Happy Holidays from the AEC Blog!

As we come to the last days of 2014, the ASEAN Economic Community blogs wishes you and your family a happy holiday season and a wonderful 2015!  I offer everyone my law firm’s holiday card below:

 Next year promises to be eventful for the AEC, as the end of the beginning for formation of the single production base and single market comes for ASEAN.  Also next year, Cambridge University Press will publish books co-authored by Stefano Inama of UNCTAD and myself:

The Foundation of the ASEAN Economic Community: An Institutional and Legal Profile

ASEAN has undertaken the complex task of creating a single economic entity for Southeast Asia by 2015 in the form of the ASEAN Economic Community (AEC), but without regulators or supranational institutions, its implementation has been an inconsistent process. Through comparisons with the EU and NAFTA, this book illustrates the shortcomings of the current system, enabling readers to understand both the potential of regional economic development in ASEAN and its foundational and institutional deficiencies. The authors' analysis of trade in goods and services, investment, and dispute resolution in the AEC indicates that without strong regional institutions, strong dispute resolution or a set of norms, full and effective implementation of the AEC is unlikely to result. The book offers clear solutions for the ASEAN institutions to help the AEC reach its full potential. Written by two leading practitioners, this insightful book will interest policymakers, students and researchers.

Rules of Origin in ASEAN: A Way Forward

Rules of Origin in ASEAN is the first in-depth exploration of the complex rules of origin in ASEAN's trade agreements. Written by two leading practitioners, they explain with clarity the existing ASEAN Rules of Origin (RoO) practices and their administration regimes in a comparative context and provide a recommendation for reform. The ASEAN RoOs can be simplified by focusing on value of materials and lowering the regional value content required to qualify as ASEAN-origin. The administration of ASEAN RoOs can be improved by expanding the use of self-certification, moving away from document-based verification to more modern post-entry audit and trade facilitation approaches. This is a timely and important topic which will be insightful to practitioners, policymakers and businesses in understanding how commerce and trade is conducted in Southeast Asia.

Please click on the above links to pre-order.

See you soon in 2015!

Could SE Asia Again Become a Major US Domestic Political Issue?

November saw developments that could result in Southeast Asia becoming a more prominent issue in domestic U.S. politics in 2015 and 2016.  Southeast Asia normally is not an issue in domestic American politics. Indeed, one could say that the last time Southeast Asia was a major domestic political issue in America was during the Vietnam War forty years ago.

This is because, with a couple of major exceptions, Southeast Asian countries do not have major diasporas in the United States, unlike, say, Australia or even Canada.    The two major exceptions are the Philippines and Vietnam, but Filipino-Americans have tended to focus more on domestic American politics (such as the current immigration debate) and a large (but declining) portion of Vietnamese-Americans are opposed to the current government in Vietnam.  Hence the diaspora politics seen in the Chinese, Japanese and Korean communities in the United States are not as pronounced in the Southeast Asian communities. 

However, the impending takeover of the U.S. Senate and increased majority in the U.S. House of Representatives by the Republican party means increased leverage by the opposition over the last two years of the Obama Administration.  The presidential election in 2016 (along with another Congressional election) and the presumed candidacy of former U.S. Secretary of State Hillary Clinton also means that foreign policy issues may become more prominent over the next two years.  That possibly includes Southeast Asia:

South China Sea – although little understood by the general American public, increased tensions and/or a major incident in the South China Sea could bring this issue to the forefront.  The dispute could even motivate the Vietnamese and Filipino communities to be more active publicly. For example, anti-China protests took place earlier this spring in Vietnamese-American communities when the Chinese oil platform was moved into the South China Sea.    

Myanmar – the Obama Administration has touted the political and economic reform process in Myanmar as a major diplomatic success.  However, stalling or backtracking in that process could attract criticism from both parties.  Senate Republican (and imminent majority) leader Mitch McConnell has historically paid much attention to the U.S. government’s Burma policy, particularly on religious issues.  Former Senator Jim Webb has announced that he will run for the Democratic presidential nomination, and feels that he was not given proper credit by the Obama Administration (and in particular Hillary Clinton) for initiating the rapprochement with the Myanmar regime.  

Trans Pacific Partnership (TPP)  – we are coming to the end of 2014 with neither a completed TPP deal nor the Trade Promotion Authority needed to finalize and pass such a deal.  Nevertheless, we could be seeing the endgame for the TPP negotiations, which will start the major political debate on the trade agreement.  Even non-trade issues related to the four Southeast Asian countries signed up to TPP could come up, such as the implementation of sharia law in Brunei.

Finally there remain the ever-present U.S. concerns about China, which can overflow to Southeast Asia.  Many in Washington are convinced that the Regional Comprehensive Economic Partnership (RCEP) is a Chinese ploy against the TPP (even though RCEP was largely proposed by the Japanese).  Earlier this year I sat through a U.S. government trade hearing on pipe from Malaysia, Thailand and Vietnam, listening to a U.S. congressman protesting about unfair trade from China (and claiming undue Chinese influence on the three countries, even though that same week Vietnamese workers were rioting against Chinese-owned companies due to the Chinese oil platform in the South China Sea).

In any event, foreign policy usually takes a backseat to domestic political concerns in the United States, unless there is a major crisis abroad.  I would expect this to remain the case in 2015 and 2016.  Nevertheless, at a time where Asia means more to the United States, events in Southeast Asia could inject the region into domestic American politics.

Malaysia's Vital Role as 2015 ASEAN Chair

Today in Naypyidaw Myanmar concluded its second and last ASEAN Summit as ASEAN Chair. With that, the figurative gavel associated with the ASEAN Chair was handed to the 2015 ASEAN Chair, Malaysia.  Although Malaysia does not formally take over as ASEAN Chair until the end of the year, in reality Malaysia has been acting in an ASEAN leadership role this year, and likely beyond next year, particularly with regard to the ASEAN Economic Community (AEC).  This is all for the better for the AEC.

As discussed previously, the major accomplishment of Myanmar as ASEAN Chair is that it was allowed to serve as ASEAN Chair, and that the ASEAN Summits and various associated meetings took place this year without difficulty.  The position of ASEAN Chair served as a carrot for Myanmar to undertake its economic and political reforms, and the ASEAN Summits allowed the Myanmar government to display its willingness to continue those reforms.  The real question for Myanmar is how next year’s elections will play out, e.g., whether a new Myanmar government will be established that can fully implement these reforms.

However, to use an old American aphorism, Myanmar is not (yet) able to “walk and chew gum at the same time.”  Although it should be complimented being able to “walk” (e.g., serve as ASEAN Chair), years of economic isolation left Myanmar ill-prepared to take on the AEC-related tasks, particularly in the run-up to the AEC’s December 31, 2015, implementation date. 

Fortunately ASEAN’s leadership had foreseen this possibility and allowed Laos and Malaysia to swap their terms as ASEAN Chair.  Malaysia, as a founding member of ASEAN and an active trading nation, is much more experienced and capable of handling the AEC issues.  Furthermore, in the Razak brothers, Malaysia’s public and private sectors have leadership devoted to ASEAN and the AEC.  Prime Minister Najib Razak wants to establish a diplomatic and political legacy, while Nazir Razak wants to create a fully functioning AEC in which his CIMB Bank thrives. 

Thus, we have seen Malaysia pushing for reforms of the ASEAN institutions as leader of the High Level Task Force on institutional reform, with Prime Minister Najib Razak openly calling for changes to ASEAN’s organizational and financial structures.  Meanwhile, Nazir Razak has been calling for similar changes to support the AEC as both a single market and a single production base. 

Indeed, because of the rotation of the ASEAN Chair, Malaysia could continue to have a continuing role beyond 2015.  Laos, despite being an enthusiastic supporter of the AEC, has limited resources and capabilities; hence its own role in AEC development in 2016 could and should be augmented by Malaysia serving as an unofficial holdover role (and when the Philippines, the 2017 ASEAN Chair, may be preoccupied with its own elections to take on early responsibilities).

The coming year therefore promises to see Malaysia continuing its work, only with the added formal position as ASEAN Chair.  It is vital for the AEC’s success that Malaysia fully follow through and deliver actual institutional reforms.  December 31, 2015, is only the end of the first stage of the AEC, and such reforms are necessary to deliver on the AEC’s full promise. 

How to Get Timor Leste Into ASEAN by 2020

This week Christian Whiton, whose work I respect, wrote in WSJ.com on the reasons why Timor Leste should join ASEAN.  Now I would agree with the political, economic and other reasons put forth in the article. Unfortunately, I don't see how this will become reality any time soon, perhaps not in this decade.

This was discussed in one of the earliest posts of this blog.  Have things changed since 2011, when Indonesia was actively pushing for Timor Leste in its role as ASEAN Chair? 

On the ground, Timor Leste has improved its governance and infrastructure, as Christian notes in his article.  However, sources in the ASEAN Secretariat and in Dili have indicated to me that Timor Leste is still far behind in understanding and incorporating the aquis of commitments associated with full ASEAN membership.  Much of this is related to the relative lack of skills and human resources in Timor Leste’s government; however, similar issues did not hold back Cambodia from joining ASEAN, issues which were resolved through the passage of time and the influx of resources.

Just as importantly, ASEAN itself is not ready for Timor Leste to join its ranks., for reasons big and small.   In 2015, ASEAN is conducting a stocktaking of the ASEAN Community, which will include a review of the authority and functioning of the ASEAN institutions.  Implementation both of the post-2015 ASEAN Community agenda and the institutional reform will take time.   ASEAN needs to get this right with its existing members before it takes on a new member.

On the smaller reasons, Dili will need time to develop the physical infrastructure to host the two ASEAN summits that will come with becoming ASEAN Chair at some point; one of these ASEAN summits will also incorporate the East Asia Summit which the leaders of the United States, China and other countries will attend.  Furthermore, if Timor Leste joined now, the rotational ASEAN Chair position would be filled by Timor Leste in 2020 (currently scheduled to be Vietnam’s term as ASEAN Chair, as the rotation is supposed to be Malaysia, Laos, Philippines, Singapore, Thailand and Vietnam beginning in 2015; Timor Leste would fit in after Thailand).  This means that Timor Leste probably cannot join ASEAN until Vietnam’s term as ASEAN Chair in 2020, or more likely, Timor Leste will agree to a delayed term as ASEAN Chair upon joining.  Although these considerations may appear to be minor, they are given weight by the ASEAN leadership. 

Weaving all of these considerations leads to a worst-case scenario of Timor Leste joining ASEAN by 2023, when its former occupier Indonesia becomes ASEAN Chair once again.  By that year, sufficient time will have passed for Dili to have addressed the large and small concerns regarding its membership application, which should allow Indonesia to make a full court press for Timor Leste once again and succeed where it could not in 2011.   

The problem is that 2023 is 8 long years away and much could happen in the interim.  Furthermore, ASEAN membership can, in and of itself, be used as a carrot and a stick to encourage Timor Leste to continue with its economic and political reforms.  Better then, to give Timor Leste a fixed date of membership, say by 2020 (which was the original date for the ASEAN Community), but take efforts to ensure that Timor Leste can be a fully functioning member by then.  That means letting Timor Leste participate as an observer to ASEAN meetings (something promised by then-ASEAN Chair Indonesia in 2011 but not really implemented) and increasing support for its accession efforts (both to ASEAN and the WTO; full accession to the WTO will greatly help Timor Leste deal with its AEC commitments).  That also means making accession conditional on achieving set goals during the process, so that ASEAN does not lock itself into taking on an unprepared Timor Leste.

By doing this, ASEAN can avoid the mistakes of the European Union. The EU has arguably taken on new members who were unprepared and required years to catch up.  The EU also started accession talks with Turkey which became interminable due to domestic European politics and ultimately alienated that country. 

Timor Leste, by comparison, carries no such political risks for the ASEAN leaders but comes with regional risks which can be alleviated by the proper use of time and resources. The bigger risk would be to put off Timor Leste indefinitely and create a underperforming, or worse, failed state at the southeastern edge of southeast Asia. 

EU Fails to Get Same Treatment as US and EFTA on Singaporean Stamp Duty

Yesterday, when I heard that the EU and Singapore announced that they had concluded the investment chapter of their bilateral free trade agreement (FTA), the first thing that came to my mind was “how will this impact the Singapore property market?” 

Confused?  Let me explain.

In Singapore most foreign nationals are required to pay an additional 10 percent stamp duty (called Additional Buyers’ Stamp Duty or ABSD) on their real estate purchases. Singaporeans do not pay ABSD.  However, nationals of the United States and members of the European Free Trade Association (EFTA, made up of Switzerland, Norway, Liechtenstein and Iceland) are exempt from paying the ABSD because of the specific terms of their FTAs with Singapore that require Singapore to treat them the same as Singaporeans.  This is known as “national treatment” in FTA terminology, e.g., the right for foreigners to be treated the same as the locals. 

Would the EU be able to achieve similar treatment for its nationals? 

The answer is no, according to the final text (subject to “legal scrubbing”) available here. 

In an “understanding” making up part of the agreement, the EU and Singapore agreed as follows:

1. Article 9.3 [National Treatment] shall not apply to any measure relating to:

(a) the supply of potable water in Singapore;

(b) the ownership, purchase, development, management, maintenance, use, enjoyment, sale or other disposal of residential property or to any public housing scheme in Singapore.

Hence this means that national treatment for EU nationals will not include equal treatment regarding the ABSD or other laws regarding residential property in Singapore. The EU didn’t get what the US and EFTA achieved in their FTAs.  This is because the EU was relatively late in seeking an FTA with Singapore (the EFTA-Singapore FTA was among the first FTAs of Singapore) and not as powerful as the United States (whose preferential treatment is also rooted in the most-favored-nation clause of its FTA, which grants it the same treatment as the EFTA members under their Singapore FTA).

However, the EU did obtain some hope in the form of a future review of the ABSD:

2. Three years after the entry into force of this agreement and every two years thereafter, should ABSD still be in force, the Trade Committee will review to see if the maintenance of the ABSD is necessary for addressing the stability of the residential property market. In these consultations, Singapore will provide statistics and information relevant to the state of the residential property market.

Thus Singapore has committed itself to scrutiny by the Trade Committee of Singaporean and EU government representatives to confirm whether the ABSD is still necessary to control Singapore property prices.  This is not the same as the US and EFTA FTAs, but it does mark a commitment by the Singaporean government to joint review of its property policies, a very rare occurrence.  Perhaps the ABSD will be terminated three years from now and this will become a moot point, perhaps not.  Either way, it is another example of how FTAs can set policy – or restrain policy options – for a government.

The EU-Singapore FTA investment chapter also contains an investor-state dispute resolution chapter that allows for international arbitration.  This has become controversial in other FTA negotiations such as the Trans Pacific Partnership talks, but evidently not so for the EU-Singapore FTA.  But its inclusion will only embolden ASEAN members such as Indonesia who believe that terminating their bilateral investment treaties with the EU (and their associated arbitration clauses) will encourage the EU to conclude their own bilateral FTAs with them.

Other items of note are exemptions for government policies necessary to protect general welfare, as follows:

 (a) necessary to protect public security, public morals or to maintain public order;

(b) necessary to protect human, animal or plant life or health;

(c) relating to the conservation of exhaustible natural resources if such measures are applied in conjunction with restrictions on domestic investors or investments;

(d) necessary for the protection of national treasures of artistic, historic or archaeological value;

(e) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Chapter including those relating to:

(i) the prevention of deceptive or fraudulent practices or to deal with the effects of a default on a contract;

(ii) the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidential of individual records and accounts;

(iii) safety.

(f) aimed at ensuring the effective or equitable imposition or collection of direct taxes in respect of investors or investments of the other Party.

In any event, the impact (or lack thereof) on the Singaporean property market is the immediate news from this development.  Given that this is a major concern of many Singaporeans, that is not surprising, as reflected by this issue being the most popular topic on this blog.  Again, however, the ABSD issue shows how FTAs can affect areas of governance far beyond trade in goods.

The Need to Increase AEC Awareness in Malaysia

With the December 31, 2015, effective date for the ASEAN Economic Community (AEC) coming up, all of the ASEAN member states are holding conferences and symposia on ASEAN integration.  Hence this report from the Star newspaper in Malaysia on a public outreach event held by the Malaysian Ministry of International Trade and Industry (MITI) was particularly exceptional, mainly because it reflects a general lack of understanding of the AEC in Malaysia. This is remarkable because Malaysia is the 2015 ASEAN chair, the lead country on ASEAN institutional reform, and the home of two of the ASEAN companies most supportive of ASEAN economic integration, Air Asia and CIMB bank.

According to the article, last week MITI minister Datuk Seri Mustapa Mohamed gamely dealt with about 100 representatives of non-governmental organizations (NGOs) who either did not understand or did not want to understand the AEC process:

Given that readers from Malaysia rank #7 in page views among the readers of this blog, far behind those from Singapore, Indonesia and Thailand and even behind Cambodia, I am more inclined to be charitable and say that the former is more likely.  Here are some of the claims made by  the NGOs:

A representative from the Persatuan Pengguna Islam Malaysia spoke about ethnic cleansing of the Rohingyas in Myanmar, asking Asean to put more pressure on Myanmar and insisting that the message must be stated when Malaysia assumes the Asean chair next year.

Comment: at first glance, this is not an AEC matter but a political-security pillar matter.  However, the basic issue of movement of natural persons across national borders in the AEC, and the fundamental rights created by such movement, is a long-term issue for ASEAN. Hopefully ASEAN leaders can understand this as the AEC process continues.

Another spoke of uncontrolled inflow of unskilled labour flooding the local market once the AEC comes into effect.

The subject on the movement of professionals within the region was raised several times during the question and answer session with the speakers expressing concern over the fate of local workers and their confusion over the terms of reference of skilled labour.

Comment: again the issue of movement of natural persons comes up.  In the short-term the issue of unskilled labor movement is not ripe, as the ASEAN Movement of Natural Persons Agreement only deals with skilled and professional workers, and not unskilled workers. But in the long run, movement of persons across national borders in the AEC will have far-reaching consequences for ASEAN and its member states.

A representative from the Malaysian Aids Council called for improving the government’s engagement with the civil society while the spokesperson from the Women Aid Organisation said the Asean women caucus had done a good analysis on women, the economy and their rights in Asean and asked who to submit the paper to.

Comment: these issues fall under the socio-cultural pillar of ASEAN and thus not within the immediate ambit of the AEC.  On the other hand, these comments do raise concerns about governance of ASEAN and the interaction between the private sector and the ASEAN institutions, another long-term issue for ASEAN.

The minister (and the reporter) summarized the sentiment from the meeting as follows:

“It is a big embarrassment if we keep on talking about AEC but many people in Malaysia do not know what Asean is all about.”

How do you explain to them that the AEC is not a monster to be feared but to be embraced, as many aspects of it are already part and parcel of us for some time now?

And therein lies the problem for Malaysia and other ASEAN member states as end-2015 approaches.  How will they deal with the increasing anxiety about the AEC?  As the above comments indicate, many of these fears are not about the AEC itself, as they deal with non-economic matters. However, to the extent that they deal with general issues of governance regarding all of the ASEAN Community, they will eventually have to be resolved, including but not limited to strengthening the ASEAN institutions. 

Thus, December 31, 2015, is not the end of the AEC process, not even the beginning of the end but merely the end of the beginning.  What happens after December 31, 2015, requires much greater consideration by ASEAN member states and their constituents because that is the true test of whether ASEAN can deal with its many challenges.