Friday, August 31, 2012

How and Why the U.S. Should Support a Stronger ASEAN

Every fall the United States has its annual “Asian” diplomatic season, usually centered around the visit of the U.S. president to the APEC, and now ASEAN, summits, starting with the (mostly) American holiday of Halloween on October 31 and ending with the American Thanksgiving holiday on the fourth Thursday of November.  This year, due to combined effect of the U.S. presidential election heating up after the Republican party officially nominated Governor Mitt Romney (along with Monday’s U.S. Labor Day holiday) and  this week’s first U.S.-ASEAN business summit, it seems as if the “American” season has started in ASEAN a bit earlier than usual.

Last year marked the renewed emphasis by the U.S. government on Asia, and to a large extent, ASEAN. Whether this is a “pivot” or “renewed focus” depends on your point of view and is debatable, but the emphasis is clear. Regardless of whether President Obama or Governor Romney wins the November 6 election, Asia should remain a top priority for the United States.

Supporting a stronger ASEAN should be at the core of U.S. policy in the region.  By a “stronger ASEAN,” I refer both to the individual ASEAN member states and the ASEAN institutions themselves.  The United States has provided peace and security for the region throughout the regional grouping’s existence.  The ASEAN member states recognize this, with former adversaries (such as Vietnam) and long standing allies (e.g., Singapore, Indonesia, Thailand) recognizing the need to have a stabilizing U.S. presence, particularly with regard to the South China Sea issues.

However, I believe that the fundamental interests of United States in the region – peace with economic and political development, on a sustainable basis – is also served by having strong ASEAN institutions.  The ASEAN Charter’s ostensible purpose, to formalize the internal operations of ASEAN, is consistent with developing rule of law and good governance for the region.  Full implementation of the ASEAN Economic Community and its constituent agreements (ATIGA, ACIA and AFAS) will promote both the establishment of the single production base and single market, which will benefit all of the citizens of ASEAN.  Stronger ASEAN institutions will also mean that ASEAN will be better able to deal with environmental, health and other human development issues that can only be addressed on a regional basis.   Finally, stronger ASEAN institutions can also promote peace and stability in the region.

In other words, what is good for the ASEAN institutions is also good for the United States, as well as good for any nation that supports long term peace and stability for the region.   The Obama administration has understood this, for the most part, and has actively engaged ASEAN institutions on all of these issues.

Yet the United States could do better. The American re-emphasis on Asia and ASEAN is primarily depicted in diplomatic and military terms, with less attention paid to American support for ASEAN economic integration and socio-cultural integration. In other words, it often appears that the United States is engaged only with the political-security pillar of ASEAN, and not the other pillars, the economic and socio-cultural pillars.  

Let me address the latter.  American influence on the socio-cultural pillar is both understated and less reported.  The United States, through  the U.S. Mission to ASEAN, USAID and other agencies has promoted the socio-cultural pillar with aid and outreach efforts.  These efforts do not attract the headlines that the political-security efforts do, but they are still significant.  The American influence on socio-cultural matters in ASEAN must also include the vast American media industry, which has now expanded to include social media and the Internet.  By and large, its impact on ASEAN has been beneficial and conducive to human development.

Where I feel the United States has not fully engaged ASEAN is in the economic pillar.  The United States does provide support to the ASEAN Economic Community, such as through the USAID project to promote the ASEAN Single Window project.  To use an other example, in the last few years the number of trade actions against ASEAN countries has decreased, with some cases terminated. 

But the main U.S.  trade initiative in ASEAN, the Trans Pacific Partnership (TPP), only involves four ASEAN members (Singapore, Brunei, Malaysia and Vietnam).  The sheer depth and breadth of the TPP talks make it impractical both for some ASEAN members to join and for the talks to end anytime soon.  The TPP will result in solid, long-term benefits for the ASEAN -4 involved, but where does that leave the other ASEAN members in the meantime?

Meanwhile, ASEAN itself is pushing forward with its Regional Comprehensive Economic Partnership (RCEP) program with its other trading partners. Some TPP issues will be covered in the RCEP talks, but in all likelihood most won’t.  The RCEP and the TPP are not incompatible, but if the RCEP takes off, the U.S. risks being left behind as India, China, Korea, Japan and Australia-New Zealand build upon their existing FTAs with ASEAN.  Even the EU is thinking about an eventual restart of its FTA talks with ASEAN, if Myanmar really continues on its path of reform.

The Obama administration relies on the TPP talks because that currently is the only FTA tool it has now.  This is largely the result of U.S. domestic politics that view trade agreements negatively, such that the Obama administration has been negotiating the TPP without full trade promotion negotiation authorization from the U.S. Congress.

But again, we could do better, and by “we” I am referring to both sides of the political debate in the United States.  We should give the next President full trade promotion authority.  We should provide ASEAN an economic program that goes beyond GSP and beyond TIFA, yet without undermining the TPP talks.  The EU has such “halfway houses” in its own trade agreements, so maybe we should do the same.    Furthermore, we should promote political and economic reform in Myanmar so that it becomes irreversible.    A normal trade relationship with Myanmar, which is a WTO member, will eliminate a major obstacle to the United States having deeper and broader economic ties with all of ASEAN.

With progress in the TPP,  in Myanmar and in U.S. domestic politics, perhaps we could also start talking about a U.S.-ASEAN FTA which would cover some or all of the areas covered by the TPP.  The scope of coverage would depend on what could be agreed upon with ASEAN members.  Unless we start talking with ASEAN about this possibility, it will never happen.

In sum, America needs to engage all three pillars of ASEAN.  Our efforts with the political-security pillar are overexposed and our efforts with the socio-cultural pillar are underexposed, but our efforts with the economic pillar need augmenting. I hope that the next president will demonstrate the leadership needed to correct this, and to show that the United States strongly supports ASEAN’s efforts in all aspects of its regional integration.

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.

Wednesday, August 15, 2012

Compliance with U.S. Burma Sanctions: On the Ground in Yangon and Naypyidaw

This year’s suspension/relaxation of Burma sanctions by the West is a prime example of the real impact of economic sanctions.  For example, although the United States suspended most sanctions on July 11 and is now allowing U.S. investment in Myanmar, the operating environment did not change overnight.   

Instead, investors are faced with a country in transition, as both Myanmar and the international community attempt to re-engage after years of economic isolation.  Compliance measures imposed by multinational companies will take months to revise, while enterprises in Myanmar attempt to learn international best practices.  Partial suspension means that investors must scrutinize possible dealings with companies and persons on the U.S. “Specially Designated Nationals”  (SDN) list, as well as the possibility that the U.S. and other Western countries could reimpose the sanctions in full.  Overhanging everything are both the 2015 Myanmar elections and very real possibility that President Thein Sein and opposition leader Aung San Suu Kyi will not be able to see through the entire transition to normalcy.

Myanmar’s transformation is underway

As a participant in the first official American trade delegation to Naypyidaw (others have been to Yangon) this month, I had first-hand experience with this country in transition.  For years I have had personal ties to the country, but until July 11 I could advise clients to consider business with Myanmar.  This article offers some personal observations on how to deal with the country and the Burma sanctions.

1. What’s in a Name? -- The government refers to the country as Myanmar.  In dealing with the government and other official entities in the country, it is best to call the country “Myanmar” and not “Burma”.

Ed at the Myanmar Ministry of Commerce

2. Financial Considerations --  pre-July 11, U.S. Burma sanctions forbade any financial transactions with Myanmar, and post-July 11, they still apply to SDNs.  Compliance measures imposed by banks, in particular the U.S.-based SWIFT system, mean that credit cards and ATM cards do not work in Myanmar. Even attempting to use such cards in Myanmar can result in their deactivation by the bank.  Until the banks modify their compliance measures, cash is king, and should be in crisp and clean US$ 100 notes without a “CB” in their serial number.

3. SDNs – For U.S.  companies at least, determining whether their potential business partner is on the SDN list or linked to an SDN is a crucial and daunting task.  The lack of information and the limited business support resources from the U.S. Embassy in Yangon mean that U.S. companies will need additional support from experienced hands in Myanmar to help in due diligence efforts.  The universe of such persons is quite limited, but growing.  More importantly, the U.S. government will eventually tailor the Myanmar designees on the SDN list over time, as a result of better understanding of the business situation and the amendment of U.S. legislation.  Until then, the issue of “dealing” with SDNs will remain the primary regulatory issue for U.S. companies.  The situations presented thusly can be prosaic (e.g., flying between Yangon and Naypyidaw involves flying on airlines owned by SDNs, so don’t do this) or unique (does appearing a photograph with an SDN constitute “dealing”?   Without a quid pro quo transaction, probably not). 

US Ambassador to Myanmar Derek Mitchell and Speaker of the Lower House of the Myanmar Parliament Thura U Shwe Mann

4. Legal System --  Myanmar’s legal system appears both familiar and foreign.  The legal system is based on the old British India colonial system of common law.   Laws and legal education are in English.  However, during the Ne Win era, the common law principles of stare decisis and hierarchy of courts were largely discarded.  The use of English as the language of law and legal education also serves to insulate lawyers from the rest of Myanmar society.  Hence like other developing countries, domestic litigation should be avoided and arbitration clauses are a necessity.  In any event, foreign investors should also wait for the passage of the much-discussed foreign investment law before investing in the country.

5. Trading – U.S. Burma sanctions never prevented the sale of goods to Myanmar, only that U.S. companies could not engage in financial transactions with the country (e.g., they couldn’t get paid).  As a result, U.S. companies sold to Myanmar through ASEAN-based trading companies.  The July 11 relaxation now allows U.S. companies to be paid directly.  However, the U.S. ban on imports from Myanmar remains in place through July 2013 at least, and perhaps until 2015 if renewed by Congress.

6. Civil Society – The July 11 relaxation mandates that U.S. companies investing in Myanmar must submit an annual corporate and social responsibility (CSR) report.  Unique to Myanmar, this requirement actually may serve to differentiate the U.S. “brand” in Myanmar and help U.S. companies deal with corruption and governance issues.  However, civil society in Myanmar is wildly diverse, with various ethnic and religious groups and a newly assertive media, complicating CSR efforts.

In sum, it is still early days for Myanmar’s transition, but the process appears to be lively and ongoing.  Many regulatory pitfalls involved in foreign investment remain, but with careful scrutiny and patience, Myanmar offers both economic potential and the opportunity to help its long-suffering people.

Wednesday, August 8, 2012

Happy 45th ASEAN Day!

Today is ASEAN Day, the 45h anniversary of the founding of ASEAN on August 8, 1967 with the signing of the Bangkok Declaration by Indonesia, Malaysia, the Philippines, Singapore and Thailand.  These founding members were later joined by Brunei (1984), Vietnam (1995), Laos (1997), Myanmar (1997) and Cambodia (1999).

In celebration of ASEAN Day, today’s AEC Blog entry forgoes the usual commentary and instead provides the lyrics and tune of the ASEAN Anthem:

Raise our flag high, sky high 
Embrace the pride in our heart 
ASEAN we are bonded as one 
Look-in out to the world. 
For peace, our goal from the very start 
And prosperity to last. 
We dare to dream we care to share. 
Together for ASEAN 
we dare to dream, 
we care to share for it's the way of ASEAN.

Audio is available here.  Happy ASEAN Day!

Monday, August 6, 2012

Silver Lining in ASEAN Foreign Ministers' Impasse?

The astute-as-usual Kavi Chongvittakorn writes in today’s Nation about the continuing impasse resulting from last month’s ASEAN Foreign Ministers meeting in Cambodia.  Khun Kavi writes that ASEAN is trying to issue a joint declaration that would substitute for the inchoate joint communiqué; he feels that ASEAN must issue this joint declaration by Wednesday, ASEAN Day, or risk a major embarrassment for the regional grouping. 

I would agree with this, but the real task will be what happens at the ASEAN Summit in November.  Even a delayed joint statement will not be as important as what happens in Cambodia later this year when the national leaders meet.

Khun Kavi does report on a possible silver lining from the entire impasse:

There have been some informal discussions among officials and academics about the need to come up with the rule of procedure to guide a rotating chair in the future. At the moment, there are no clear rules concerning the Asean chair and its relations with other Asean organs and how the Asean Secretary General and its staff can be of assistance. The Asean foreign ministers took things for granted that they would be able to form a consensus on any issue, albeit disagreements, as in the past four decades. But the Phnom Penh incident changed all that.

I think establishing such rules would be a natural progression of the formalization process established by the signing of the ASEAN Charter in 2007.  If the relationship between the ASEAN institutions, including the ASEAN Chair, ASEAN Summit, ASEAN Secretary General and ASEAN Secretariat, can be formalized, this will benefit the administration of the ASEAN Economic Community, which already has several major agreements and subsidiary agreements covering its implementation.

The other shoe to drop, of course, would be how such rules would be administered and enforced?   For example, should there be a repeat of the Cambodia ministerial meeting, who would resolve the dispute?  The ASEAN Charter states that the ultimate authority in ASEAN is the ASEAN Summit of leaders. Hence the current impasse can be resolved by the ASEAN Summit, and its resolution is following this path.  In all likelihood it will require the personal intervention of the ASEAN leaders in Cambodia to resolve the dispute. 

Clearly, however, such an approach is not good for ASEAN.  Waiting more than 3 months for the ASEAN leaders to resolve a dispute with the ASEAN Chair will subject the regional grouping to more diplomacy-by-press-release and criticisms via the media.  This is not good for ASEAN’s relatively weak institutions. 

Khun Kavi points out that next year, ASEAN will review the ASEAN Charter.  I agree that this would be a good time to discuss putting rules into place to govern intra-ASEAN relationships.  By then, Brunei will have taken over as ASEAN Chair.  In my view, Cambodia’s reluctance to raise the South China Sea issue will be less pronounced after its term as ASEAN Chair ends, because ultimately Hun Sen will act to form and rebalance its current pro-China tilt.  Hun Sen didn’t become the longest-serving ASEAN leader without some survival skills, so I don’t think he will either pursue a completely obstructionist approach at the ASEAN Summit or after Cambodia’s ASEAN Chair term ends. But while Cambodia is ASEAN Chair this year, Cambodia looks likely to keep whatever diplomatic commitments it has made to China.

In any event, the silver lining in the impasse may be recognization of the need to strengthen the ASEAN institutions and their relationships within and without ASEAN. Let’s hope that the informal discussion can go beyond the relatively small circle of academics and officials who study ASEAN and reach into the ASEAN leadership.

Even CLMV Countries Feel the AEC Blues

It is commonly believed that the CLMV countries (Cambodia, Laos, Myanmar and Vietnam) countries will benefit the most from the ASEAN Economic Community (AEC), with their large labor pool and reduced operating costs.  However, even the CLMV countries can have the same anxieties as more developed ASEAN members such as Thailand. See this from Vietnam News:
Businesses in HCM City are urging government agencies to create more technical barriers to trade to protect domestically manufactured goods from foreign competition. Nguyen Quang Anh, chairman of the HCM City Plastics and Rubber Manufacturers Association, said the country's technical barriers were inadequate, leaving local industries vulnerable.
Their proposed solution is to create even more non-tariff barriers (NTBs):
Nguyen Quoc Anh of the HCM City Enterprises Association said the association would work with government agencies to promote the establishment of more technical barriers to trade. Over the last five years, Viet Nam had set up only a few technical barriers to trade, while global trade expanded greatly, according to Do Duc Chi of the city's Planning and Investment Department.
Of course, eliminating existing NTBs, let alone creating new NTBs, is a core commitment of the ASEAN Trade in Goods Agreement (ATIGA).  Thus these  Vietnamese companies are -- perhaps innocently, perhaps ingeniously -- publicly articulating that their government adopt new NTBs to protect their domestic markets.

This is nothing new, and in fact happens within ASEAN countries all the time.  Only in this case, the Vietnamese made their demands public, rather than in the hushed halls of government ministries. 

NTBs can indeed be effective protective measures.  For example, in one ASEAN-6 country, it can take many months (in some cases exceeding a year) to qualify a steel shipment for customs clearance.  In another ASEAN-6 country, imports are channeled through a limited number of ports, with sensitive items subjected to more rigorous customs checks.  In both cases, exporters are discouraged from shipping goods to those countries.

As I wrote in the earlier blog post, eliminating NTBs is both a critical and continuing task for the ASEAN Secretariat to establish a single production base and single market.  Finding NTBs is difficult enough without ASEAN member states conjuring up even more NTBs, and not all of them will do us the favor of publicly advocating for them.  This task alone will require additional resources and powers for the ASEAN Secretariat.  

Friday, August 3, 2012

US Import Ban on Myanmar Renewed

The US Congress voted yesterday to extend the ban on imports from Myanmar. The import bans are authorized by the Burmese Freedom and Democracy Act (BFDA) of 2003.  Thursday’s US Congressional resolution extended authoritization for the BFDA ban for another three years, to July 2015.  The resolution also extended the ban itself for another year, to July 2013 (note the distinction between the authorization for the ban and the ban itself).  The ban can be renewed for another year by another Congressional resolution before July 2013.

The US President retains the ability to terminate the ban “upon request of a
democratically elected government in Burma” and when conditions in Section (3)(a)(3) of the BFDA — progress on human rights, release of all political prisoners, freedom of speech and the press, freedom of association, peaceful exercise of religion, democratic governance, not designated as “a country of interest” for narcotics trafficking—have been met.  That would require the Administration to submit a formal report to Congress on bilateral and multilateral efforts to promote human rights and democracy in Myanmar, the effectiveness of the trade sanctions on improving conditions in Myanmar and furthering U.S. policy objections towards Myanmar, and the impact of the trade sanctions on national security, economic, and foreign policy interests of the United States.

As I discussed earlier, the US Congress is supportive of current Obama administration policy, but was expected to renew the BFDA.  Not only is the Obama administration not prepared to make the case for the full waiver, those in Congress who are focused on the Burma issue would not accept that a “democratically elected government” exists in the country and that all of the Section (3)(a)(3) conditions have been met. 

In any event, another year of the ban should provide constructive pressure on the Myanmar regime to continue its reform efforts, with lifting the ban a useful incentive.  It also gives companies in Myanmar – particularly those who are not on the Specially Designated Nationals list – time to organize and prepare themselves to re-engage with the US market.  That re-engagement will take time, and I’ll have more on this after I get back from Yangon and Naypyidaw.