Monday, July 25, 2011

The Neglected ASEAN EDSM

Recently the media have reported on a WTO panel decision on Philippine excise taxes imposed on imported liquor.  The case, brought the U.S. and the EU, questioned whether the Philippine government discriminates against imported liquor by subjecting it to a much higher tax rate than is imposed on domestic liquor.  Although the panel decision will not be publicly issued until next month, the victorious EU parties have been circulating news of the case and the Philippine liquor industry has urged their government to appeal to the WTO Appellate Body, which apparently, it will.

Some media reports compare and contrast this result for the Philippines with the Philippines’ successful WTO challenge of Thailand’s customs valuation of cigarettes exported from the Philippines.  Until the Philippine liquor decision is issued officially, substantive comparisons are a matter of speculation at this point. 

More interesting from the ASEAN point of view is a comparison on a procedural, systematic point of view.  In other words, faced with similar issues of international trade, how did the litigants approach the dispute?

Both disputes are similar in that high value products (liquor and tobacco) subject to high tax and duty rates were involved.  In other words, there were large amounts of tax and duty liabilities at stake.  This meant that the private sector was highly motivated to persuade their respective governments to take up the cases (in the case of the U.S., EU and the Philippines) and to defend the cases (in the case of Thailand and the Philippines).  In the case of the Thai cigarettes dispute, traditional ASEAN reluctance to challenge another member publicly in a trade matter was overcome by the high stakes and arguments raised by the Philippine domestic industry.  In both cases, the governments and private sectors engaged international trade lawyers to present their arguments.

The obvious difference is in the choice of forum.  The EU and the U.S. had to bring the Philippines to the WTO in the liquor dispute, as there were no alternative fora.  In the cigarettes dispute, the Philippines, on the other hand, could have elected to use the Enhanced Dispute Settlement Mechanism (EDSM), which is based largely (and in some cases verbatim) on the WTO dispute settlement procedures.  If the processes are virtually the same, why choose the WTO process?

First, from the ASEAN government point of view, the WTO process could be seen as being less confrontational.  The WTO process allows third parties to participate, and in the Thai cigarettes dispute, Australia, China, the EU, India, Taiwan, and the U.S. participated. Their presence elevated the dispute from an ASEAN regional dispute subject to review by ASEAN peers, even though airing the dispute at a multilateral level arguably subjected Thailand to greater scrutiny worldwide.

Second, and more importantly, the parties involved did not want to risk their case in an untested EDSM.  The EDSM and its predecessor systems have never handled a full-on arbitration procedure, much less attempted to enforce an arbitration panel decision against an ASEAN member.   Having had no experience with EDSM, could one guarantee that an EDSM panel decision would be implemented?  The WTO, on the other hand, has a tried and tested dispute system and implementation process.  In fact, the first WTO dispute involved Singapore and Malaysia.    Given the stakes involved, almost no trade lawyer advocate choosing EDSM over the WTO. 

Therein lies the tragedy of EDSM.  On paper, it strongly resembles the WTO process and should have all of its advantages.  Yet because of the institutional deficiencies and bureaucratic inertia, EDSM remains unused and underdeveloped.  I have argued elsewhere that this undermines investor confidence in the AEC. That is not to say that ASEAN countries should initiate EDSM disputes for the sake of developing the EDSM. However, until parties are comfortable enough to entrust their disputes to EDSM, the AEC will not reach its full potential.