Tuesday, August 28, 2012

Hong Kong and the ACFTA

As reported earlier, Hong Kong has asked to accede to the ASEAN-China Free Trade Agreement (ACFTA).  The ASEAN Economic Ministers meeting in Cambodia this week will consider the request, with the ASEAN Summit in November making the final decision. 

The Singapore Straits Times today (link after the pay wall) reports that Singapore and other ASEAN member states want Hong Kong to sweeten its offer.  According to the article, a study conducted by the Asian Strategy and Leadership Institute (ASLI) projects that Vietnam, Cambodia, Malaysia, the Philippines and Thailand would benefit, in descending order of magnitude.  Singapore would be the only ASEAN member state adversely affected, according to ASLI.

As Hong Kong and Singapore are similarly strong in services and capital, Singapore would face increased competition within ASEAN in these sectors if Hong Kong were to accede to the ACFTA. This was noted by Mr Lee Yi Shyan, Singapore’s Senior Minister of State (Trade and Industry):
"Given the similarities between Hong Kong and Singapore, an amount of competition is unavoidable. The question is, how can we find a way to strike a win-win situation?  And if Hong Kong alone cannot make that offer, then we will see if the China side can provide some of the potential benefits to make this a more favourable deal for Asean members." This, he said, could include looking at how China's services industry can be opened further to Asean companies.
Such an augmented offer would not necessarily benefit Singapore, which already has its own FTA with China with deep and broad commitments in services and investment, but benefit all of ASEAN.

Mr. Lee also expressed concern that Hong Kong’s joining an existing FTA sets a precedent:
"This is an important technical and procedural question as there are very few precedents.  Would it mean a renegotiation of an FTA already in existence?"
For example, what would happen if North Korea re-united with South Korea?  Would the North Korean territory immediately accede to the ASEAN-Korea Free Trade Agreement?   When the Federal Republic of Germany (e.g., West Germany) absorbed East Germany, East Germany immediately was covered by the EU treaties, so this is a valid, if not immediate, concern.

I would add two other possible areas of concern for Singapore that arise from the proposed Hong Kong accession.

First, to some extent, the market access and dispute resolution commitments of the ACFTA exceed those provided by the ASEAN Framework Agreement on Services (AFAS) and the ASEAN Comprehensive Investment Agreement (ACIA) for ASEAN members.  If Hong Kong were to accede to the ACIA, it could result in the discouraging prospect (for Singapore) of Singapore’s main regional competitor for trade and capital operating within ASEAN but with better protection and access than Singapore itself has under AFAS and the ACIA. This represents a fundamental need in the AEC, the need to mesh together the ASEAN internal market agreements with the ASEAN FTAs with its trading partners.   In other words, this is an indigenous ASEAN problem that ASEAN needs to resolve on its own, which does not arise from Hong Kong or China.

Second, if Hong Kong were to accede to the ACFTA, its companies would have access to the investment protection and dispute resolution provisions of the ACFTA.  Philip Morris Asia (PMA), a Hong Kong company, has used similar provisions under the 1993 Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Protection of Investments to bring an investment arbitration proceeding against Australia’s law requiring plain packaging for tobacco products.    Hence, theoretically, PMA could bring a similar action under Article 14 of the Agreement on Investment of the Framework Agreement on Comprehensive Economic Co-operation between ASEAN and the People's Republic of China, part of the ACFTA, against labeling requirements imposed by Singapore, Thailand and other ASEAN member states on tobacco products. The possibility of opening themselves up to a Hong Kong-based arbitration claim must be on the minds of ASEAN officials.

These considerations, together with the overall tensions between ASEAN and China regarding the South China Sea territorial dispute, may delay Hong Kong’s accession to the ACFTA. Eventually these will issues will be resolved, but perhaps not by the ASEAN Summit in November.