Thursday, June 28, 2012

Pakistan, Sri Lanka and Timor Leste in ASEAN?

The headline “Pakistan needs Indonesian support for ASEAN membership” in yesterday’s Pakistan Daily Times was jarring to see on the Google news widget on this blog yesterday.  Only after reading the actual text of the article could one determine that the interviewee, an Indonesian diplomat, was actually talking about an ASEAN-Pakistan free trade agreement (FTAs), not actual membership in ASEAN itself. 

I write “jarring” but not absurd in the above paragraph because South Asian countries such as Pakistan have sought membership in ASEAN before.  Sri Lanka tried to join ASEAN at the time of its founding in 1967:

Suddenly the issue of Ceylon’s efforts to join ASEAN came up. Tun Abdul Razak, who led the Malaysian delegation, announced that the Malaysian Prime Minister Tunku Abdul Rahman “had made a promise” to the Prime Minister of Ceylon “regarding Ceylon’s admission to the group”. An “undertaking had been made and he, Razak, could not retract it”. The other delegates were “stunned”. The geographical limits proposed for the organization did not extend beyond Burma.  Reluctantly every body “decided to wait for the arrival of application from Ceylon. Nothing happened. The clock was ticking and the Thais wanted the birth of the organization to take place within an auspicious time. Before that deadline, the meeting was called to order”.

(Thanks to Dr. V. Suryanarayan for this discussion).  As Singaporean President S.R. Nathan recounts in his memoirs, the Sri Lankan government later decided to drop the application:

Nathan has mentioned in his book that few years later Gunasingham, Sri Lankan High Commissioner to Singapore, explained why Colombo “failed to take its application forward”. Gunasingham had sent an analysis of the emerging geo-political situation in Southeast Asia. In that note he had explained how the Southeast Asian countries wanted to “shore up the strategic environment …than the protective shield offered by the American presence and by the umbrella of Southeast Asia Treaty Organisation”. Gunasingham was of the view that the “dominoes will continue to fall” as things stood “at present”. There will be no “stopping the process”, unless the Southeast Asian States associate themselves in a regional organization, which will usher in “unity of will and purpose and co-operative setting”. Gunasingham discussed the subject with Thanat Khoman, the Thai Foreign Minister, who “seemed to welcome the idea” of Ceylon’s membership. Gunasingham also felt that other member states were sympathetic to the idea.

Gunasingham got no reply from Colombo. His analysis was that the Government came under pressure from the left parties and also from India “which feared that its sphere of influence might be eroded” China and Soviet Union also opposed the move. Some non-aligned countries also felt that Sri Lanka would be giving up its policy of non-alignment. Gunasingham concluded, “Sri Lanka’s hope of breaking away from its moorings in South Asia and becoming a trading nation with links to Southeast and East Asian nations as well as to all of littoral Asia was lost”. The application was shelved, and as Nathan concludes, in later years, Sri Lanka’s “internal security situation deteriorated”.

Frankly, the nature of ASEAN as a regional institution would have been irrevocably changed had Sri Lanka been considered seriously as a member.  History would have been much different had the meeting started a little later.  In any event, any application by Sri Lanka or Pakistan would now be barred by Article 6.2(a) of the ASEAN Charter, which requires a prospective applicant to have a “location in the recognised geographical region of Southeast Asia.”

Moving from the hypothetical to the actual, the current ASEAN membership application of Timor Leste is being considered by an ASEAN committee, which met this month.  This article in the Jakarta Post comments on Singapore’s supposed opposition to Timor Leste’s application. The author posits that Singapore may oppose Timor Leste’s membership because (1) it does not want Indonesia to have another ally in the grouping, (2) taking in Timor Leste now would delay the ASEAN Economic Community (AEC) implementation, and (3) Singapore is bargaining for economic advantage, particularly with regard to energy resources in Timor Leste.   

The article correctly notes that (1) is not relevant because of the “ASEAN way of consensus,” such that having another vote in ASEAN is not really so important. It also states that ASEAN has demonstrated flexibility in the implementation of the AEC, particularly for Cambodia, Laos, Myanmar and Vietnam (CLMV) countries, so why not for Timor Leste?  The author goes to note that Article 21(2) of the ASEAN Charter allows for this differential treatment pursuant to the “ASEAN – X” formula. Thus, the article posits that (2) is not a justifiable reason to delay Timor Leste’s ASEAN membership, such that continued reliance on these issues may lead to unwarranted speculation that (3) is the real reason for Singapore’s opposition.

In my view, the Jakarta Post article assumes that ASEAN’s institutions and structures for the AEC are sufficiently developed to handle another developing country member, one that is not a WTO member (Laos is not a WTO member but will join soon).  As regular readers of this blog know, I don’t think that the ASEAN institutions and structures are sufficiently developed, as I discussed here.   In other words, it is not just that Timor Leste is not ready for ASEAN, but that ASEAN is not ready for Timor Leste. 

To put it in more stark terms, if Timor Leste is accepted as an ASEAN member, by my estimate, Timor Leste would become ASEAN Chair by 2020.  A lot can happen in eight years, as occurred in Cambodia after it joined. But there would really need to be major leaps in development and infrastructure assistance for the country, similar to what happened in Cambodia.  That effort would be highly distracting from current efforts to complete the AEC. 

Finally, I really don’t think that Singapore is jockeying for economic advantage in Timor Leste.  The country is not traditionally part of Singapore’s trading patterns, and as the Jakarta Post article notes, the Australians and Indonesians have already filled most of the major economic roles there.

Again, I have no doubt that Timor Leste will eventually join ASEAN, given the high level of support from ASEAN member states and the need to promote regional stability by including the country in ASEAN. But ASEAN needs to complete the AEC by 2015 before taking on another member.  Both Timor Leste and ASEAN will benefit from having a longer time horizon for ASEAN membership.

Monday, June 25, 2012

Thoughts on US Trade Policy Regarding China

I am interviewed by John Richardson in today's ICIS report on US trade policy regarding China.  It is not directly related to ASEAN but touches upon some issues also raised during the APCAC "doorknock" described in my previous post.  Follow the link for more.

Friday, June 22, 2012

Gauging US Thoughts on Myanmar and the TPP

This week I attended the annual Washington Doorknock of the Asia-Pacific Council of American Chambers of Commerce (APCAC).   This is an opportunity for American Chambers of Commerce in Asia to hear from the Obama administration and the US Congress about their thoughts and opinions on Asia.   There were a few items that impact the ASEAN Economic Community (AEC):

First, State and Treasury department officials indicated that the official suspension of US Burma sanctions against the Myanmar regime will take place soon, and no later than Secretary of State Hillary Clinton’s visit to the ASEAN Regional Forum in Cambodia on July 12-13The suspension had been announced in May during a visit by the Myanmar foreign minister to Washington, but the formal suspension, in the form of a “general license” to do business with Myanmar, has not yet been issued by the Treasury department, which administers the Burma sanctions. 

The suspension will likely cover all of the issues discussed in my previous blog entry, with the additional likelihood that companies investing in Myanmar will have to file a periodic report on corporate social responsibility efforts.  The suspension will not likely result in a lifting of the ban on imports from Myanmar, as the U.S. Congress will likely pass an extension of the ban and other sanctions for an additional year (although President Obama’s ability to waive the sanctions will also continue).  The suspension comes as the US-ASEAN  Business Council and the American Chamber of Commerce plans two separate business missions to Yangon and Naypyidaw in July and August (I am going in the August mission).

Second, thoughts on the Trans Pacific Partnership (TPP) were mixed.  Most thought it would not be practical for the TPP to be completed this year although progress had been noted.  Some (mostly Republicans) thought that without Trade Promotion Authority (TPA), a statutory delegation of authority by the Congress to the President along with expedited consideration and voting procedures for Congress, a TPP result would be difficult to achieve.  Along with the long-stalled WTO Doha Roud, the TPP is the first major trade agreement the US has attempted to negotiate without TPA (or its predecessor Fast-Track) since the 1970’s, and trading partners will be reluctant to negotiate and conclude deals if they know that Congress will later rewrite the agreement during the consideration process.  In addition, TPA traditionally comes with formal notice and consultation processes to be followed by the Administration, which USTR has been following without statutory authority for TPP anyway.  Nevertheless, there were some complaints that without the TPA stipulations, USTR’s consultation process with Congress has been less satisfactory than its outreach efforts to other stakeholders such as non-governmental organizations. 

There was concern about how TPP could be linked up with US efforts to engage ASEAN more.  Major ASEAN members such as Malaysia, Indonesia and the Philippines are not in the TPP talks, and may not be ready to join for the foreseeable future due to their domestic political concerns.  One State official opined that perhaps a “half-way house” for these ASEAN members could be created so that ASEAN could have some linkages with the TPP; other officials thought that economic development in these ASEAN members would be better served by their joining the TPP talks in full, noting that Thailand had had its opportunity for a bilateral FTA with the US in the last decade and would already be in the TPP talks now if it had entered into an FTA.

Third, this was an opportunity to meet several US officials who have had a major impact on ASEAN, including Senator Daniel K. Inouye, the US Senate president pro tem, whom I have long admired as an Asia-Pacific American political pioneer:

During the meeting, he remembered his last visit to Yangon in 1966, making him one of the first US legislators to visit Myanmar/Burma.  Another notable legislator is Rep. Xavier Becerra, who had been offered the USTR position by President Obama.  USTR Ron Kirk has done an excellent job, but seeing Rep. Becerra in action during a panel makes me wonder what could have been achieved with him at USTR.

Monday, June 18, 2012

How ASEAN Goods Lose Their Identity (and How to Correct This)

Another issue illustrating some of the frustrations economic actors have with the ASEAN Economic Community (AEC) regards intra-ASEAN trade in the ASEAN Trade in Goods Agreement (ATIGA).  Under the ATIGA, goods qualify for the zero preferential tariff rate for intra-ASEAN trade if they satisfy the rules of origin of ATIGA.  Generally, this means that the goods have either 40% ASEAN value added or have undergone a transformation that shifts the customs classification of the good. 

Theoretically then, once a good qualifies as ASEAN-origin for ATIGA purposes, it should always qualify.  That’s not the case.  As explained earlier, because ATIGA and other ASEAN free trade agreements (FTA) currently rely on paper documentation (the “Form D”) to prove origin, inconsistencies in customs treatment can result. For example, if a good has 40% ASEAN origin, it would qualify for ATIGA and the ASEAN FTAs in most cases.  However, as discussed in a earlier post, the ASEAN exporter will have to fill out multiple sets of origin documentation to qualify for FTA treatment despite having met the qualifications of both FTAs.

Even within ASEAN, in the ATIGA, there is inconsistent treatment.  A good can lose its “ASEAN identity” and not qualify for ATIGA even though it has met the ATIGA rules of origin.  If an ASEAN-originating product from Member State A was  declared for importation with a Form D in Member State B, and at a later stage is exported to Member State C, it is at present impossible (legally and practically) to obtain a Form D in Member State B, and the full rate of duty will be applied in Member State C. There is only a provision for ‘back-to-back’ certificates: a certificate of origin can be issued on the basis of another certificate of origin under certain conditions where goods have not been declared for importation yet and are effectively in transit.

The loss of origin issue has been identified in earlier studies as one of the possible causes of underuse of preference in ASEAN.   Apart from being a possible cause of underutilization, this issue is also felt to stand in the way of a true ‘free movement of ASEAN originating goods’, which, with a view to the AEC objectives, makes finding and introducing/implementing   a  solution   even  more  important (It  should  be realized, however,  that there is no solution that will solve all cases of lost origin’, as there will always be situations in which an exporter (a trader in particular), is just not able to prove that the goods to be exported were already originating in an ASEAN member state. Proof is an elementary requirement that should not be dropped.).

There are two possible solutions for this legal lacuna. 

First, ASEAN can undertake full implementation of the ASEAN Framework Agreement on Goods in Transit.   The agreement called for a protocol to allow for customs transit between and through ASEAN member states.  However, since 1998, the protocol has not been finalized.  According to sources, differences between Malaysia and Singapore over railway checkpoints had delayed agreement for years (recall that Malaysia had asserted that goods and people passed from Malaysia to Singapore at the Tanjong Pagar train station, which was deep inside the geographical territory of Singapore).  However, with Malaysia and Singapore having resolved this dispute, and the customs and immigration facilities having been moved to the Malaysia-Singapore border in Woodlands, the political obstacles to passing the customs protocol have dissipated.  The protocol needs to be finalized.

Second, ATIGA itself could be amended to deal with this lost origin issue.   Under ATIGA, the issuing authorities can only issue a Form D for goods originating in the country in which the certificate is applied for.  The first step towards a solution is therefore to remove the restriction and to allow that certificates of origin can also be issued when the ASEAN country of origin of the goods in question is different from the issuing ASEAN member state. The legal basis for the issuing of certificates  of origin is laid down in Article 38 of ATIGA. The text of this article does not rule out the issuing of a certificate stating a country of origin different from the country in which the certificate is to be issued, but refers to the procedural rules contained in Annex 8 of the ATIGA.   Therefore Article 38 would not need to be amended. It is Rule 10.1 of Annex 8  that contains the restriction in question; here the text would require a minor amendment by replacing  “.......originating  in  that  Member  State by  “.........originating  in  a Member State”.  With that, Annex 8 would allow for certificates to be issued/invoice declarations to be made out for goods originating in an ASEAN member state different from the exporting ASEAN member state.

Either way, ASEAN needs to deal with such details if the AEC is to achieve both the single production base and the single market.  Otherwise, competitors such as nation-states like China and India, or regional blocs like NAFTA and the EU, where such origin issues have been resolved or do not exist, will be better placed to attract investment.  

Friday, June 15, 2012

The ASEAN Economic Community Needs to Give Priority to the Single Production Base

In yesterday’s Malaysian Star, London School of Economics professor Danny Quah asserts that the ASEAN Economic Community (AEC)’s main priority should be develop the single market in southeast Asia:

Asean needs to realise that it is in a better place location. We think we are part of a global supply chain, where the East is involved in the manufacturing and assembly, while the product is sold to Western consumers.  In the example of the manufacturing of the Apple Iphone, Asia's contribution of the entire value chain is just 4% of the value-added created,” said Quah.

Quah: ‘There is a shift in economics eastward, it is real and will continue.’
“To continue with the Iphone analogy, this would mean that the rise of Asia has only been made up from 4%. If this were true, then Asia' success of the global supply chain would be very fragile.  At the best of times we make 4%.  In the worst of times, we would be making negative returns,” said Quah.
“So if we really held on to that 4% theory, this would not be possible. If the West is not consuming, then who is? The decoupling is actually going on in the world. Asia has a momentum in its economic trajectory that is independent of the troubles of the West,” said Quah.
“The missing link is that we think we make up the 4%. There is a shift in economics eastward, it is real and will continue.  We must adjust our mental mind map. We must take greater responsibility. We need to be more innovative and develop domestic demand in our own markets,” said Quah.

Now, I do not doubt that Asia, and by extension, ASEAN, needs to develop its domestic markets.  Empowering the Asian consumer is a positive thing, particularly in China and India.  Stronger consumer markets in China and India not only will help support the world economy, but empowered consumers in those countries will demand higher quality, better distribution and more efficiency. 

However, unlike China and India, ASEAN neither operates fully as a single market nor has the institutions to regulate a single market.  This blog has consistently argued that a single market needs a single regulator, or at least have sufficiently coordinated regulators that can provide consistent and clear regulation for the single market. 

Yet the ASEAN Charter notes that the aim of the region’s economic integration is to “create a single market and production base which is stable, prosperous, highly competitive and economically integrated” in paragraph 5 of Article 1. The “single market” and the “single production base” are correctly identified as two separate concepts in the Charter: (1) the “single market” for goods, services, labor, investment and capital, and (2) the “single production base” which would supply ASEAN products for consumption not just in ASEAN but for export to elsewhere in the world. 

In my opinion, the ASEAN Charter inverted the significance of the AEC’s integration goals.  Given the economic disparities among ASEAN members, both in terms of development and size, a single market alone will not necessarily provide sufficient economic benefits for the populace. The income gap between the ASEAN member with the highest GDP per capita (PPP), Singapore, and the ASEAN member with the lowest GPD per capita (PPP), Myanmar, remains at 50:1. By contrast, the ratio in the EU of its highest GDP per capita member, Luxembourg, and that of its lowest, Bulgaria, is only approximately 7:1. Furthermore, the majority of ASEAN’s population are in countries classified as LDCs. 

Unlike the EU, therefore, achieving a single market should not be viewed as the end objective of economic integration. Rather, like NAFTA, integration through the AEC should be viewed as a means to an end.  Establishing a more effective, harmonized production base through AEC measures will encourage foreign and domestic investment in ASEAN, with the resulting products both consumed within ASEAN and exported abroad. The general population in ASEAN will benefit to the extent that increased investment results in higher employment, wages and overall development.   ASEAN leaders appear to understand this aspect of economic integration, as denoted by their repeated calls for greater involvement by SMEs and ASEAN-owned businesses in regional integration.  Without improved participation by this sector of ASEAN’s economy, the benefits of regional economic integration will remain concentrated in limited segments of the economy that have already integrated, such as automobiles and electronics.

Thus, for political purposes, the creation of the single market is noted as the primary goal of AEC integration, in practical terms, the creation of the single production base will have the more immediate impact on ASEAN’s citizens.  If the AEC is to have a material effect on the citizens of ASEAN, it would make more sense to build the production base, then attract foreign investors who will hire ASEAN citizens and put funds into the local economy.  Given the disparity in economic development and market sizes, giving priority to development of the single market would mean a much longer roll-out process with less economic impact on the region.

Hence I have posited that attracting investors to a single production base in ASEAN requires improved monitoring, administration and implementation of AEC measures.  This, in my view, is best served by improving predictability and clarity in the operations of the ASEAN institutions.