MANAGING THE CHALLENGES OF WTO PARTICIPATION: CASE STUDY 24
Malaysia: Labelling Regulations on Natural Rubber Condoms and the WTO TBT Agreement
Norma Mansor, Noor Hasniah Kasim and Yong Sook Lu*
Opinions expressed in the case studies and any errors or omissions therein are the responsibility of their authors and not of the editors of this volume or of the institutions with which they are affiliated. The authors of the case studies wish to disassociate the institutions with which they are associated from opinions expressed in the case studies and from any errors or omission therein.
ON THIS PAGE:
> I. The problem in context
> The Malaysian economic story
> The rubber industry and condom manufacturing
> II. The local and external players and their roles
> III. Challenges faced and the outcome
> The outcome
> IV. Lessons for developing countries
I. The problem in context
When the Malaysian Standards Industrial Research Institute Malaysia (SIRIM), an organization designated as a national enquiry point for technical barriers to trade (TBT) in the World Trade Organisation (WTO), informed local manufacturers that the Ministry of Social Welfare of Colombia had proposed a new requirement for the labelling of natural latex condoms, a local company voiced its objection against such a requirement. The Draft Decree from the Committee on Technical Barriers to Trade (CTBT), received by the WTO on 15 May 2003, stated that ‘each condom in the individual container shall bear at least the following information: manufacturer, trade name, sanitary register number, expiry date, batch number, the number of condoms contained, instructions for use of the condom, the statement that the condom is made of natural rubber latex that can cause irritation, instructions for the storage: “Store the condom in a cool dry place away from direct sunlight”’. The proposed regulation was to take effect from 15 August 2003.
Alarmed, Tharampal Singh, senior director (operations) of Medical-Latex (DUA) SDN BHD (ML), a Malaysian condom manufacturer, called Salmah Mohd Nordin, a SIRIM officer, to express his dissatisfaction with the new requirements. ML has been producing condoms for export since 1987, exporting 80 million condoms a year to Colombia, Venezuela and Ecuador; ML is in fact the biggest supplier in Latin America. Losing ground in these markets would adversely affect ML’s profitability.
As far as Tharampal is concerned, the new requirements did not make sense. Since he joined the company in 1990, ML, which goes for niche markets, producing high-quality condoms, has penetrated some of the European markets such as Greece, Spain, Portugal and France, with plans to expand to other European countries. Tharampal contends that ‘ML aims for the most stringent standards and maintains a controlled environment for the manufacturing process and hence we could enter any market. We aim to fulfil the toughest standards.’ He claimed that ‘Any little news about allergies would hit the latex condom industry. Thus, we always have to be alert.’ He insisted that ‘Medical-Latex meets all major international standards such as ISO [International Organization for Standardization] 9001; EN 46001 (medical device directive); British Standards Institute (BSI); Laboratoire National D’ESSAIS (LNE). ML condoms carry quality seals from these highly reputable British and French standards organizations.’
Tharampal was then asked by SIRIM to put up a case for it to be discussed at the National Sub-committee (NSC) on the TBT Agreement. The NSC consists of the representatives of the ministries for Trade, Industry, Consumer Affairs, Health, Agriculture and Science, other regulatory agencies, national trade and industry associations and SIRIM as a secretariat. Among other things the NSC examines and formulates responses to WTO notifications.
After deliberating on ML’s case a response was formulated and was as follows. ‘There is too much information to be included on each individual condom pouch; the foil surface is not big enough. According to ISO 4074:2002(E) the labelling is separated into two parts:
The individual container shall bear at least the
following information: identity of manufacturer, the lot number, the
expiry date (year, month).
The consumer package (e.g. a folding pack) shall bear at least the general information in the official language of the country of destination (description of the condom, number of condoms contained, nominal width of the condom, trade name and address of the manufacturer, distributor, expiry date, instruction to store the condom in a cool dry place away from direct sunlight, whether the condom is lubricated or lubricant is perfumed or flavoured, lot number, the statement “the condom is made of natural rubber latex”, instructions for use of the condom, instructions of how to dispose of the used condom, a statement that a condom is for single use.’
The comment continued, ‘Our viewpoint is that the ISO allows the general information to be included on the consumer package (folding pack, envelope etc.) where the printing surface isn’t a problem for complying with the requirement.’
The Malaysian economic story back to top
The Malaysian economy has gone through rapid structural changes since Malaysia gained independence in 1957. It is one of the most advanced countries in the Third World and in recent years had experienced one of the highest growth rates, of about 8% per annum, from the mid-1980s until 1997, when the country was not spared the Asian economic crisis. However, it rebounded commendably, registering annual growth ranging from 4 to 5% since 1999. In the nineties, Malaysia with the other ‘new tigers’ was proud of its economic achievements and social development. Malaysia is a founder member of the WTO by virtue of its membership of GATT since 1957.
A broad historical account is necessary to describe the emergence of the little-known former British colony as a new industrialized country (NIC) almost half a century after independence. Agriculture was the main source of growth in the early phase of development. In the 1950s and the 1960s, the traditional export economy was renewed through a very successful programme of replanting rubber estates and rejuvenating smallholdings with more productive varieties of rubber trees. In spite of declining world prices, the natural rubber industry has been able to remain competitive with synthetic rubber.
In the 1960s and 1970s, import-substitution and export-oriented industrialization propelled economic growth. The most important source of Malaysian economic growth has been the development of a substantial oil and natural gas industry.
In the mid-1980s, however, the government through its fiscal policies adopted an all-out strategy of pursuing export markets to attract foreign direct investment (FDI) while at the same time enhancing domestic investment. Tax allowances and pioneer status were given to promote the secondary sector. Manufacturing and the growing service sectors were the engine of growth. In the 1990s the economy was sustained through improved productivity and industrial upgrading to higher value-added industries.
Malaysia has today become an export-driven economy spurred on by high technology, knowledge-based and capital-intensive industries, the result of opening itself to foreign direct investment. Malaysia aggressively and successfully promoted FDI, primarily through a government agency, the Malaysian Industrial Development Authority (MIDA). Today, its market-oriented economy, combined with an educated multilingual workforce and a well-developed infrastructure, has made Malaysia one of the largest recipients of FDI among developing countries. Malaysia has been transformed from a primary commodities producing and exporting country into a thriving modern economy, where manufactured products now account for more than 80 per cent of total exports, largely due to the role of multinational corporations (MNCs).
The rubber industry and condom manufacturing back to top
The Malaysian rubber industry has maintained its forward march into the twenty-first century. However, because both latex and field coagulum harvested from rubber plantations are highly susceptible to degradation by contamination, rubber has to be processed into marketable forms that will allow for safe storage and marketing. Nonetheless, it has achieved overall expansion through increasing the range of products manufactured and the number of units, as well as through technological sophistication. Total rubber production in 2004 is expected to increase by 17.6%, to 1.16 million tones (in 2003 it had increased by 10.6% to 986,000 tonnes).
The importance of rubber ever since it first appeared, and the decisive role that it has played in the development of modern civilization prompted much interest in discovering its chemical composition in order to synthesize it. Through these research projects, the tyre industry saw the possibility of breaking away from the grip of the world’s natural rubber supply.
Synthetic rubber may be obtained in many different ways, and there have been dramatic changes in the global rubber consumption. Table 1 shows Malaysia’s rubber consumption by type.
% of world
Source: MRB’s quarterly rubber consumption survey, International Rubber Study Group (IRSG)
Malaysia is today a leading exporter of rubber products. Its rubber product manufacturing industry began in 1921 with a modest range of products that included tyres, tubes, footwear, rubber bands and moulded rubber goods for the domestic market. At present Malaysia is the world’s major exporter of rubber gloves, condoms and catheters, and its rubber products are exported to more than 140 countries.
As well as supplying the greater part of the world’s latex concentrate, Malaysia has a thriving modern latex products manufacturing industry such as medical examination gloves, both household and surgical gloves, and a wide range of medical products such as catheters. Much of the world’s rubber thread production is centred in Malaysia itself: thread is used in furniture webbing, elasticised panels for shoes, men’s sock tops and ladies’ underwear, and many of these items are made in Malaysia. Since 1996, latex products have formed 76-80% of Malaysian exports of rubber products. Recently the condom-making industry has become important and is growing rapidly.
In fact more than a decade ago in 1991, United Press International (UPI) forecast that Malaysia was poised to become the world’s leading condom producer, mainly because Malaysia has an advantage over Japan, South Korea and other countries in its ready supply of raw latex. If the goal is reached, Malaysia could dominate a significant piece of the world market, according to Lim Beng Huat, general manager of Medilatex, a manufacturer producing 170 million condoms a year. Currently, there are fourteen condom manufacturers in Malaysia.
II. The local and external players and their roles
The concept Malaysia Incorporated, which was launched in the mid-1980s, was aimed at mobilizing the public and private sectors to work together as one big unit to achieve rapid development as Malaysia aspires to be an industrialized nation. Through its fiscal policies various incentives and heavy infrastructure investments were offered by the government to support the economy and attract businesses. Playing the role of facilitating an environment for a private-sector-led growth, the government also provides a link with export markets through various agencies such as the earlier mentioned MIDA and the Malaysian External Trade Development Corporation (MATRADE). Multi-prong strategies include attracting FDI and promoting Malaysian exports internationally.
Meanwhile, to help Malaysian manufacturing companies with technology development and quality assurance, Standard Industrial Malaysia (SIM), formed in 1969, was upgraded into a vehicle for standards and industrial promotion. The agency, now called SIRIM, is entrusted with the tasks as the prime mover in industrial research and development. It also acts as a catalyst in bringing about national economic dynamism through excellence in technology and the international acceptance of Malaysian products and services. The mission of this organization is to enhance business competitiveness through technology and quality, and to fulfil the needs of the industry. Other roles include acting as the national technology development corporation and as a vehicle for technology transfer. SIRIM Berhad was established to assist the Malaysian government in institutional and technical infrastructure, its main functions being to promote and undertake scientific industrial research, to boost industrial efficiency and development, to provide technology transfer and consultancy services, to develop Malaysian standards and to promote standardization and quality assurance for greater competitiveness, and to enhance public and industrial welfare, health and safety.
SIRIM’s role was further expanded when the Malaysian government in 1993 appointed it to manage the General Agreement on Tariffs and Trade (GATT, the WTO’s predecessor) enquiry and notification functions. This was most appropriate because apart from being the focal point for TBT enquiries both from Malaysia and from other WTO members, SIRIM also works closely with other government agencies and the private sector in highlighting new or amended regulations/standards issued by WTO members that would have implications for Malaysia’s domestic industry. Considering the private sector’s reliance on WTO rights, SIRIM plays a pivotal role in ensuring that Malaysian companies are informed of any compliance requirement.
In this regard SIRIM, as mentioned by Salmah, a SIRIM officer, would ensure that ‘Any notifications that we received would be disseminated to government agencies, institutions, organizations, associations and other interested parties in Malaysia through the WTO/TBT Newsletter which is published fortnightly and circulated to a mailing list of about 400 entries. The newsletter is also posted on SIRIM’s website.’
To be an effective member of the WTO, Malaysia has set up the National Sub-committee (NSC) on the TBT Agreement that will examine the effective implementation of Malaysia’s rights and obligations under the TBT agreement and will co-ordinate implementation issues related to the TBT with other agencies responsible for the agreement. The NSC will also monitor the operation and administration of the TBT agreement with regard to the duties of the enquiry point and act on issues or standards of export and domestic markets that are barriers to trade. The main objective of the establishment of the enquiry point is to ensure that technical requirements are transparent and to ensure that information is readily available to those who needed it, especially the traders. Other functions of the NSC regarding the TBT Agreement are co-ordinating with other agencies or ministries on responses to WTO notifications, managing Malaysia’s notification to the WTO/TBT Committee and also formulating recommendations on TBT matters.
There are several other services provided by the Malaysian WTO/TBT Enquiry and Notification Point. It will assist in answering foreign enquiries on any existing or proposed Malaysian standards, regulation and conformity assessment systems. It will also help in answering domestic enquiries and any existing or proposed standards, regulations and conformity assessment systems affecting the trade of other WTO member countries and also assist in the preparation and submission of notification on Malaysia’s proposed technical regulations to WTO in accordance with TBT agreement obligations.
Programmes are also arranged for regulatory agencies to enhance their awareness on notification obligations. These may include sending reminders and organizing meetings or discussions and other awareness programmes.
However, as shown in Table 2 on activities at the WTO/TBT Enquiry and Notification Point, the number of notifications submitted by Malaysia to the WTO Secretariat is very small; in 2003 none was submitted, in contrast to the number of notifications received from the WTO.
|Notifications submitted to WTO Secretariat||3||2||1||0|
|Requests for notification texts:|
|Co-ordination of comments/views on:|
|TBT notification received from WTO for circulation||559||402||553||783|
Source: Standard Management Department, SIRIM Berhad.
III. Challenges and outcome
The TBT Agreement seeks to ensure that technical regulations and standards, as well as testing and certification procedures, do not create unnecessary obstacles to trade. However, it recognizes that countries have the right to establish protection, at levels they consider appropriate with a legitimate objective, for example for human, animal or plant life or health or the environment, and should not be prevented from taking measures necessary to ensure those levels of protection are met. However, legitimate objectives are subject to the requirement that they are not applied in a manner that constitutes a disguised restriction on international trade, mentioned in the preamble of the WTO/TBT agreement. The agreement therefore encourages countries to use international standards where these are appropriate, but it does not require them to change their levels of protection as a result of standardization. Product standards should be based on scientific information and evidence. Mandatory product standards should be based on internationally agreed standards.
Tharampal was therefore baffled when he was informed of the Colombian draft proposal. ML, an affiliated company of a German multinational corporation, the Beiersdorf group, has been producing high-premium quality condoms for export since 1987.
The production of condoms from latex is relatively simple and since 1920 has virtually remained unchanged. Each pack carries the ISO 4074, the global standardization for condoms made from natural rubber. ISO/DIS 4074 states all the requirements and specifies the test methods to be used for male condoms made from compounded natural rubber latex. The rules were set strictly because condoms are medical devices and should be produced under a good-quality management system.
The development of condoms made from other material (non-latex condoms) has been prompted by the epidemics of HIV/AIDS and other sexually transmitted diseases (STDs), the perceived shortcoming of latex condoms, the increasing incidence of allergies to latex condoms and the advent of new technologies and materials. Japan is one of the developed countries that commercially produces synthetic condoms by using synthetic rubber, which take only 7% to 8% of the world’s condom market.
The ISO certification differentiates between the natural rubber condom and the synthetic one, since non-latex condoms have physical properties different from those of latex condoms. Manufacturers have had to submit detailed information, including the full range of pre-clinical data on the materials, its manufacturing process and the safety processes adopted before conducting actual clinical studies.
Hence Tharampal saw the Colombian draft regulation as being without a legitimate objective and in direct contravention of Article 2.2 of the TBT Agreement, since there is no scientific proof that natural rubber can cause allergies. In addition, Article 2.4 of the Agreement stipulates that where technical regulations are required and relevant international standards exist members should use them. As far as ML is concerned there exists a harmonized standard that it is currently adopting. This would be in line with the principles of the WTO/TBT Agreement of transparency, non-discrimination, mutual recognition, equivalence and harmonization.
Tharampal is also concerned that in the event of the enforcement of the Colombian decree ML’s expenses would be adversely affected, since the redesign of the individual container of the condom would be necessary because the existing packet is too small to accommodate the proposed labelling. Furthermore, sales could be badly affected as the warning against allergies would be given undue prominence and at the same time create panic among the consumers.
SIRIM is equally baffled by the draft technical regulation as it exceeds ISO 4074:2000(E) as mentioned earlier. In addition, the imposition of technical regulations on labelling is unnecessary, since labelling can be interpreted as standard as stated in Annex 1 of the TBT Agreement, and therefore compliance is not mandatory.
The outcome back to top
Malaysia’s notification of objection against Colombia’s draft decree was deliberated and recorded by the Committee on Technical Barriers to Trade (CTBT) at the WTO in Geneva. According to procedure the country issuing the decree should respond to Malaysia’s comments and there should be some form of bilateral engagements before matters are brought to the WTO’s attention. The WTO Dispute Settlement Mechanism (DSM) would only intervene should there be further disputes. In this case, Ms Salmah of SIRIM sent two reminders but received no response from the Colombian government. It was therefore assumed that as a result of the action taken by Malaysia to assert its rights under the TBT agreement, Colombia had withdrawn its decree. Both ML and SIRIM believe that the matter has been resolved, since ML continues manufacturing using its original package and continues to control the market share in Colombia.
The notification from the CTBT, dated 15 May 2003, gave the final date for comments as 6 August 2003 — giving ML under three months to respond — otherwise the decree would be adopted on 15 August 2003; there were concerted efforts by ML and SIRIM to register their objections expeditiously. Other than the routine expenses incurred in communicating with SIRIM and other government agencies ML did not have to spend on marketing campaigns or road shows to rebut the possible negative repercussions of the Colombian decree.
IV. Lessons for developing countries
Recent decades have seen rapid growth in the world economy. This growth has been driven in part by the even faster rise in international trade. Malaysia is the fourteenth largest trading nation, and in its effort to achieve its development goals it has placed great emphasis on public- and private-sector collaboration. Tharampal of ML expressed this when he said, ‘The irony about the WTO is that on one hand free trade is encouraged, yet it is possible for each country to come up with new conditions that were never there. So, to really benefit from the WTO it is very important for businesses to work closely with government, because businesses do not have the expertise and ready resources to negotiate internationally. Hence we have to depend on assistance from the government, given that the WTO is a body of governments.’ Hence it is critical to promote collaboration in developing standards for the manufacturing fraternity exemplified by ML. Also, it is appropriate to appreciate the regular meetings held between SIRIM and various business associations such as the Federation of Malaysian Manufacturers (FMM), the Malaysian International Chamber of Commerce and Industry (MICCI) and the Malaysian Employers Federation (MEF).
‘ML is very big in research and development both in our processing and the product. As far as processing is concerned pro-active measures are taken to steer quality in every stage of the manufacturing process. At ML every member of the staff is trained and committed to achieve consistent quality in our product manufacture. Continuous training in quality management and skills for all levels of staff ensures increased productivity and value adds to our product’, said Tharampal.
He added that being a member of business associations is equally important: ‘We are fully committed to the development of the medical device industry in Malaysia, ML is active in the Association of Malaysian Medical Industries (AMMI). We participate actively in FMM, MATRADE, MICCI, Malaysian-German Chamber of Commerce and Industry, Malaysian Rubber Products Association (MRPMA) and MEF. By becoming a member of these associations we are exposed to changes in other industries that might directly or indirectly affect us.’
One point that came across very strongly in ML’s case is the importance of obtaining certification from international bodies on standards and quality assurance. This is crucial, especially for products meant for export markets. A producer has to ensure the correct certification for manufactured products to avoid compromising on quality and non-compliance with international standards. Once this is attained any new regulations or requirements imposed by member countries are easily surmountable.
In ML’s case it went beyond certification as it also participated in promoting quality standards internationally. Together with SIRIM and the Malaysian government ML is involved in developing quality standards for condoms in the international work group for ISO TC 157.
Governments should develop expertise on the various trade requirements of the WTO and enhance their capacity to meet these requirements. If they are met there is little need for DSM/WTO involvement. The national government has also to develop the capacity to negotiate internationally. The yawning gap in terms of expertise between developed and developing nations contributed to poor trading terms, thereby creating tensions in WTO negotiations.
In Malaysia there is still room for improvement. For instance, Malaysia’s notifications submitted to the WTO are very small in number. Malaysian companies, in general, view the WTO as promoting the developed countries’ agenda. Therefore agencies such as SIRIM, MIDA and MATRADE should increase their efforts in raising awareness of the rights of WTO members, including obligations and notification rights that could be resolved through the WTO.
Tharampal, however, had one suggestion on the role of SIRIM as the TBT national focal point: ‘It would be more effective if SIRIM had a column on WTO updates in a local newspaper — this channel would reach wider members of the public and industry.’
* Faculty of Economics and Administration, University of Malaya, Kuala Lumpur.