Strengthening Support for ASEAN at the National Level

This week CIMB Bank head Nazir Razak proposed that ASEAN adopt a region-wide master plan for the banking industry and that ASEAN member states create ASEAN-specific government ministries to deal with ASEAN Economic Community issues.  These are positive suggestions to advance the AEC, suggestions which result from the overlapping competencies at play in ASEAN which often act at cross-purposes.  (NB: I have done instructional work for CIMB and written for the CIMB ASEAN Research Institute.)

The banking sector of course falls within the purview of the AEC and is covered as part of the financial services industry under the ASEAN Framework Agreement on Services (AFAS). However, AFAS deals with market access and not with the details of banking regulation, which would be covered by the ASEAN Banking Integration Framework,  which is still under discussion.  Furthermore, banking issues in ASEAN have been traditionally supported by the Asian Development Bank rather than the ASEAN Secretariat, even though the Secretariat is charged with monitoring the AEC. 

The issue of overlapping bureaucracies and competencies in ASEAN is not limited to the banking industry.  Intra-ASEAN relations themselves are subject to such overlap. As ASEAN was initially a political grouping, internal coordination was originally handled exclusively by the foreign affairs ministries of the member states. Later,  the addition of economic issues led to the involvement of other ministries such as trade and commerce ministries. 

The overlap has slowed down some operational aspects of ASEAN. For example, the ASEAN Charter calls for member states to station permanent representatives in Jakarta to deal with ASEAN matters.  These usually are senior foreign affairs ministry officials with relatively limited experience in economic matters.  The ASEAN Charter also calls for member states to establish national secretariats for ASEAN matters, but again these are all part of the foreign affairs ministries.

Thus, Dato Seri Nazir’s call for the master plan and national ASEAN ministries would better serve the implementation of the AEC.  Having ASEAN-specific ministries would allow member states to put all aspects of ASEAN cooperation – e.g., the political-security, economic and socio-cultural pillars – under one roof in each country, with a singular focus on ASEAN community construction.  For example, many EU member states have a ministry devoted to EU matters to provide such cooperation. 

Creating a Ministry of ASEAN Affairs in each member state would be a good step to creating “more ASEAN”. The question is whether the newly designated ministry officials would look back to their former colleagues as their peers or view the ministry as their new bureaucratic home.  If the former were to occur, then the creation of ASEAN ministries would simply be putting a new label on the ASEAN national secretariats.  However, if the new Ministry of ASEAN Affairs officials take their new responsibilities to heart, all aspects of the ASEAN Community will be better supported and less subject to the bureaucratic wrangling that currently happens in ASEAN.  Let’s hope that Dato Seri Nazir’s proposal is taken seriously as ASEAN leaders review the institutional structure of the grouping.

Why the TPPA Needs TPA

With the (temporary?!!) resolution of the funding issues, the US government turned its attention to other matters, including what is known as “Trade Promotion Authority” (TPA).  Under TPA, the US Congress provides authorization to the US President to negotiate trade agreements such as the Trans Pacific Partnership Agreement (TPPA) currently under negotiation.

Obtaining TPA will be necessary for the Obama administration to negotiate and conclude the TPP agreement.  This is because negotiation and implementation powers are not the sole province of the US President for trade agreements.  The US President can negotiate and conclude an agreement, but without TPA, the US Congress is free to amend the agreements during the approval and implementation process. This contrasts with the Westminster parliamentary model which applies in most of the other TPP negotiating parties, in which the government of the day has both negotiation and implementation powers.

Thus, without TPA, the other TPP negotiating parties will be very reluctant to conclude a TPP deal with the US when they know that the US Congress will be able to amend the agreement and change its terms.  This is why the last two GATT/WTO agreements and all recent US free trade agreements (FTAs) were all successfully concluded through the TPA mechanism.  The TPA commits the US Congress to an expedited legislative schedule for the trade agreement, and most importantly, commits the House and Senate to up-or-down votes without the possibility of amending the agreements.

The problem for the TPP talks is that the political sentiment in Washington is mixed on TPA.  Certain factions in the Democratic party are not sympathetic to the need for a TPP agreement, as explained here.  The Republicans are traditionally pro-free trade, but the “Tea Party” faction is loathe to give President Obama any legislative victories, as evidenced here.  TPP negotiating parties reading such articles would become quite pessimistic about the Obama administration getting TPA through Congress.

However, the Obama administration, which had been content not to make trade a priority in the first term, appears committed to getting the TPP and Transatlantic Trade and Investment Partnership (the free trade talks with the EU) concluded in the second term. If this is to happen, the President has to make a personal effort with Congress, not just on the funding issue, but on TPA as well.  Trade has always cut through party lines, and with frictions based more on the economic interests in each member’s constituency rather than ideology.

Congress also has to understand that TPA does not result in the handing over of a blank check to the Obama administration.  Fundamentally, TPA is a legislative rule, and each house of Congress has the constitutional right to organize how it operates.  If the President is deemed to have abused his TPA authorization, either house can vote to withdraw or suspend the TPA authority or process (I wrote about this in 1989). This happened during the George W. Bush administration when the then-Democrat controlled House of Representatives suspended the TPA process for the US-Colombia FTA, delaying its passage for years until Democrat concerns were addressed. 

At the end of the day, TPA is an expression by the US Congress of its prior consent to trade negotiations.  It provides the US President with enough credibility to negotiate and conclude trade deals. Without TPA, the United States will be unable to complete its key economic diplomatic initiative in Asia (including ASEAN), which will have long-term detrimental consequences for America.  TPA was born from a bipartisan initiative during the (Republican) Ford administration and has successfully delivered FTAs that have benefited the United States and its trading partners.   If the United States is to maintain its vital role in Asia, both the Obama administration and Congressional leaders have resume bipartisan cooperation to get TPA approved.

Some ASEAN Exporters Face Impeding Loss of EU Market

The US government successfully avoided (for now) missing its funding deadline this week, but Washington politicians are not the only ones dealing with time pressures.  ASEAN exporters reliant on the EU market also face a major change in import duties, which barring a major miracle, will adversely affect their sales to Europe.

Most ASEAN countries benefit from low or zero import duties when they export to Europe because they currently qualify for the Generalized System of Preferences (GSP).   Under the GSP, the EU and other developed economies provide import duty preferences to encourage economic development in the less-developed countries.  Brunei and Singapore, considered too economically developed, are not currently part of the GSP program.

The cost savings can be significant.  For example, plastic bags normally attract a 6.5% import duty rate, but plastic bags from Thailand currently attract 0% import duties because Thailand qualifies (for now) under the GSP program.

However, earlier this year the EU announced its revised GSP rules.  The new GSP rules “graduate” Indonesia, Malaysia and Thailand out of the program, with only Cambodia, Laos and Myanmar automatically maintaining their GSP status, and the Philippines and Vietnam eligible to apply as “vulnerable” countries requiring continuing GSP status. 

The new rules take effect on January 1, 2014.  This will have a major impact for Indonesia, Malaysia and Thailand.  They will become less competitive not only relative to other ASEAN members, but to other countries as well.

It was with this in mind that the EU and individual ASEAN members had entered into free trade agreement (FTA) talks.  The EU started FTA negotiations with Indonesia, Malaysia and Thailand with the aim of reaching agreement before the impending expiration of GSP status. 

Alas, the EU’s FTA talks with the three countries have become stalled.  Changing domestic political environments have made FTAs a harder sell.  After the 2013 elections, FTAs have become much more controversial in Malaysia.  Indonesia is now focused on the upcoming 2014 elections, and FTAs are always controversial in Thailand.  There is also FTA fatigue in some countries, where local industries now have to deal with increased competition from FTA partners such as China and are reluctant to more FTAs.

The EU had hoped that the impeding January 1 deadline would focus national leaders in Indonesia, Malaysia and Thailand to reach an agreement.  That appears highly unlikely.  Now the chances of reaching an agreement will depend on pressure from Indonesian, Malaysian and Thai exporters faced with significantly higher import duties in Europe.   Given the other political concerns at play, however, the complaints from those exporters will need to reach a crescendo before their governments will move forward with EU FTA talks again.  In other words, for Indonesian, Malaysian and Thai exporters, the EU market will become a lot worse before it gets better.

Wrap-up of the 23rd ASEAN Summit

The major achievements of the 23^rd ASEAN Summit held this week in Brunei can be linked to what did and did not happen.

First, ASEAN chair Brunei again delivered a no-drama summit meeting, much appreciated after Cambodia’s 2012 tenure as ASEAN chair with its repeated attempts to intervene on the South China Sea issue.  Notably, this year Cambodia has not been active on the South China Sea issue, reflecting perhaps Hun Sen’s focus on his domestic politics and Cambodia’s having satisfied whatever obligation it owed to China last year.  Myanmar now takes over as ASEAN chair, which was once a development to be dreaded and now is viewed as having encouraged the reform efforts in that country.  Myanmar’s term will probably be focused on showing the world that its reform efforts are genuine, meaning that it will follow ASEAN consensus on political-security issues and the ASEAN Secretariat’s guidance on economic issues while showcasing the country.

Second, the ASEAN leaders agreed to establish a “High-Level Task Force on Strengthening the ASEAN Secretariat and Reviewing the ASEAN Organs.”  This is a much-needed review of the functioning of the ASEAN institutions and hopefully will result in augmenting both the authority of the ASEAN institutions and their effectiveness, a constant theme of this blog.

Third, President Obama was not in Brunei.  My previous link suggests what the US can do to repair the diplomatic damage.

Fourth, the ASEAN leaders approved various ASEAN Economic Community-related decisions, which are described in my earlier post here.

Fifth, a joint haze-monitoring system was approved. The system will involve the sharing of digitized land-use maps and concession maps of fire-prone areas that cause haze, with the data will be shared among the governments of Singapore, Malaysia, Indonesia, Brunei and Thailand. This represents an ASEAN-consistent approach to the haze situation, rather than the bilateral approach that had been circulating earlier, and is a positive immediate step, given that Indonesia is not likely to ratify the ASEAN Agreement on Transboundary Haze Pollution so soon, given its upcoming elections. 

Finally, the US (represented by Secretary of State John Kerry) said that it supported a code of conduct for the South China Sea. This was interpreted by some media outlets as support for a legal-oriented solution the disputes and hence support for the Philippines’ UNCLOS arbitration case (I think this might be stretching the analysis too far).  India announced that it would station a resident ambassador to ASEAN, joining ASEAN’s other major trading partners.  Singapore said that it would help lead the joint ASEAN bid to host the football World Cup.

A US-ASEAN Holiday Summit to Repair Diplomatic Damage

With the absence of President Obama from the APEC and ASEAN summits in Bali and Brunei this week due to the fiscal stalemate in Washington, the annual “American season” in Asia has taken on a more negative note.  The mainstream media, as to be expected, has portrayed the President’s absence as an indication of U.S. weakness, especially when compared with the presence of Chinese president Xi Jinping (nevermind that the disputes between China and several ASEAN members in the South China Sea/West Philippine Sea remain unresolved, of course).  As discussed in the previous post, the President’s absence also threatens any imminent agreement in the Trans Pacific Partnership talks.

Thus, the Obama administration is under pressure, real or perceived, to do something to repair the diplomatic damage caused by this month’s domestic political drama. Let me suggest a repackaged old idea – a special Presidential summit with ASEAN leaders. 

During his term, President George W. Bush had proposed a special US-ASEAN summit to be held at his Crawford ranch.  The summit never took place because of issues related to the then-military regime in Myanmar, but the motivation, a personal and direct approach by the President, was much appreciated in ASEAN. 

The US could use the boost accorded by a special ASEAN summit.  President Obama does not have a ranch, but he does have the advantage of time and place, in the upcoming Thanksgiving and Christmas vacation season and his birth state of Hawaii, respectively.  A special ASEAN summit during this time would express the President’s deep and personal commitment to the US relationship with ASEAN, and would be much appreciated by ASEAN leaders.  It would also present an opportunity to show that the US remains engaged in the region, particularly if both the Democratic and Republican leadership could be enticed to come to Hawaii (which, given the weather in Washington in November and December, might not be that difficult).  Furthermore, the US could offer a Hawaii summit to conclude the TPP talks, with non-ASEAN TPP parties being invited to a separate session.

All of this, of course, will depend on two major outcomes.

First, the President and Congress will need to resolve the financial standoff.  This is easier said than done, but (hopefully) the impending pressure of resolving the debt limit by October 17 will help focus minds. 

Second, the TPP talks need to be resolved if there is to be a special TPP summit.  That will depend on the former, as TPP parties will be reluctant to sign off on a deal that will not be approved by the US Congress without major revision. 

President Obama’s absence from Bali and Brunei this week is a major stumble for the US, but one that can be remedied by a Thanksgiving or Christmas summit.  However, the US needs to get its domestic political affairs in order before this can happen.