Indonesia's Shift in Arbitration May Help ACIA, Hurt Non-RCEP Partners

Earlier this month Indonesia informed the Dutch embassy in Jakarta that it was terminating its bilateral investment treaty (BIT) with the Netherlands as of July 1, 2015.  “Sunset” clauses mean that current investments will continue to be covered until July 1, 2030.  This termination was confirmed by Indonesian vice president Boediono. Moreover, the Dutch embassy said that it had been informed that Indonesia intended to terminate all 67 BITs. 

The main legal protection offered by the Indonesian BITs is the ability for foreign investors to invoke investor-state arbitration.  This is seen as a must, as most foreign investors do not have confidence in the Indonesian domestic judicial system.  Arbitration in neutral international forums such as the International Center for the Settlement of International Disputes (ICSID) reassure foreign investors that their investments will be protected.

This move does not necessarily mean that Indonesia is moving away from international arbitration.  Rather, Indonesia is moving the arbitration option from its BITs to regional agreements such as the ASEAN Comprehensive Investment Agreement (ACIA), the Regional Comprehensive Economic Partnership (RCEP) agreement between ASEAN and its trading partners, and its own bilateral free trade agreements (FTAs).

First, the ACIA, which Indonesia ratified in 2011, requires ASEAN member states to provide for dispute resolution for investments from other ASEAN member states. Article 33 of ACIA allows investors to seek dispute resolution in domestic courts or arbitration through ICSID, regional arbitration centers, UNCITRAL or on an ad hoc basis.  The ACIA contains other protections commonly found in BITs.  Hence foreign investors worried about investing in Indonesia  (or other ASEAN member states with more uncertain domestic judicial systems) will relocate or reroute their investments through other ASEAN member states.  This, of course, will raise issues regarding whether multinational investors invoking the ACIA actually qualify for its protections, but this is a common issue that arises in all investment treaties.

Second, by taking BIT investor-state arbitration off the table, Indonesia is also taking a tactical approach to the RCEP and its FTA negotiations with the EU.  With an RCEP agreement (which conveniently should be reached by end 2015), investors from China, India, Japan, Australia-New Zealand and Korea would have investment protections such as investor-state arbitration. Tellingly, the initial alarm from the foreign investor community about Indonesia’s intended terminations has not come from these countries.

Instead, the initial alarm bells have been raised by Europeans, particularly from the British and Dutch.  Perhaps this is as intended by Indonesia, which is negotiating an FTA with the EU that could include investor-state arbitration.  Yet the EU-Indonesia FTA talks have slowed down recently; Indonesia’s taking the BITs off line incentivizes the EU to seek investor-state arbitration in the EU-Indonesia FTA talks, much as the EU’s removal of Indonesia from Generalized System of Preference (GSP) preferential tariffs incentivizes Indonesia to conclude the EU-Indonesia FTA quickly as well before it loses too much market share in the EU.

In the end, Indonesia’s move to end its BITs marks a tactical and strategic shift  in how Indonesia approaches arbitration and investment protections. These could strengthen the ASEAN institutions, as the ACIA and RCEP will become more important over time.  This move should also speed things along for the EU-Indonesia FTA talks, and even for an EU-ASEAN FTA. 

Wrap-up of the 2014 ASEAN Economic Ministers' Retreat

Last month the ASEAN Economic Ministers (AEM) held their annual retreat in Singapore.   This year’s meeting focused more on setting goals for 2014 rather than announcing decisions or completion of work projects:

• The AEM endorsed the High Level Task Force on Economic Integration’s recommendation to establish a working group to determine a framework for continued integration in the ASEAN Economic Community (AEC) for the post-2015 period, e.g., 2016-2025.  The working group will focus on non-tariff measures (NTMs) and strengthening the ASEAN institutions.   The AEM also asked the ASEAN Secretariat to prepare a paper on strengthening the ASEAN institutions, for review by the ASEAN Summit in May 2014.

• The AEM discussed prioritizing ASEAN’s relations with its trading partners.  In the Regional Comprehensive Economic Partnership (RCEP) talks with Australia-New Zealand, China, India, Japan and Korea, ASEAN will focus on goods, services and investment, and put intellectual property, competition and economic and technical cooperation with the RCEP partners on a “cooperation basis” (e.g., any RCEP commitments on these issues will be aspirational at best, looser than those for goods, services and investment).   The AEM also noted the need to harmonize rules of origin in the RCEP talks. All of this confirms that RCEP will be more of a “cleaning-up” exercise than the broad, ambitious effort involved in the Trans Pacific Partnership (TPP) talks – just as important, but not as far-reaching.

• The AEM targeted August 2014 for the signing of services and investment chapters of the ASEAN-India Free Trade Agreement and November 2014 for services and investment chapters in the ASEAN-Japan Closer Economic Partnership.  Free trade agreement talks with Hong Kong will start in early 2014 (but, in my opinion, drag on until the RCEP talks are closer to completion in end 2015). 

• Myanmar outlined its deliverables for its term as ASEAN Chair in 2014, particularly on small and medium-sized enterprises and public-private partnership for infrastructure development. 

• The AEM stressed the need to increase public outreach on the ASEAN Economic Community to the business sector and the general public.

All in all, no surprises.  But the above confirms that the AEC integration process continues onward, regardless of who is the ASEAN Chair, and that the ASEAN leaders recognize the need to harmonize ASEAN’s FTAs with its trading partners and the need to strengthen the ASEAN institutions.  Indeed, these tasks largely go hand-in-hand. The real question is whether ASEAN will address these needs properly, something we will have to wait until end-2015 to see.

2015: End of the Beginning for the AEC

Last week a couple of “negative” articles about the ASEAN Economic Community (AEC), namely the Asian Development Bank's (ADB) recent report on the AEC.  I’d like to put them into perspective.

First was a WSJ.com post entitled “Few Know — or Care — On Eve of Southeast Asian Common Market”:

One of the editors of “The ASEAN Economic Community: A Work In Progress,” Mr. Shrestha spoke to journalists, economists and policy makers at the book’s launch at ADB headquarters in Manila.  Mr. Shrestha said a survey he helped produce in 2012 showed low awareness of the impending common market. The survey covered 381 companies in Asean member states, mostly in manufacturing and services.  Mr. Shrestha said businessmen in the region are more aware of free trade agreements Asean has signed with outside countries than they are of the looming common market. By and large, they’ve failed to take advantage even of existing benefits as Asean prepares to integrate its markets next year. In Mr. Shrestha’s survey, 77% of respondents said they never benefited from lower tariffs from any free-trade agreement, and 87% said they had not benefited from investment liberalization.

To corroborate his findings, Mr. Shrestha looked at a survey last year by the American Chamber of Commerce of 475 U.S. companies operating in Southeast Asia. It found firms were less interested in the common market and were more focused on constraints in individual Asean countries. The major concerns were corruption, poor infrastructure and the lack of trained labor in the region, Mr. Shrestha said. A majority of respondents in both surveys believe the common market won’t come about next year; that Asean is really 10 individual markets rather than a single one; and that the region remains highly fragmented and diverse, Mr. Shrestha said.

The second was a Philippine Star article titled “ASEAN econ integration not likely in 2015 – ADB”:

The economic integration of the Association of Southeast Asian Nations (ASEAN) will likely not be attained by 2015, economist of the Asian Development Bank (ADB) said.  In the book launching of “The ASEAN Economic Community,” ADB lead economist at the Office of Regional Economic Integration Jayant Menon said the targets for the regional economic integration would likely be missed.  “The December deadline will not see Asean achieving all ASEAN Economic Community (AEC) targets in 2015. And it will still involve more work for post-2015,” Menon said.

The pessimism about the AEC in these articles is correct, if one focuses entirely on the AEC’s objective of creating a single market by end 2015.  I would agree that it is not reasonable to expect a single ASEAN market to come into being by then.  For the single market, 2015 represents not the end, nor the beginning of the end, but rather the end of the beginning, to paraphrase Winston Churchill. 

On the other hand, the AEC can be said to already exist, as this blog has noted elsewhere.  The single production base of the AEC is fully functional, albeit largely limited to the Japanese automotive and electronics industries.  More has to be done to expand the scope of the AEC single production base to include ASEAN-owned companies, particularly SMEs, in order to increase the local “buy-in” by ASEAN constituents.    There has been more progress on the single production base than the single market, but again more has to be done.

By the way, the Amcham survey, as I have noted, is distorted by the fact that U.S. companies operating in the region are involved less in manufacturing and more in services.  Services trade has not liberalized as fast as trade in goods, and the slow materialization of a single AEC market would naturally make U.S. companies more bullish on Southeast Asia, but bearish on the AEC. But this is not the only way to view the AEC.

In any event, the ADB study is correct in that more has to be done to publicize the AEC within ASEAN and increase usage of the AEC agreements, according to the Philippine Star:

“Removing barriers to trade in sensitive areas such as agriculture, steel and the increasingly important areas of services,” the ADB economist said, adding that the issue of large number of Filipino nurses dominating one or two ASEAN member nations remains an issue. Other issues are the elimination non-tariff barriers such as closing loopholes that permit misuse of rules that have been made for good, including sanitary and phytosanitary rules on food and antidumping regulations; removing border barriers such as quantitative restrictions, border administration, and even closures; removing behind-the-border constraints related to logistics, transport, infrastructure bottlenecks, and weak institutions; and adopting harmonized standards on competition policy and intellectual property rights (IPR).

However, creation of a truly effective single AEC market will require more robust ASEAN institutions. Without stronger regional institutions to monitor, administer and sanction AEC directives, and/or more effective intra-ASEAN dispute resolution, the AEC will remain limited and not fulfill its potential.

ASEAN Willing to Resume FTA Talks with the EU

ASEAN Secretary General Le Luong Minh yesterday stated that ASEAN could resume its free trade agreement (FTA) talks with the EU. According to the Nation, ASEAN could pick up its FTA talks with the EU after the formation of the ASEAN Economic Community (AEC) in 2015:

"Currently, ASEAN is too busy moving towards a single market under the 2015 target," he said. "But after the AEC has been achieved, then we should be ready for tighter cooperation with others, and the FTA negotiation with the EU is one of the top priorities after 2015."

Of course, the end of 2015 is also the target for completion of ASEAN’s Regional Comprehensive Economic Partnership (RCEP) talks with its trading partners.  Hence by then ASEAN should have achieved greater progress on the operation of intra-ASEAN trade (e.g., the AEC), as well as reached a common position in dealing with trading partners (e.g., the RCEP), including the EU.  Indeed, the AEC and RCEP are self-reinforcing, as trading partners will use the RCEP talks to prod ASEAN members to administer the AEC more effectively.

The EU had initiated FTA talks in 2006 with ASEAN, but they stalled.  Reasons cited included opposition in Europe on human rights grounds to negotiating with the Myanmar government, as well as insufficient negotiating infrastructure on the ASEAN side (e.g., who speaks for ASEAN?).  Eight years later, Myanmar has changed to the satisfaction of most Europeans and the EU has spent millions of Euros in development assistance for ASEAN to develop its institutions.    

With the assistance of the EU, optimistically, the RCEP talks and AEC implementation will have progressed sufficiently for ASEAN to be able to resume its FTA talks with the EU after 2015.   The loss of Generalized System of Preferences trade privileges for Malaysia and Thailand’s exports to the EU also should motivate these ASEAN members to the negotiating table.

Or perhaps not.   Although several ASEAN member states have entered into FTA negotiations with the EU on a bilateral basis, only Singapore has achieved an FTA with the EU, and even that was somewhat delayed.  Without a fully functioning government, Thailand cannot enter into FTA talks with anyone at the moment; FTA negotiations require authorization from the Thai parliament.  Malaysia’s FTA talks with the EU have also stalled amid domestic pressures, and EU FTA negotiations with Indonesia, the Philippines and Vietnam are at varying levels of preliminary progress. 

Secretary General Minh is correct in his assessment that ASEAN can only resume FTA talks with the EU only after 2015.  Hopefully by then ASEAN will have augmented its regional institutions sufficiently, and the ASEAN member states will have resolved the domestic political issues blocking an EU-ASEAN FTA.  It may take a few more years to reach that goal, but at least the EU and ASEAN are willing to put an FTA on the table, something that the US can only offer in partial form (via the Trans Pacific Partnership) and without a full mandate at the moment. 

ASEAN Around the Horn

Today we have another edition of “ASEAN Around the Horn,” a recap of developments I didn’t cover in other posts:

1. The ASEAN Economic Ministers held their retreat February 26-27 in Singapore.  On the ASEAN Economic Community, the ministers stated as follows:

"The Ministers discussed and agreed on the priorities of the ASEAN Economic Community (AEC) in 2014, which include raising awareness on the AEC; operationalising the ASEAN Framework for Equitable Economic Development; strengthening regional cooperation for SME development; and developing a regional framework for public-private partnership. Several agreements and protocols which would further deepen market integration, particularly in easing the flow of services, as well as services and investment agreements with Japan and India, are also targeted to be signed within this year."

And on the Regional Comprehensive Economic Partnership (RCEP) talks the ministers stated:

"The Ministers noted the good progress made in the ongoing negotiations of the Regional Comprehensive Economic Partnership (RCEP). Since the negotiations on the RCEP commenced in May 2013, three rounds of negotiations have been completed. Participating countries continued to deepen their detailed and technical work on trade in goods, trade in services and investment in the relevant Working Groups. Work has also begun in other areas with the recent creation of Working Groups on intellectual property, competition, economic and technical cooperation, and dispute settlement. The Ministers agreed on the importance of maintaining the negotiating momentum to ensure the successful negotiation of the RCEP by the end of 2015."

I will have a more detailed post on the Retreat when I get more information.

2. Indonesia took another step towards ratifying the ASEAN Agreement on Trans-boundary Haze Pollution.  Legislators representing almost 65% of the Indonesian parliament agreed to support passage of the Agreement. Only the opposition the PDI-P and PKS parties oppose the Agreement as an infringement of Indonesian sovereignty.  Indonesia hopes to have the Agreement ratified before the next ASEAN haze meeting in April.

3. The ASEAN Alliance of Health Supplement Associations (AAHSA) and the International Alliance of Dietary/ Food Supplement Associations (IADSA) have jointly issued an ASEAN TMHS  (Traditional Medicines and Health Supplements) Scorecard, which purports to be first of its kind developed by an industry in the region:

"The Scorecard affirms the significant progress ASEAN has achieved in the harmonisation with 9 out of the 14 standards and technical requirements being completed since 2004 in the areas of labelling, composition, quality, safety, and product placement. The Scorecard also shows that the TMHS harmonisation is reaching the goal of building the ASEAN Single Market in this sector as most of the measures identified for harmonisation have met the 50% threshold for completion with a few remaining to be completed by the end of 2015. The majority of the companies involved in the health supplements industry, including the small and medium enterprises will eventually be able to achieve the harmonised standards and technical requirements."

"The scorecard indicates that ASEAN would need to work swiftly to complete the remaining measures. A number of measures remain in progress or on hold due to the lack of consensus on how to tackle them. The health supplement sector feels strongly that any exceptions from the ASEAN requirements, such as on labelling, will impede the free flow of health supplement products across the region, and believes ways should be found to remove these exceptions."

4. India supposedly has completed the domestic ratification procedures for signing the services chapter of the ASEAN-India FTA.  This has been reported many times previously, the services chapter seems more likely to reach fruition this year.

5. The UN warned that greater regional integration in ASEAN could also benefit the narcotics trade unless ASEAN member states improve their criminal justice and public health infrastructure.

6. Seafood producers plan to issue a harmonized ASEAN industry standard for shrimp.  This is to help ASEAN shrimp producers deal importation issues arising in major markets such as the EU and the US.

Political Crisis Affects Thailand's Ability to Implement AEC Commitments

The protracted domestic political impasse in Thailand already has impacted the country’s immediate economic prospects.  Now foreign investors have expressed concerns that the difficulties will impact the country’s ability to implement its ASEAN Economic Community (AEC) commitments, beyond the 2015 implementation date.

For example, the Thai Board of Investment, which approves projects, has been stymied since its members’ terms expired last October.  The Thai Prime Minister, who serves as ex officio chair, cannot appoint new members due to her caretaker status.  Hence new projects cannot be approved.

This and other delays in AEC- related legislation and regulation was cited by the Joint Foreign Chambers of Commerce in Thailand (JFCCT), in a report by the Nation:

"A number of specific changes to laws and procedures are required to ensure smooth implementation and to allow Thai companies and citizens to obtain the benefits envisioned. The current political situation, unclear outcome of elections, uncertainty of government functions and control issues raise significant concern in terms of decision making and implementation capabilities. Some changes will require a functioning parliament."

The JFCCT went on to note specific AEC-related issues which require immediate attention:

“For example, to allow the labour changes to work, the Thai labour law needs amendment. A sitting parliament needs to do this. To allow the services changes involving ASEAN national foreign ownership of up to 70%, the Foreign Business Act and some other procedures need to be changed. Other changes needed include a large effort to harmonize the many varied definitions, standards and procedures. These include labelling, university qualifications, taxes, and customs practices. The ministers of multiple departments and staff from many ministries need to agree and implement these.”

Of course, many of these issues were outstanding before the current political crisis in Thailand.   The Thais were among those most anxious about increased competition arising from the AEC, and so were already somewhat reluctant participants in the process.  The continuing political impasse makes them even more so.

Without a resolution, implementation of AEC and other ASEAN Community commitments by Thailand becomes delayed even further.  Will this spur ASEAN to intervene directly?  Very unlikely, given ASEAN’s principle of non-intervention in domestic political matters,  as well the current Thai leadership’s preference to seek assistance from the UN rather than ASEAN.  Nevertheless, the leaders of Thai society need to be reminded of the short and long term negative effects to the Thai economy, including AEC-related matters. Whether Thai leaders will seriously consider these effects remains to be seen.