Malaysia takes stand on GSP

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withdrawn in three months, because many U.S. multinational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.