The Return of the Haze

The Indonesian-origin haze has returned to Singapore and Malaysia this week.  From my office, you can see the Marina Bay Sands casino. The view has changed dramatically this week:

The view on a normal day

The view on Monday June 17

The view (?) on Friday June 21

Here's a link to my previous posts on what has unfortunately become a regular event in Southeast Asia:

http://aseanec.blogspot.com/2011/09/combatting-asean-haze-requires-both.html

Stay indoors and stay healthy!

The TPP Gets Pushed Forward by China and the US

The Trans Pacific Partnership (TPP) had two developments this week that increase the likelihood of its completion and passage sooner rather than later.  Ironically, these developments come from the two countries are associated with being in the TPP talks (the US) and not being in the TPP talks (China).

First, the Obama Administration’s nominee for US Trade Representative (USTR), Michael Froman, said during his Senate confirmation hearing that the Administration would introduce trade promotion authority (TPA) legislation soon. This is a major development because of the nature of the US constitutional system.  In the Westminster parliamentary system, the executive branch will have a majority in the legislature, such that any trade agreements negotiated and signed by the executive will have effect.  However, in the US system, the executive branch only has authority to negotiate, but not to bind, the US to trade agreements.  Such agreements need to be passed by the Congress, and are subject to amendment.  TPA represents a pre-authorization of authority by the Congress to the President so that he or she can negotiate trade agreements without their being subject to legislative revisions.  This is necessary to reassure trading partners that their negotiated bargains with the US President will not be revised during the legislative process. 

Thus, TPA will reassure negotiating parties in the TPP and Transatlantic Trade and Investment Partnership (TTIP) FTA talks (and perhaps, the long-suffering WTO Doha Round talks) that the US takes the talks seriously and will implement bargains reached at the negotiating table.  Just as importantly, re-authorization of TPA will formalize the role of Congress in the process, as TPA legislation usually concentrates oversight and consultation during the negotiating process with the select committees responsible for trade.  This is no small development, as without TPA, the USTR can be subject to second-guessing by any member of Congress.

However, since TPA expired during the George W. Bush administration,  the President and Congress have had a contentious relationship on TPA.  When Congress last offered to give the Obama Administration TPA, the Administration shook off the offer.  So will the Congress go along this time?  The Republican-controlled House of Representatives may not want to give the Obama Administration policy victories.  On the other hand, the Obama Administration has been so battered by recent political controversies that the House may decide to let this one go.  In any event, most Republicans are pro-business and generally pro-TPA.  Also, if the agreements become too politically difficult, the House can always vote to suspend TPA, which the then Democrat-controlled House did to President Bush with the US-Colombia FTA.

The other major TPP development is China’s sotto voce statement that it was considering joining the TPP talks.  Now I for one do not subscribe to the theory that the TPP is intended as a trade bloc that would intentionally exclude China.  However, any TPP agreement that includes China must necessarily have sufficiently high standards both to bind China to its implementation and to secure approval in domestic legislatures that will view any FTA that includes China with a skeptical eye.  Japan’s joining the TPP talks has already caused enough political indigestion as it stands.

Hence China’s clearing of its throat on the TPP may motivate the current TPP negotiating parties to complete their work sooner rather than later.  A completed TPP negotiating text with sufficiently high standards will either discourage China from attempting to join the talks (and avoid the diplomatic awkwardness of having to explain why China should not attempt to join now) or encourage China to accept the completed trade compromises of an agreement which would be palatable to domestic constituencies in the US and elsewhere.  Of course the latter is the better outcome but the former is more likely.

Elsewhere I had opined that the TPP talks would not be completed until the end of the Obama Administration in 2016.  With these two developments, I might be proven wrong. I hope that I am.

The ACIA's Influence on the DBS-Danamon Saga

Today it was reported that Singapore’s DBS bank has extended its offer to purchase a controlling stake in PT Bank Danamon. This is just the latest development in a long-running saga, and again illustrates the difficulty for some ASEAN companies to make cross-border investments within the regional bloc, despite the coming into force of the ASEAN Comprehensive Investment Agreement (ACIA).   This move comes after Indonesia in July 2012 imposed rules that would limit investment in Indonesian banks to 40%, with larger shareholdings requiring additional regulatory approvals. More recently, Bank Indonesia indicated that approval of the DBS-Danamon share purchase would be conditional on Singapore’s allowing for reciprocal market access in the retail banking industry for Indonesian banks. 

One question I often get asked how can the Indonesian government throw up these restrictions if the ACIA is in place?  Doesn’t the ACIA require that the Indonesian government treat DBS of Singapore the same as an Indonesian investor? The answer, of course, rests in the details of the ACIA.

The ACIA has a carve-out for regulation of financial service providers.  Article 17(2) of the ACIA specifically incorporates paragraph 2 (Domestic Regulation) of the Annex on Financial Services of the  General Agreement on Trade in Services in Annex 1B to the WTO Agreement (“GATS”), which states in part:

Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member's commitments or obligations under the Agreement.

Hence Bank Indonesia has couched its measures as justified for such prudential reasons. The second sentence does specify that measures for prudential reasons should not be used to avoid commitments under the agreement.  If one looks at the July 2012 restrictions, the Indonesian government took pains to note that they applied all investors, foreign and domestic. Hence in writing the restrictions do not violate the ACIA’s national treatment obligation (e.g., the obligation to treat ASEAN investors the same as domestic investors).  Now in practice, these restrictions may have the effect of discouraging foreign investment, particularly if domestic investors can use indirect shareholding to circumvent the restrictions (more so if Bank Indonesia does not actively look for them) but in principle they are consistent with the ACIA’s national treatment obligations.

Furthermore, enforcing this within ASEAN would be difficult, given that ASEAN dispute resolution procedures are untested.  In any event Singapore, like other ASEAN members is reluctant to invoke such procedures. 

Thus, the ACIA has affected the DBS-Danamon saga, but in a more indirect way than perhaps one would expect.  Yet because financial institutions have a fundamental effect on regional economic integration (e.g., the Euro saga in the EU) perhaps this is to be expected.  Hopefully such sagas will become the exception and not the rule in the development of the ASEAN Economic Community.