Monday, July 25, 2011

The Neglected ASEAN EDSM

Recently the media have reported on a WTO panel decision on Philippine excise taxes imposed on imported liquor.  The case, brought the U.S. and the EU, questioned whether the Philippine government discriminates against imported liquor by subjecting it to a much higher tax rate than is imposed on domestic liquor.  Although the panel decision will not be publicly issued until next month, the victorious EU parties have been circulating news of the case and the Philippine liquor industry has urged their government to appeal to the WTO Appellate Body, which apparently, it will.

Some media reports compare and contrast this result for the Philippines with the Philippines’ successful WTO challenge of Thailand’s customs valuation of cigarettes exported from the Philippines.  Until the Philippine liquor decision is issued officially, substantive comparisons are a matter of speculation at this point. 

More interesting from the ASEAN point of view is a comparison on a procedural, systematic point of view.  In other words, faced with similar issues of international trade, how did the litigants approach the dispute?

Both disputes are similar in that high value products (liquor and tobacco) subject to high tax and duty rates were involved.  In other words, there were large amounts of tax and duty liabilities at stake.  This meant that the private sector was highly motivated to persuade their respective governments to take up the cases (in the case of the U.S., EU and the Philippines) and to defend the cases (in the case of Thailand and the Philippines).  In the case of the Thai cigarettes dispute, traditional ASEAN reluctance to challenge another member publicly in a trade matter was overcome by the high stakes and arguments raised by the Philippine domestic industry.  In both cases, the governments and private sectors engaged international trade lawyers to present their arguments.

The obvious difference is in the choice of forum.  The EU and the U.S. had to bring the Philippines to the WTO in the liquor dispute, as there were no alternative fora.  In the cigarettes dispute, the Philippines, on the other hand, could have elected to use the Enhanced Dispute Settlement Mechanism (EDSM), which is based largely (and in some cases verbatim) on the WTO dispute settlement procedures.  If the processes are virtually the same, why choose the WTO process?

First, from the ASEAN government point of view, the WTO process could be seen as being less confrontational.  The WTO process allows third parties to participate, and in the Thai cigarettes dispute, Australia, China, the EU, India, Taiwan, and the U.S. participated. Their presence elevated the dispute from an ASEAN regional dispute subject to review by ASEAN peers, even though airing the dispute at a multilateral level arguably subjected Thailand to greater scrutiny worldwide.

Second, and more importantly, the parties involved did not want to risk their case in an untested EDSM.  The EDSM and its predecessor systems have never handled a full-on arbitration procedure, much less attempted to enforce an arbitration panel decision against an ASEAN member.   Having had no experience with EDSM, could one guarantee that an EDSM panel decision would be implemented?  The WTO, on the other hand, has a tried and tested dispute system and implementation process.  In fact, the first WTO dispute involved Singapore and Malaysia.    Given the stakes involved, almost no trade lawyer advocate choosing EDSM over the WTO. 

Therein lies the tragedy of EDSM.  On paper, it strongly resembles the WTO process and should have all of its advantages.  Yet because of the institutional deficiencies and bureaucratic inertia, EDSM remains unused and underdeveloped.  I have argued elsewhere that this undermines investor confidence in the AEC. That is not to say that ASEAN countries should initiate EDSM disputes for the sake of developing the EDSM. However, until parties are comfortable enough to entrust their disputes to EDSM, the AEC will not reach its full potential.

Monday, July 18, 2011

The NME Issue in Asia: Beginning of the End or the End of the Beginning?

Last Friday the WTO Appellate Body ruled against the EU’s approach in an antidumping investigation on carbon steel fasteners from China. The ruling on its face is limited to addressing the practice of assigning non-participating exporters a single antidumping duty rate based on the presumption that all exporters in China are controlled by the government unless demonstrated otherwise.  In cases involving China, exporters must submit information to demonstrate that they operate independently of the government to qualify for their own antidumping duty rate or face imposition of the “China-wide” rate, which is usually rather high. But the decision could have a more wide-ranging effect on exporters in ASEAN and China in dealing with trade remedy disputes.

The practice of assigning a “China-wide” rate, which is also followed by the United States and other jurisdictions, is based on the assumption that China is a “non-market economy” (NME) in which government control of the economy is overwhelmingly distortive.   In such cases, the exporter’s actual prices and costs cannot be used, allowing the investigating antidumping authority to use hypothetical values, which usually result in higher antidumping duty rates.  Just as controversially, the U.S. and EU also impose anti-subsidy (countervailing) duties against NMEs on the basis that the exporter’s government can subsidize individual exporters as well as control the economy as a whole (although another WTO panel ruled that this approach provides excessive, duplicative import relief; how can one measure a government subsidy to an exporter in an economy under overwhelming government control?).   

In the ASEAN context, the NME issue cuts both ways.  Under the terms of the ASEAN-China FTA, ASEAN members recognize China as a market economy.   ASEAN members thus use Chinese exporters’ actual costs and prices in calculating their antidumping duties.  Theoretically, this would also allow ASEAN members more leeway to impose antisubsidy duties against China, but traditionally ASEAN members are reluctant to initiate antisubsidy investigations (and the few that have taken place have been against India). 

ASEAN member Vietnam is also regarded as an NME and agreed to be treated as such until 2018 as part of its WTO accession terms.  Fortunately for Vietnam, it has used its ASEAN membership to negotiate treatment as a market economy both by its fellow ASEAN members and by countries with which ASEAN has FTAs (e.g., China, Australia, New Zealand, Korea, Japan and India).    This is an example of an ASEAN member using its status to achieve results comparable to what a larger country such as China has achieved (although many more countries recognize China as a market economy, in advance of the 2016 date stipulated in China’s WTO accession terms).   Vietnam will surely ask for market-economy status if and when bilateral FTA negotiations with the EU take place, and the NME issue has already affected the Trans Pacific Partnership negotiations. 

In the carbon steel fasteners case, the EU had argued that its approach was necessitated by the NME situation in China.  Its calculation of the “China-wide” rate for the entirety of China not demonstrated to be operating independently of the government was required in order to calculate a dumping rate for the exporters operating as a single entity under Chinese government control. The WTO Appellate Body explicitly rejected this argument, finding that the WTO Antidumping Agreement has no such provision for dealing with such a situation. 

The WTO ruling thus appears to undermine the entire premise of the NME methodology, i.e., that the government in an NME should be considered to be an exporter due to its control of the economy. It could be the impetus for resolving this ongoing trade irritant for China and Vietnam, even though the issue should dissipate by 2016 (for China) and 2018 (for Vietnam).  However, it is just as likely that the domestic industries in the U.S. and EU will push for alternative NME approaches that avoid the problems raised in the EU carbon fasteners case or even outright rejection of the WTO ruling itself.  Either way, the WTO has handed Asian trade policymakers another set of trade frictions to resolve.

Monday, July 11, 2011

Why Should Jakarta Be the "ASEAN Capital"?

Last week I was in my law firm’s Brussels office and teaching at the College of Europe with one of my law partners.  Being in the “EU capital,” I was interested to see this article querying whether Jakarta could continue to serve as the “ASEAN capital” due to its infrastructure problems.  Also, I am occasionally asked why the ASEAN institutions are based in Jakarta instead of a more convenient or more developed location.

The ASEAN Secretariat (and therefore the ASEAN Secretary General) have been located in Jakarta since their establishment.  Article 11 of the ASEAN Charter, which formalizes the Secretariat’s role, does not stipulate its location.  However, Article 12 of the Charter states that the member states’ permanent representatives to ASEAN are based in Jakarta, which imply that the Secretariat should be based in Jakarta. 

Would the ASEAN Secretariat be better situated elsewhere?  Of course, Singapore is more centrally located in the region with better infrastructure, albeit with higher operating costs.  Kuala Lumpur has similar advantages (there is no better microcosm of the ASEAN public than the Air Asia hub at KLIA) with cheaper costs.  The politics of relocating the Secretariat aside, both cities could claim to be “better” locations.

Yet even in the more integrated EU, the major institutions are not conveniently located.  The European Commission and European Parliament (as well as NATO headquarters) are located in Brussels, which is well connected regionally but not globally (there are few flights from Asia, for example).  Brussels is also as far away by air from the newer EU members in Eastern Europe as Jakarta is from Hanoi or Manila.  Hence convenience may be overrated as a consideration.

Also, the politics of location do matter.  The EU example also illustrates what happens when intra-member political considerations factor into institution-building.  The European Parliament meets in Brussels and Strasbourg  and maintains its secretariat in Luxembourg. The European Court of Justice is in Luxembourg, and the European Central Bank is in Frankfurt.  ASEAN has been fortunate to avoid these geographic compromises.

It is probably well and good that the ASEAN institutions see the real-life problems of Jakarta residents on a daily basis, which are similarly faced by almost every other ASEAN member.  It is just as important that the ASEAN institutions be located in the country with the plurality of population and area in ASEAN.  The more important question for ASEAN is whether the members are willing to contribute more funds and human resources to the ASEAN institutions.  That requires a long-overdue revision to the funding formula of ASEAN, rather than continued equal contributions by each member state.   Just as Jakarta authorities need to face the challenges of administering their ever-growing city, ASEAN leaders need to face the challenges of developing their regional institutions.

Monday, July 4, 2011

U.S. Trade Policy in Asia Shuffles Forward While Others Pace Ahead

Last week there were many FTA-related developments in Asia, positive for ASEAN and Asia, but mixed for U.S. trade policy in the region.  On Friday the Korea-EU FTA (KOREU) took effect, with the EU accelerating ahead of the U.S. in Korea while the Korea-U.S. FTA (KORUS) remains in the legislative process in the U.S. Congress.  Also on Friday, the India-Malaysia Comprehensive Economic Cooperation Agreement took effect, adding broader coverage of industry sectors than the ASEAN-India Free Trade Agreement (AIFTA) covers, and including services, which AIFTA currently does not cover.   Finally, more details emerged on the proposed EU-Indonesia Economic Partnership Agreement talks to begin in November, joining the existing EU FTA talks with ASEAN members Singapore and Malaysia.

Meanwhile the U.S. continued to struggle to pass already-negotiated FTAs with Korea, Colombia and Panama.  While the Obama Administration announced a compromise to move the FTAs as a package with trade-related labor assistance legislation, opposition Republican legislators voiced objections to the compromise. Earlier, when Republicans proposed giving President Obama expanded “trade promotion authority” to negotiate FTAs and other trade agreements as part of the FTA-trade assistance package, the Obama Administration and Democrats rejected this as complicating the compromise.  When compared to FTA developments in the Asia, U.S. trade policy appears rather chaotic at the moment.

With one bright, perhaps Quixotic, perhaps inspirational, exception.  U.S. Senator Richard Lugar, one of ASEAN’s greatest supporters, re-introduced legislation encouraging the negotiation of a U.S.-ASEAN FTA.  Putting aside the problems noted earlier in the U.S. Congress, particularly the lack of trade promotion authority, and assuming that a way can be found to deal with Myanmar/Burma, this proposal recognizes that the U.S. needs to encourage economic ties with ASEAN.  It recognizes that the Trans Pacific Partnership (which includes ASEAN members Singapore, Brunei, Malaysia and Vietnam) is a positive development, but is not a substitute for a U.S.-ASEAN FTA. 

The legislation is not binding and not likely to be passed anytime soon, but Senator Lugar has made far-sighted proposals before.   After all, the Senator first proposed the appointment of a U.S. ambassador to ASEAN before there was an ASEAN Charter that allowed ASEAN to accept her or his appointment.  The proposal thus helps remind U.S. policymakers to maintain focus on ASEAN, even if other trade issues of the day may occupy their immediate attention.  Otherwise competitors like the EU will continue to steal a march in the region.

Friday, July 1, 2011

Trade Remedies as an Example for AEC Administration

Earlier this week I participated in a Malaysian government hearing on the proposed imposition of safeguard measures on hot-rolled steel in coils (my client supports imposition).  The hearing was an all-day affair, with vigorous arguments from both sides and lawyers from Malaysia, Singapore, the U.S., Australia, Taiwan and Indonesia presenting economic and legal arguments in support and in opposition to the proposed measures.  The scene could have taken place during my first trade remedy litigation case, the massive 1992-93 U.S. antidumping and countervailing duty investigations on steel from 20+ countries. 

Trade remedies are part of the AEC, incorporated into national legislation and the various FTAs signed by ASEAN.  The trade remedies process demonstrates how ASEAN government authorities can and should interact with the private sector in the administration and implementation of the AEC.   In trade remedies, issues about sovereignty are relaxed, with ASEAN government officials routinely crossing borders to conduct investigations.  ASEAN trade ministries conduct hearings with input from the private sector and its representatives, adhering to WTO and domestic obligations of fairness and transparency. Trade remedy procedures result in the application of measures whose implementation can be monitored.  Trade remedy procedures also allow for dispute resolution and judicial or administrative appeal. 

These aspects of trade remedies --- feedback, implementation and dispute resolution – are not as well developed in other aspects of the AEC.  For example, disputes regarding the ASEAN Trade in Goods Agreement (ATIGA), even though involving issues similar to those involved in trade remedies, have less transparency and offer less opportunity for public-private sector interaction.  Nor do private sector participants have the right to seek dispute resolution.  These difficulties arise from the greater concerns regarding national sovereignty and historical norms of transparency, which the ASEAN members have overcome in the area of trade remedies but not elsewhere.

Thus, the AEC needs more hearings, more rule of law and more transparency.  The AEC needs less resistance on sovereignty issues.  In trade remedies, ASEAN members have demonstrated that they can work on such a basis and they should apply the lessons learned from the administration of trade remedies to other aspects of the AEC.