Saturday, October 8, 2011

Putting "ASEAN-X" to Work for the AEC

Last week I experienced firsthand the application of “ASEAN-X,” the regional cooperation formula established by Article 21.2 of the ASEAN Charter:

In the implementation of economic commitments, a formula for flexible participation, including the ASEAN Minus X formula, may be applied where there is a consensus to do so.

ASEAN-X thus allows a sub-group of ASEAN to proceed with an economic policy without waiting for participation by the other member states.  What I observed were the natural tensions that arise when two parts of a regional economic bloc develop at different paces, e.g., a “two-speed” approach such as what happened in the EU with the Euro.    But I also observed positive signs that the ASEAN-X formula can work, with sufficient good faith and compromise.

The program in question regards the rules of origin, or the procedures for demonstrating that goods qualify for preferential duty treatment under the ASEAN Trade in Goods Agreement (ATIGA) and the various ASEAN FTAs with trading partners such as Australia and New Zealand under the ASEAN-Australia-New Zealand FTA (AANZFTA). 

The current practice in ASEAN’s FTAs (including ATIGA and AANZFTA) require the submission of formal written certificates of origin to qualify the goods for FTA treatment, such as the “Form D” in ATIGA.  As I have written before, the issuance and acceptance of Form D documentation is fraught with delays and hassles due to minor discrepancies and other problems in its administration.  

Self-certification would allow exporters, including both manufacturers and trading companies, to apply for approved exporter status from their local national governments.  After achieving approved status, the exporter need only submit a basic declaration on its invoices in order to qualify its goods for the FTA’s preferential duty rate.  Certificates of origin would no longer be required for such exporters.

The EU-funded APRIS project (which I worked on) proposed a dual certification system for ATIGA, whereby exporters could use self-certification or could continue with the existing Form D approach.  ASEAN members felt full implementation was not practical, and instead authorized a pilot project for self-certification.  Brunei, Malaysia and Singapore initiated their pilot program in late 2010, allowing their exporters to obtain approved status and self-certify their exports. Thailand is to join the pilot program this month.  Thus, the pilot program is effectively an “ASEAN-6” economic program.

The current participants indicate that they believe the program is a great success.  The number of transactions covered by the program has increased during its one year of operation, and both companies and governments have been quite happy.

Yet during last week’s workshop on self-certification, funded by the AANZTA Economic Cooperation Work Program, some non-participants in the program, e.g., the “6”, expressed skepticism about the pilot program.  Indonesia has publicly stated that it would participate in the pilot program only if participating companies were limited to manufacturers, and if the authorized signatories per company were limited to three persons.  This reflects a general suspicion among certain ASEAN customs authorities that companies, and in particular trading companies, could abuse the system to obtain FTA origin wrongly.   These countries also expressed skepticism about the success of the pilot program.

However, the potential for abuse of FTA preferences has always existed.  The current scheme places too much emphasis on form over substance, as an unscrupulous exporter could obtain a certificate of origin using subterfuge anyway.  Inspecting individual paper certificates for compliance does not really prevent such abuse.   A self-certification scheme, backed by vigorous post-entry audit by customs authorities, will actually target such behavior more efficiently.   Trading companies can be subject to additional scrutiny, as they are currently.

I am personally confident that data from the pilot program will demonstrate that self-certification can work in ASEAN.  Nevertheless, the pilot program participating countries need to win over their skeptics. Qualitative, as well as quantitative, analysis should be presented to demonstrate that the program works.  Compromise is also essential.  Indonesia should drop its requirement to use only 3 signatures per company, and the current participants should be flexible enough to allow Indonesia to accredit only manufacturers.  Indeed, Malaysia only accredited manufacturers in the pilot program (Singapore and Brunei accredited both manufacturers and trading companies). 

The self-certification dispute thus illustrates the potential risks of the ASEAN-X formula.  ASEAN-X is intended to allow for a transitional period for the implementation of economic programs in the AEC.  A sub-group of members can experiment with policies, which if successful, can be adopted by the others on their own time frame.  But ASEAN-X should not be used to create a multitude of sub-groups each doing their own thing; that contravenes the entire purpose of establishing a single market.  ASEAN-X must be seen instead as a means for experimentation, demonstration, and explanation of economic initiatives.  This requires continuing dialogue between the sub-group and the others.  Otherwise, ASEAN-X risks creating a permanent “two-speed” system, or worse, a “buffet” system whereby members can pick and choose their programs.   ASEAN-X does not work if the “X” is the number “8” or “9”.

Fortunately, at the AANZFTA workshop, I saw that the pilot program participants were willing to share more about their experience, and that the non-participants are willing to compromise and learn more about the program. This is positive both for self-certification, which will save companies transactional costs and hassles, and for the AEC, which will benefit from proper use of ASEAN-X.   I look forward to hearing more good news about the pilot program and the increased use of self-certification.