to insist, they will not relent. Therefore, it is better not to appeal," Mahathir said.

Malaysia is taking a leaf from the books of those who had "graduated" out of their GSP status, especially closest neighbor Singapore, by venturing out to new markets overseas which beckon. Just as they had succeeded in reducing their economic dependence on the U.S., Malaysia feels that it too will be equally successful.

The GSP are tax exemptions and/or tax reductions developed nations like the U.S., Japan, the European Union, Australia and Canada grant to the exports of developing countries in order to make them competitive. These concessions constitute a form of economic aid designed to help developing countries achieve a healthy balance of trade, and ultimately attain developed nation status.

The U.S., the largest donor, offers GSP to 4,100 exports of 145 developing countries which are manufactured at relatively low production costs. They are currently allowed into the U.S. without duties imposed on them. The status of each recipient country is subjected to review from time to time. If the U.S. is satisfied that the country concerned has "graduated" to developed nation status, going by its favorable trade figure, then its GSP status will be terminated.

South Korea, Taiwan, Hong Kong and Singapore have each had their GSP status terminated since January 1989, owing to their rapid economic growth which propelled them toward becoming developed nations. Malaysia would be the next country to lose its GSP status broadly on similar grounds.

In fact, U.S. Trade Representative Mickey Kantor had reminded Malaysia about this when he disclosed last August that he would recommend to President Bill Clinton that Malaysia's GSP status be removed by Jan. 1, 1997, the date of its "graduation" to developed nation status.

"Like the four former beneficiaries -- Korea, Taiwan, Hong Kong and Singapore -- that were graduated from the program six years ago, Malaysia no longer needs such preferential treatment to be competitive in U.S. markets," Kantor said in Washington last August.

According to U.S. statistics, Malaysia was the top GSP beneficiary in 1994, accounting for 28 percent of total GSP imports from all 145 recipient countries. Malaysia's export of GSP products increased from $3 billion to $5 billion, a massive 66 percent from 1993 to 1994. U.S. officials have concluded that should Malaysia continue to retain its GSP privileges under such conditions, the rationale of the aid program would be compromised. It would also be unfair to other recipient countries.

Although Malaysia appeared not to dispute the economic rationale of the U.S. argument, it felt that Washington had also unfairly resorted to subjective criteria, such as alleged "violations" of human and labor rights, as an excuse to end its GSP status.

Examples of such criteria were the U.S. 20th annual Human Rights Report in March, which criticized Malaysia's Internal Security Act, limited press freedom and "abuses" in detention centers. Malaysia was also offended when President Clinton named it among 31 countries in Latin America, the Caribbean, Asia and the Middle East as "major illicit drug producing or drug transit countries".

Malaysia felt that the U.S. had arbitrarily applied western standards to developing countries in assessing their human rights record, without considering the different circumstances such countries were in. Washington unfairly drew its conclusions by listening to the views of only "one side" (i.e. opponents of the government), especially on environmental issues, ignoring what the Malaysian government had to say.

An issue which Mahathir raised on several previous occasions concerned the "rights" of trade unions. The U.S. felt that Malaysian laws restricted the right of workers to resort to industrial action. Mahathir argued that if his government had been "too lax" like some of its western counterparts, there would have been too many strikes disrupting production. Malaysia would then not have enjoyed its present economic success.

Mahathir also felt that the U.S. was not qualified to pass judgment on others regarding the issue of human rights, since it practiced double standards. Citing the verdict of the O.J. Simpson trial, he noted that people could lose confidence in the judiciary. As for the allegation that Malaysia served as a conduit for Southeast Asian drugs bound for the U.S., Mahathir contended that the U.S. was equally to blame; the demand for drugs in the U.S. had encouraged their illicit production in Southeast Asia in the first place.

The next three months will be crucial for Malaysia as it prepares itself for a significant drop in its exports to the U.S., come January 1997.

Initially, Malaysians were upset over the U.S. decision to remove their country's GSP status, with International Trade and Industry Minister Rafidah Aziz, saying the per capita income criterion used by the U.S. was "unfair".

"We have accepted graduation of products out of the GSP, when they have reached a certain export level, but we cannot accept being graduated out as a country as we have not reached the per capita benchmark," Rafidah said angrily.

She pointed out that Malaysia's per capita income was only $3,440: far below the $8,000 required to graduate from the scheme.

But after the initial anger, many Malaysian exporters are coming to terms with the prospect of their country losing its GSP status, saying that it was inevitable. That was a price to pay for the country's rapid economic development. They must pull up their socks or be left behind.

In echoing Mahathir's call that Malaysia should learn from the experiences of Taiwan, South Korea, Hong Kong and Singapore in coping with the loss of their GSP status, Tan Keok Yin, the executive director of the Federation of Malaysian Manufacturers, said:

"Studies showed that despite the absence of the GSP status, these countries went on to become competitive internationally and are now competing with OECD countries for the world market. Why can't Malaysia do the same?" he said.