Malaysia's Success Has Its Drawbacks 
International Herald Tribune
October 9, 1995
Michael Richardson 

Economic achievement can sometimes be a two-edged sword, as Malaysia recently learned when the United States decided to remove from it the preferential trade status Washington usually reserves for developing nations.

Under the so-called Generalized System of Preferences, 145 developing countries are eligible for zero or very low tariffs on more than 4,400 selected products or product categories. The value of these duty-free imports into the U.S. last year was about $19 billion

Malaysia was the top beneficiary under the program in 1994, accounting for 28 percent of total imports under the plan. For the year, it increased the value its GSP exports to the United States to $5 billion from $3 billion in 1993 — an increase of 66 percent.

Announcing the decision recently, Mickey Kantor, the U.S. trade representative, said that Malaysia's "extraordinary economic performance" had shown that it no longer needed the system of preferences, which aims to help developing countries compete in the American market against imports from more-developed nations.

He recommended continuing some preferential treatment for Malaysia until Jan. 1, 1997, to give time for U.S. importers to adjust.

"Malaysia is clearly a world-class producer of the products that it ships under the GSP program and it is to be congratulated for its success," Mr. Kantor said.

Ultimately Malaysia decided not to appeal against the decision, which for now is moot because the Generalized System of Preferences expired on July 31. Congress has not yet considered whether to reauthorize the system, as the Clinton administration has requested, but appears likely to do so after making some modifications to the scheme.

Testifying before a congressional panel in Washington, John R. Malott, the new U.S. ambassador to Kuala Lumpur, said that since 1960, Malaysia had probably achieved more progress in raising the per capita income, life expectancy and educational levels of its 19 million population than any other developing nation in the world.

"Over the past two decades, 80 percent of Malaysia's population has moved into the middle class," he noted. "It has achieved eight continuous years with growth rates over 8 percent (after adjustment for inflation), and unemployment is below 3 percent."

The United States is the leading foreign investor in the country, which has become America's 13th largest trading partner, despite the sometimes strident anti-Western rhetoric by the Malaysian prime minister, Mahathir bin Mohamad.

At first, Kuala Lumpur appeared ready to try to reverse Washington's move. Rafidah Aziz, the minister of trade and industry, said that Malaysia would appeal the decision if it could, because it was not ready to "graduate" from the preferential trade program.

Mrs. Rafidah said Malaysia hoped that other countries that accorded preferential trade status to Malaysia would not use the American decision as a precedent to withdraw their trade privileges from Malaysia as well. She was evidently referring to similar schemes operated by the European Union and Australia.

She also asserted that under the GSP legislation, a beneficiary country could only be "graduated" from the program once its per capita gross national product reached $8,000, whereas Malaysia's per capita was only $3,400

In fact, the graduation level in 1994 was $11,831, but Mr. Kantor indicated that the Clinton administration did not want to put the whole program in jeopardy in Congress by allowing one country to get the lion's share of import gains.

Leading lawmakers on trade questions in Congress have said they are determined to reform the system of preferences to redirect more of its benefits to the neediest nations.

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

The four 1989 graduates were East Asia's newly industrialized economies, the region's so-called Tigers.

Despite some concern among local and foreign investors in Malaysia that they might lose their market share in the United States, and reports that some importers in America had indicated that they were looking to China as an alternative source for GSP products, the Malaysian government opted to treat Washington's decision as an incentive to make the Malaysian economy more internationally competitive.

Mr. Mahathir evidently realized that as a vocal champion of poor countries, Malaysia would be placed in an invidious position by objecting to its graduation. Analysts say he also saw it as a source of national pride that his country was, in effect, being upgraded to the ranks of the Tigers.

Following a cabinet meeting that decided not to appeal the U.S. decision, Mr. Mahathir said that Malaysia did not want to be "under obligations" to any country that might use its markets to exert pressure on various issues.

Instead, he said, Malaysia should use the opportunity to diversify its exports by finding alternative markets.

Mr. Mahathir has strongly criticized the United States and other Western nations for trying to link trade and aid to human rights, democracy, working conditions and the environment in developing countries.

The Federation of Malaysian Manufacturers said that the deadline for final graduation set by Mr. Kantor would create a sense of urgency for local manufacturers and exporters to improve competitiveness.

Tan Keok Yin, the federation's executive director, said that the U.S. preferential tariff scheme had served Malaysia well for nearly 25 years, giving it a "pretty good lead time" over other competing economies, and there was no reason for the country to fail in the U.S. market without the program.

An American official said that the change from GSP duty-free treatment to most-favored nation, duties should not be particularly burdensome for a country such as Malaysia, since most most-favored nation rates on products covered by GSP were already low.

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