Opening Malaysia’s Procurement under TPP Will Require Flexibility

The TPP parties should use a variety of tools to address Malaysia’s concerns with opening its government procurement under the TPP. 

According to recent press reports, Malaysia is “wary” of procurement commitments in the Trans-Pacific Partnership (TPP) negotiations (Washington Trade Daily, Around the Globe (Feb. 12, 2014)).  Malaysia is being asked in the TPP to let foreign suppliers compete in its procurement on an equal basis with its domestic suppliers.  To address Malaysia’s reluctance to do so, the other TPP parties can draw upon a variety of tools.  The United States should lead the way based on its own protection of small and minority-owned businesses and the flexibilities provided in its free trade agreements (FTAs).

To respond to Malaysia’s concerns, the U.S. has two models to draw upon.  First is the exclusion of its own preference programs for small and minority-owned businesses from its commitments in trade agreements.  Second, in other FTAs, it has accepted both permanent and transitional measures to protect vulnerable constituencies and address sensitivities. 

Since 1981, when the United States implemented its first international procurement agreement, it has excluded the procurement that it reserves for U.S. small and minority-owned businesses from its international procurement commitments.  Currently, it reserves 23 percent of U.S. federal procurement for U.S. small and minority-owned businesses under a variety of programs.  In FTAs with the U.S., other TPP partners have taken similar exclusions for their small business programs: Canada mirrors the U.S. exclusion; Australia excludes any form of preference to benefit its small and medium enterprises; and Peru excludes procurement programs on behalf of its small and micro-sized companies.

In addition to small business exclusions, the U.S. has found ways in other FTAs to address sensitive issues of its partners in opening their procurement markets.  FTAs allow set-asides that are not limited to small businesses.  The North American Free Trade Agreement (NAFTA) permitted Mexico to set-aside procurement from NAFTA obligations, temporarily through 2002, for Petróleos Mexicanos (Pemex) and Comisión Federal de Electricidad (state-owned electric utility), as well as for construction services.  Beginning in 2003, Mexico may set-aside a certain amount of procurement annually.  In addition, the U.S.-Panama Trade Promotion Agreement allows the Panama Canal Authority to set-aside 10 percent of its procurement for expansion of the Panama Canal for Panamanian nationals or suppliers owned and controlled by Panamanian nationals.

Several U.S. FTAs permit the use of offsets (requirements of domestic content):

  • NAFTA allows a Mexican procuring entity to impose local content requirements of no more than 40 percent for labor-intensive turnkey or major integrated projects and 25 percent for capital-intensive turnkey or major integrated projects.
  • The Dominican Republic-Central American-U.S. FTA permits the Dominican Republic (DR) to maintain offsets for 15 years, under which it may: 1) require a foreign supplier seeking to participate in a DR procurement of construction services to be associated with an enterprise established under DR laws; and 2) require 50 percent of the management of a covered procurement to be comprised of Dominican nationals.

In addition, NAFTA permitted Mexico to base its service coverage initially on a positive list (listing only its covered services), while Canada and the U.S. defined their service coverage with negative lists (all services covered excepted those listed).  It was not until 2005 that Mexico used a negative list for its service coverage under NAFTA.

In addition to these FTA measures, the recently revised GPA specified transitional measures for developing countries.  The use of such permanent and transitional measures are intended to facilitate a country’s opening of its procurement for the first time, as is the case with Malaysia.

Malaysia traditionally has used procurement to support national public policy objectives, in particular to encourage greater participation in its economy by bumiputera (ethnic Malays), which comprise a majority of its population.  It extensively uses preferences, providing them to bumiputera suppliers and other domestic suppliers in its domestic tenders.  It also requires many of its state-owned enterprises to utilize procurement policies that favor bumiputera suppliers.  As part of its policy, Malaysia restricts participation by foreign firms in its procurement, generally requiring foreign companies to take on a local partner for their tenders to be considered.   It invites international tenders only if goods and services are not available locally.

Under the TPP, Malaysia will gain new opportunities for its suppliers in the procurement markets of the United States and other TPP parties. But, to do so, it will need to ensure that TPP suppliers have fair opportunities to participate in a broader range of its procurement than they do currently.  With flexibility and the types of tools outlined above, Malaysia and the other TPP parties should be able fashion transitional and permanent measures that will enable Malaysia to open its procurement market to its TPP partners while protecting its more vulnerable constituencies.

Jean Heilman Grier

February 17, 2014

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