As Malaysia's Mahathir Threatens U.S. Investors, Trump Must Step In

As Malaysia's Mahathir Threatens U.S. Investors, Trump Must Step In
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After riding a populist wave to election in May, Malaysian Prime Minister Mahathir Mohamad has threatened to eliminate major foreign investments in the southeast Asian country by fiat. As Mahathir escalates his threats, the Trump administration must signal it is prepared to retaliate if American investments are jeopardized.

Mahathir’s criticism of investors out-negotiating past administrations on deals and foreigners taking Malaysian jobs is downright Trumpian. The Malaysian leader, who served as prime minister from 1981 to 2003, imprisoned political foes, exploited racial divisions and suppressed the media.

But since assuming office, he has cast himself as a reformer focused on rooting out pervasive waste, fraud and graft. Mahathir recently said he will try to cancel multibillion-dollar Chinese-backed energy pipeline and rail projects in his latest effort to curb corruption, promote economic nationalism and shrink a staggering debt load. Construction of the projects, estimated to cost more than $22 billion, has been indefinitely delayed as Mahathir seeks a better deal with China.

"We don't think we need those two projects. We don't think they are viable. So if we can, we would like to just drop the projects," he told the Associated Press in an interview.

The government has not reported exactly how much of its debt of $250 billion is owed to China. But Beijing-led projects represent a substantial portion, including the $20 billion, 430-mile East Coast Rail Link and two gas pipelines worth $1 billion each. Much of the money has already been paid and would be difficult to claw back.

The deals were negotiated in 2016 by former prime minister Najib Razak, who has been indicted on multiple charges connected to a multibillion-dollar money laundering scheme at the state investment fund 1MDB. The scandal has transfixed Malaysian society as prosecutors indicted Najib just last week on his latest criminal charge--accepting some $10 million from “unlawful activities.” Prosecutors allege that $4.5 billion was misappropriated from the fund during Najib’s nine-year tenure as prime minister. He denies wrongdoing.

Experts, though, draw a distinction between Mahathir's anti-corruption campaign and his brinkmanship on cancelling foreign investment projects.

“Even if Malaysia feels justified in scrapping the contracts, it’s a very risky thing to do unilaterally because it could scare off investment from the United States or other countries,” said Stuart Gottlieb, a former U.S. Senate foreign policy adviser who now teaches international affairs at Columbia University. “If the Malaysian prime minister can do this to China, he can do it to American and other foreign investors.”

Mahathir arrives today for a multi-day visit to China, his first since taking power, focused mainly on economic matters. The symbolism of Mahathir first visiting the Chinese city of Hangzhou to meet with Alibaba founder Jack Ma is intentional. Mahathir has strongly encouraged investments in line with his populism and blasted foreign ownership of property and infrastructure. Alibaba has invested more than $100 million in partnership with the Malaysian government for a “digital free trade zone.”

“The prime minister likes our idea about not coming here to buy land and build and construct without hiring local people,” Ma told Malaysian reporters in June.

It’s not just Chinese investments that have been derailed by Mahathir. In May, soon after he assumed power, Mahathir unilaterally announced the cancellation of a $28 billion high-speed railway link to Singapore.

“It’s going to cost us a huge sum of money -- we’ll make no money at all from this operation,” he told reporters.

That may be the case. But as the prime minister’s new government scrambles to cut costs, he’s also obliterating the trust of foreign investors who depend on consistent legal rules beyond Mahathir’s whims.

U.S. Secretary of State Mike Pompeo chose Malaysia as the first stop on a recent southeast Asian tour. Before his trip, Pompeo stressed in a speech that the United States, unlike China, can provide certainty to financial deals because its economic system is based on the rule of law. It may also have served as a warning to Malaysia:

“With American companies, citizens around the world know that what you see is what you get: honest contracts, honest terms, and no need for off-the-books mischief,” he said. “Integrity in business practices is an essential pillar of our Indo-Pacific economic vision, and it is what each country in the region needs.”

Mahathir, who at age 93 is the world’s oldest elected leader, has developed a reputation as highly critical of the United States while open to American investment. But he has a history of bizarre statements that should alarm enterprises with interests in Malaysia.  

“The Europeans killed six million Jews out of 12 million. But today the Jews rule this world by proxy. They get others to fight and die for them,” he declared in 2003, just one among decades of anti-Semitic statements. Mahathir is a fervent Sept. 11 truther, suggesting that the U.S. government staged the terrorist attack to build support for a global war against Muslims:

“I am not sure now that Muslim terrorists carried out these attacks,” he said at a press conference in 2010. “There is evidence that the attacks were staged. If they can make Avatar, they can make anything.”

President Trump, after withdrawing from the Trans-Pacific Partnership trade agreement in 2017 and then directing his economic advisors to renegotiate U.S. entry to the pact in April, has limited credibility on investment and trade policy in southeast Asia generally and Malaysia particularly. His advisors, though, should make clear to Mahathir that the United States will retaliate if Malaysia cancels investments involving U.S. firms.

Jeff Patch is an analyst with Capital Policy Analytics, a Washington, D.C.-based economic research and consulting firm.

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