Helping Myanmar/Burma Participate in the AEC

Many observers have become excited by recent moves by the Myanmar (aka Burma) government.  The release of some political prisoners gives hope that the regime is genuine in its efforts to move beyond its junta past.  Diplomatic moves such as suspension of a Chinese dam project and the visit of Myanmar’s president to India, may evidence a desire for broader relations with the world beyond China.  Others are skeptical, feeling that such moves are cosmetic only, intended to help Myanmar become ASEAN chair in 2014 (to be effected by a swap with currently scheduled Laos).

Both groups are probably correct.  There appears to be a window of opportunity for reform as the regime attempts to achieve its goal of ASEAN chair.   Ignoring these internal and diplomatic developments risks undermining supporters of liberalization, and would allow the hardliners in the Myanmar regime to resume overt control over the country.

Yet, as I argued in the first post of this blog, Myanmar is not capable of serving as ASEAN chair in 2014.  ASEAN should not allow a closed economy largely controlled by the military and its supporters to oversee the last, crucial year before the full implementation of the ASEAN Economic Community in 2015. 

Laos and its officials have demonstrated enthusiasm for the AEC, motivated by the economic progress of its neighbors in Vietnam and Cambodia, but perhaps more so by its geographic position as a landlocked state dependent on freer trade and investment.  Plus, the AEC will benefit from the dynamism and enthusiasm of the smaller members who will become ASEAN chair in 2012-2014: Cambodia, Brunei and Laos.   Malaysia as ASEAN chair in 2015 can consolidate the progress.

Nevertheless, if the appeal of the ASEAN chair is indeed motivating change in Myanmar,  then why not give that appeal more time to work? Myanmar is due to become ASEAN chair in 2016 anyway, and by that time much of the major work for the AEC should have already taken place.  The country would also benefit from additional two years of political and economic liberalization, if it continues.  Current ASEAN chair Indonesia could offer to serve as a “mentor” to Myanmar during the next 5 years. In this role, Indonesia could serve as a useful role model (former military-controlled government-turned democracy with a globalized economy) and as a fail-safe (should Myanmar backtrack, experienced Indonesia could easily step in as ASEAN chair again). 

The West can help the reform efforts in Myanmar by allowing technical  economic assistance from multilateral and regional institutions.  For example, a Burmese person I met at an AANZFTA workshop in Bali last week lamented that Myanmar would like to participate in a pilot program on the ASEAN Single Window, but could not because aid funding was blocked by U.S. sanctions.   The West should be encouraging such assistance, which will open up the country and lessen the influence of the regime’s military supporters.   Any more lifting of sanctions beyond technical assistance should depend on further progress in the country, which will take some time.

The release of political prisoners and diplomatic moves are positive first steps by the Myanmar regime.  However, the country still has problems with its economy, religious and ethnic discrimination, and other issues.  It should not be “rewarded” with the ASEAN chair in 2014, particularly when ASEAN can ill-afford the time and resources to deal with the inevitable distractions should Myanmar become chair prematurely.  Rather, ASEAN members should protect their own collective interests by not giving Myanmar the chair in 2014, but to encourage greater economic openness in the country by allowing Myanmar to become chair in 2016, with Indonesia providing useful oversight.  For its part, the West should take advantage of this window of opportunity to foster development of a Burmese middle class, and to accept that Myanmar will become ASEAN chair at some point. The cumulative effects of such efforts will help the Burmese people overcome the years of misrule by the military regime.

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.

Trade in Services May Present Greater Challenges to the AEC

Last week, several articles brought attention to the role of services in the ASEAN Economic Community (AEC).  Two reports from Thailand indicated that Thai IT companies looked forward to the AEC, while Thai tourism companies demanded additional protection from AEC-led liberalization.  The Philippine Supreme Court Chief Justice called for an ASEAN-level body to regulate lawyers in the region, while another prominent person proposed an “ASEAN immigration lane” devoted to nationals of the member states.

The ASEAN Framework Agreement on Services signed in 1995 provides that member states will provide market access and right of establishment to companies and individuals from other member states.  That access must be at least as open as that guaranteed by the WTO General Agreement on Trade in Services (GATS), if not more, with regard to the four modes of service supply established by the GATS:

1.                  Cross border supply – the supplier is in one country, servicing a customer in another country.

2.                  Consumption abroad – the customer travels to another country to purchase and consume the service.

3.                  Commercial presence – the supplier establishes a commercial presence in the country of the consumer to provide services.

4.                  Presence of natural persons – the supplier stations its staff in the country of the consumer to provide services.

Since 1995 ASEAN has engaged in ongoing negotiations to liberalize services trade, with a stated goal of full liberalization by 2015.  Furthermore, ASEAN members have negotiated mutual recognition agreements that allow service providers accredited in one ASEAN member to be recognized as approved service providers in other member states.

Intra-ASEAN services trade, according to ASEAN Secretariat data, is dominated by Singapore, Malaysia and Thailand.   The three countries account for a supermajority of service export and service import.

Because services can range from the impersonal (downloading a report over the internet) to the intimate (getting a haircut), issues regarding services can become very intense.  An uncompetitive factory can replace its production machinery, and the machinery will not complain.  An uncompetitive service supplier may have to send its staff for retraining or let them go, and the staff will definitely complain!  These articles thus demonstrate some of the issues related to AEC-related services liberalization.

First, an “ASEAN lane” at immigration would be a positive political gesture and would indeed give ASEAN more meaning at the individual level. Some countries already have such lines. However, unlike the EU, which has similar EU lines (or “Schengen lines” named after the EU agreement regarding cross-border travel), ASEAN has not yet agreed on a common visa.  This would require linking immigration databases across the region to establish an ASEAN Single Window for people.  Given the difficulties in establishing an ASEAN Single Window for goods, coordination of immigration databases may face similar difficulties (although this would benefit ASEAN’s bid to host the 2030 World Cup).  Also unlike the EU, ASEAN members have not agreed on complete freedom of movement within the region, which would be controversial given the income and population disparities within ASEAN giving rise to migration.  In short, an “ASEAN lane” would definitely help as a first step, but achieving full movement of persons within ASEAN is a long ways off.

Second, regional oversight of service providers should be encouraged, but will be limited by profession-specific factors.  In the legal sector itself, ASEAN members will need to reach agreement on the level of market access liberalization.  Furthemore, an ASEAN-level bar regulator, as proposed by the Philippine Chief Justice, would practically require that ASEAN members agree to mutual recognition of bar qualifications within the region.  This would be difficult given that some countries have varying routes to lawyer qualification. For example, Indonesia has many bar associations operating at the provincial and city level, even with multiple associations in the same city. 

Third, the two Thai articles demonstrate how service industry issues can be come very personalized.  Both the IT and tourism sectors were specified as priority sectors by ASEAN, with tourism already subject to an MRA.  The Thai tourism service industry is thus complaining about market opening that has already taken place.  The industry difficulties it raises, such as poor language capabilities, should be addressed by better training rather than introduction of market barriers.  The Thai IT industry, on the other hand, sees the AEC as an opportunity to its regional markets, and wants greater access. 

The service industries will thus present ASEAN policymakers with major challenges.  Continued liberalization and achieving full freedom of movement will be necessary for the AEC to develop fully and not remain solely dependent on trade in goods or investments.  Yet service modes 3 and 4, because of their highly visible and intimate nature, will raise local concerns about societal norms, cross-border security, and other issues which affect the socio-cultural and political-security pillars of ASEAN as well.  The EU, and to a lesser extent NAFTA, continue to face these issues every day.  Full development of ASEAN as a community will depend on how its leaders deal with them.