Friday, October 28, 2011

Injecting Business Acumen into ASEAN's Leadership

Yesterday CIMB Bank head Nazir Razak, the chief organizer of the ASEAN Business Club (ABC) and supporter of the CIMB Asean Research Institute (CARI),* proposed that the next ASEAN Secretary-General come from the corporate sector in order to support development of the ASEAN Economic Community.  According to the Bernama news service, ASEAN needs “someone who can really shake things up.”   Although Datuk Seri Nazir’s proposal has almost no chance of being adopted in its entirety, it is exactly the kind of input that the business community needs to contribute to ASEAN and it needs to be adopted in some form. 

ASEAN Secretary-General Surin Pitsuwan’s term ends at the end of next year.  Being a former Thai Deputy Prime Minister and Foreign Minister, Dr. Surin has instilled greater political and diplomatic prestige to the position, and by extension, to the ASEAN Secretariat.  Dr. Surin has succeeded in his immediate and primary task, the full implementation of the ASEAN Charter.

The current crucial task is to implement the AEC fully within the region by 2015. Datuk Seri Nazir correctly identifies the need to have the next ASEAN Secretary-General be someone who understands the corporate community.   A Secretary-General with direct corporate experience will have greater appreciation of the aspirations and frustrations of the ASEAN business community, especially the lack of development in ASEAN’s institutions.  There is no shortage of ministers and former ministers with business experience in Indonesia, Malaysia, the Philippines, Singapore and Thailand who are well-qualified to serve as ASEAN Secretary-General.

Unfortunately, Article 11.1 of the Charter requires that the next ASEAN Secretary-General must come from Vietnam, the country next in alphabetical order after Thailand.  Because Vietnam is relatively new to international commerce, it has not developed the pool of ministerial level candidates who also have business experience.  Fortunately, Vietnam is both an eager supporter of globalization and of ASEAN, so I remain confident that it will put forward a suitable candidate experienced from Vietnam’s WTO accession negotiations and implementation, if Vietnam correctly understands that ASEAN’s current great task is economic integration, and not necessarily resolving the South China Sea/Spratly Islands dispute.    Such a candidate will be able to appreciate the business community’s needs, even if she or he does not have first-hand corporate experience.

Nevertheless, ASEAN can still follow through on Datuk Seri Nazir’s proposal by selecting one of the Deputy Secretary Generals from the corporate community.  There are 4 Deputy Secretary Generals, 2 of which are chosen competitively and 2 of which are chosen through the alphabetical rotation system.   The current Deputy Secretary General for the AEC,  S. Pushpanathan, is a veteran of the ASEAN Secretariat and has done admirably.  However, he and the ASEAN Secretariat would benefit from the input of corporate experience.

In any event, Datuk Seri Nazir’s proposal is exactly the type of provocative proposal that the ABC and CARI should put forth.  Full development of the AEC requires active and constructive input from the ASEAN business community, and I hope that the ABC and CARI will continue to provide such input.

*CARI has republished some of my AEC blog articles. This article, as is the case for all of my articles, represents my personal opinion and not that of CARI or any other direct or indirect affiliation of mine.

Tuesday, October 18, 2011

ASEAN Economic Ministers Lay Down a Marker for FTA Negotiations

ASEAN Economic Ministers at their informal retreat in Kuala Lumpur last weekend prepared a draft framework of general principles regarding ASEAN’s future participation in free trade agreement (FTA) talks, including a broader free trade agreement of the Asia-Pacific.  According to Kyodo News, the “ASEAN Framework for a Comprehensive Regional Economic Partnership” commits ASEAN to pursuing FTAs that include general principles such as differential treatment for Cambodia, Laos, Myanmar and Vietnam (CLMV countries), transparency, economic and technical cooperation, trade and investment facilitation, and consistency with the group’s plans for the ASEAN Economic Community (AEC).  The full text is available here.

The importance of this draft framework lies more in its timing rather than its substance, other than the requirement of differential treatment for CLMV countries (which is embodied throughout ASEAN’s economic agreements).  The other general principles are positive and should be incorporated as best practices in any FTA. 

Rather, the announcement of the draft framework represents a marker thrown down by ASEAN to remind its trading partners of the regional bloc’s importance.

For the United States, the draft framework indicates that ASEAN does not view the Trans Pacific Partnership (TPP) as a substitute for a broader US-ASEAN FTA.  Progress in the TPP talks, perhaps even the announcement of an agreement in principle, is quite possible by the November 2011 APEC summit in Hawaii.  Yet the TPP only involves four ASEAN members (Brunei, Malaysia, Singapore and Vietnam) and issues particularly relevant to Vietnam (state-owned enterprises, textiles) have been quite difficult.  The draft ASEAN framework serves to remind the United States that ASEAN has alternatives, and that the grouping wants to be considered as a whole (even if US Burma sanctions would prevent this).

For the EU, the draft framework is a reminder that ASEAN does not consider EU-ASEAN FTA talks to be ended, merely suspended.  The EU suspended talks in favor of bilateral FTA negotiations with Singapore, Malaysia and Indonesia, with the EU claiming that a lack of institutional development in ASEAN and the EU’s own Burma sanctions prevented negotiations on a bloc-to-bloc basis.  With the EU and Singapore expected to announce successful FTA talks any time, the ASEAN framework reminds the EU that the other ASEAN members still want a broader agreement, but perhaps with a scope narrower than the EU would like but which would be more consistent with ASEAN’s existing FTAs with Australia, New Zealand, China, India, Japan and Korea.

For those other Asia-Pacific partners, the draft framework indicates that ASEAN wants to remain at the center of any discussions of a FTA of the Asia Pacific.  ASEAN sources indicated that the framework would be the group’s preferred initial focus of future FTA discussions in the Asia Pacific, rather than the joint China-Japan FTA study program presented to the ASEAN Economic Ministers meeting in Manado in August 2011.

For India, the draft framework demonstrates that ASEAN is not satisfied with the status quo in the ASEAN-India FTA (AIFTA). AIFTA currently only covers trade in goods (and even then in an incomplete way, as there remain gaps such as on product-specific rules of origin).  Last week ASEAN and India engaged in another round of AIFTA talks regarding trade in services, which has proven difficult to resolve, despite the fact that the other ASEAN-level FTAs have included at least goods and services and in some cases, investment.

Thus, the ASEAN Economic Ministers are using the draft framework as indicator of how the group will address future developments in its FTA efforts with trading partners.  The framework expresses a willingness to negotiate but on terms that are acceptable to the entire grouping, and in a manner consistent with ASEAN’s current program to implement the AEC.   Whether ASEAN’s trading partners will heed the different messages conveyed by the FTA framework remains to be seen in the weeks to come.

Thursday, October 13, 2011

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.

Saturday, October 8, 2011

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.

Monday, October 3, 2011

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.