December 31, 2015: Time to Celebrate, Then Get Back to Work, ASEAN

At the stroke of midnight tonight, the ASEAN Economic Community (AEC) comes into being.   There will be no fireworks or concerts tonight devoted to the AEC, unlike the formation of the single market in the EU in 1992 (and definitely not a song like the Kinks’ Down All the Days (to 1992)).    Aside from a few ASEANcrats in Jakarta and elsewhere in Southeast Asia, probably not many people will directly celebrate tonight’s milestone.

Tonight does not mark the end of economic integration in Southeast Asia, nor even the beginning of the end.  Rather, December 31, 2015, represents the end of the beginning of economic integration in ASEAN, a long, often times slow, process. 

Intra-ASEAN duties have been eliminated on virtually all goods through the ASEAN Trade in Goods Agreement (ATIGA), and investment rules have been established through the ASEAN Comprehensive Investment Agreement (ACIA).   This represents significant progress since the early days of ASEAN economic efforts in the 1970s.  In some ways, we already have had an AEC for several years, and tonight only represents its formal recognition.

Granted, implementation of ATIGA, ACIA and other ASEAN agreements has been inconsistent.  Liberalization of trade in services through the ASEAN Framework Agreement on Services (AFAS) will not be completed by the 2015 timeframe.  By any measure, many AEC measures have not been completed as well.  Coupled with other perceived deficiencies in regional cooperation in Southeast Asia (haze, migration, South China Sea/West Philippine Sea, etc.), it is easy to discount ASEAN as an organization.

Yet focusing solely on the negative in ASEAN overlooks the positive achievements of the organization.  The fact remains that ASEAN is the most successful regional organization in the developing world.  No two members of ASEAN have engaged in outright hostilities, despite the long history of conflict in the region: even during the Preah Vihear dispute, ASEAN helped with its resolution.  ASEAN has helped Myanmar return to the global scene.  ASEAN helped with the birth of Timor-Leste (and possibly is part of its future as well).    Finally, ASEAN has provided economic deliverables from ATIGA, ACIA and (albeit incompletely) AFAS, as well as the ASEAN FTAs with Australia-New Zealand, China, India, Japan and Korea.

ASEAN has therefore achieved much, but as the deficiencies indicate, it could achieve so much more.  That is where the ASEAN institutions and/or the ASEAN processes need strengthening and improvement.  Without some relaxation of national sovereignty concerns that will allow for such augmentation of the ASEAN institutions and/or processes, ASEAN will find it increasingly difficult to deal with regional issues of economic integration (whose further progress will require dealing with issues within national economies, not just at the national borders), security, the environment, health and other issues.

Thus, ASEAN, born in the 20^th Century, needs to update itself for the 21^st Century; the status quo is insufficient to deal with today’s issues.  That is not to say that ASEAN must follow the EU model of strong regional institutions or the NAFTA model of robust processes.  A grouping of relatively young nations with varying legal and political systems will necessarily have to find its own direction.  That process will appear slow and inconsistent, particularly to Western observers, but it will and must take place. Otherwise, ASEAN risks becoming as irrelevant as its predecessors became.

Tonight ASEAN should celebrate both its achievements and its potential.  It and the generations of leaders in the ASEAN governments and institutions who worked on its formation and operations deserve this.  Then the next morning, it will be time to get back to work, for there is much to be done.

With AEC in Sight, an Old ASEAN Project Lingers On

The Nation today reported on a controversial power plant being built to power a potash mine in Thailand.  What’s interesting about the dispute is that it involves an ASEAN project that dates back to the earliest days of ASEAN economic cooperation, just as the ASEAN Economic Community (AEC) is about to be launched formally later this month.

The AEC is just the latest iteration of economic cooperation in Southeast Asia, a process that dates back to the 1967 Bangkok Declaration. However, the scope and vision of economic integration has changed over the years. Originally economic cooperation was driven more by the ASEAN governments, rather than the private sector. As such, the priorities of ASEAN governments focused more on collaboration on economic matters to promote social and political stability, rather than economic competitiveness.  This is reflected in the 1976 Bali Concord I declaration, which called for ASEAN members to provide mutual support in food and energy.

This vision was implemented in the ASEAN Industrial Project (AIP) scheme of 1980.  Under the AIP, each ASEAN member would sponsor an industrial project. The host government and its private sector would take 60% shareholding, with the other member governments taking up the remaining 40%.  The output of each project would receive trade preferences for exports to other ASEAN countries under the ASEAN Preferential Trading Arrangements agreement (APTA), and would have exclusivity within ASEAN.

Given these priorities, it was no surprise that the AIP projects focused on agriculture, e.g., food security: Indonesia (urea), Malaysia (urea) and the Philippines (phosphates). Thailand started in soda ash, then changed its project to potash, which is used in the production of fertilizer. Singapore proposed a diesel engine project, which was somewhat related to agriculture since the engines could be used to power agricultural equipment. 

Unfortunately, the APTA and AIP schemes were not successful. APTA failed because it only provided for relative reductions in import duties, rather than absolute reductions (a 50% reduction of a 100% import duty leaves a significant duty in place) and because it only covered a limited number of products (the most infamous being snow removal equipment, useless in a tropical region). 

The AIP scheme was relatively more successful, with Indonesia and Malaysia successfully constructing their urea projects. The Philippine project became caught up in the post-Marcos era political and economic transition, with phosphates being replaced by fertilizer, then pulp and paper, then copper fabrication, then eventually becoming defunct.   The Singapore project was hampered by the reluctance of other ASEAN members to grant exclusivity to the diesel engines (Malaysia, in particular).  Singapore then shifted its project to a Hepatitis-B vaccine production plant, which can in retrospect be seen as inconsistent with the objective of the AIP scheme. More importantly, Singapore deliberately limited its investments in the other ASEAN members’ AIP projects to 1% shareholding to express its discontent with the program.  With other ASEAN members following suit on the basis of reciprocity, the AIP projects began to have funding shortfalls.

Which brings us to the Thai potash project, now called ASEAN Potash Mining Public Company Limited.  After much planning and effort, the company now plans to start mining potash next year, 36 years after the AIP projects were first envisioned.  The local community, however, objects to the construction of a coal power plant to power the mine, suggesting solar or natural gas. The mine’s management says that only its own coal-fired plant can make the mine economically viable.  The local community has resorted to protesting at the embassies of Brunei (which joined the AIP scheme when it became an ASEAN member in 1984), Indonesia, Malaysia, the Philippines and Singapore, because they still have equity in the potash project. 

Without making any assessments on the Thai company’s dispute with the local community, the AIPs in Thailand and elsewhere demonstrate the pitfalls when economic cooperation and integration is driven by government priorities, not market concerns.  A normal business would not take 36 years to come into fruition. Moreover, direct government ownership can bring unwanted criticism, as the Thai dispute illustrates. 

Fortunately, ASEAN economic integration has long since moved away from statist efforts and is based more on market-driven efforts by the private sector.  The continuing struggle of the Thai AIP to bring itself into being is another blast from the past demonstrating that ASEAN governments should support, but not lead, economic integration in Southeast Asia through the AEC.

SEZs Just Another Market Distortion in the AEC

On the sidelines of last month’s ASEAN Summit in KL, Laos Minister of Industry and Commerce Khemmani Pholsena proposed an ASEAN-wide standard for Special Economic Zones (SEZs), stating, “We think that a framework for Special Economic Zones would be good to set up because we see that in each ASEAN member state, we develop different economic zones,” according to the Nikkei Asian Review.  Although not likely to be adopted, it does raise the issue of market-distortive subsidies in the ASEAN Economic Community (AEC). 

SEZs are zones specially designated for investment, usually considered outside the customs territory of the host country. Hence most SEZs have duty-free imports and exports, lighter regulations on labor and establishment, and perhaps income tax exemptions and deferments.  All ASEAN countries have some form of SEZs, and use them to encourage foreign investment into their countries.

The motivating concept of the Laotian proposal is that this competition among ASEAN members disadvantages less competitive countries.  Countries with poorer infrastructure or connectivity, like Laos, have to offer more investment incentives to encourage foreign investment. The downside is that those are the countries that can ill-afford the loss of tax revenue involved in such investment incentives.  Thus, an ASEAN-wide standard for SEZ incentives would help end this “race to the bottom” to outdo each other with such incentives.

Unfortunately, ASEAN has shown very little willingness to address market-distortive subsidy and incentive policies, whether in SEZs and other programs aimed at attracting foreign investment, or in agriculture.   This contrasts with the EU, where the European Commission aggressively targets state aid that supports national industries (although like most jurisdictions maintains its own agricultural subsidy programs).  The Laotian proposal may be an idea whose time has not yet come, but if ASEAN is to achieve a true single market in the AEC, it will need to deal with government subsidy and incentive policies like the SEZs.

Grading the ASEAN Economic Community Without a Scorecard

The ASEAN Secretariat released two reports before this month’s ASEAN Summit on the ASEAN Economic Community (AEC). The ASEAN Integration Report 2015 and its companion report ASEAN Economic Community 2015:Progress and Key Achievements provide useful updates on the AEC from the macro and micro points of view. 

On the macro level, the AEC appears to be doing well, according to these graphics from the reports:

However, readers of this blog know that I am also interested in developments at the micro level, particularly on the single production base and single market. There, more modest – but positive -- progress is being made:

• AEC Scorecard – the Scorecard was last published in 2012; the Progress and Key Achievements report provides a partial update, stating that 92.7% of “focused” AEC deliverables (e.g., priority items) had been achieved by October 2015. Although this is positive, the actual completion rate of deliverables as per the full AEC Scorecard was 79.5%, according to this same report. 
• ATIGA Tariff Elimination – 99.2 of tariff lines were reduced to 0% in the ASEAN-6, with the CLMV countries expected to have 90.8% of tariff lines at 0% by this year, for an overall average of 96%.  The remaining items subject to tariffs are sensitive items, e.g., agricultural goods.
• Rules of Origin – all 10 ASEAN members are now participating in one of the two self-certification pilot projects, with Cambodia, Brunei, Malaysia, Singapore and Thailand in pilot program 1 (which includes trading companies) and Indonesia, Laos, Myanmar, Philippines, Thailand and Vietnam in pilot program 2 (which does not).  Myanmar was in the process of joining pilot program 1.  No time frame was given for completing the two pilot programs and applying a single approach to self-certification. In addition, all members except Cambodia and Myanmar have phased out the redundant requirement of reporting FOB value on Form D origin documents when the Change in Tariff Classification methodology is used.
• ASEAN Single Window (ASW) and Trade Facilitation – the Protocol on the Legal Framework to Implement the ASW was signed, with the next stage of the ASW pilot program starting up, the electronic interchange of the Form D origin documents.  The ASEAN Trade Facilitation Joint Consultative Committee has been reactivated. Indonesia, Laos, Malaysia and Thailand have established National Trade Repositories of laws and measures affecting trade, which will help establish the ASEAN Trade Repository.
• Non-Tariff Measures (NTMs) – these remain problematic, as data on the scope and implementation of NTMs remains spotty (for example, Thailand has self-reported 869 NTMs to the WTO, whereas Myanmar has self-reported just 1).  The reports indicate that more effort is needed to update the relevant information and allow for the private sector to engage with ASEAN on NTMs.  The ASEAN Framework Agreement on Mutual Recognition Agreements on industrial standards will be reviewed and revised.
• Customs – Protocol 7 (customs transit) of the ASEAN Framework Agreement on the Facilitation of Goods in Transit (AFAFGIT) has been signed and is being ratified, with Protocol 2 (frontier posts) being finalized for signing.  A pilot program to implement AFAFGIT will be operational in Malaysia, Singapore and Thailand in May 2016.
• Services – the report mentions the need to upgrade the ASEAN Framework Agreement on Services (AFAS) with an ASEAN Trade in Services Agreement (ATISA).   This topic is discussed in greater detail in the ASEAN Services Monitoring Report which was also issued around the November summit meeting and which I summarize in an earlier post.
• Investment – the report notes that four countries revised their reservations (exceptions) to the ASEAN Comprehensive Investment Agreement (ACIA), with Brunei dropping manufacturing and forestry, Laos dropping manufacturing and Myanmar removing some restrictions on foreign investment; however, Indonesia introduced more restrictive measures for mining.
• Capital -- ASEAN Finance Ministers signed the Protocol to implement the 6th Package of Financial Services Liberalization under the AFAS; this establishes the ASEAN Bank Integration Framework (ABIF). 

All in all, the reports describe an AEC that is a work-in-progress.  The AEC will indeed go into effect on December 31, 2015, but not a fully-functional AEC, as indicated by the 20.5% of the AEC Blueprint measures which have not yet been implemented.  Nevertheless, the degree and scale of work completed are still positive given the limitations imposed on the ASEAN institutions.  Hopefully, ASEAN leaders will follow the suggestions made by the Financial Times (and this blog) and assign additional authority to the ASEAN institutions and processes to achieve a fully functional AEC.

Upgrading the US-ASEAN Relationship

While attending the East Asian Summit this weekend in Kuala Lumpur, U.S. President Barack Obama invited ASEAN leaders to attend a special summit in the United States next year.  This is not the first time a U.S. President has made such an invitation, but (hopefully) it seems that the factors that waylaid the last such proposal won’t do the same to this one.  The proposed 2016 summit also demonstrates the usefulness of addressing U.S. relations with Southeast Asian countries within the ASEAN context, rather than on a bilateral basis, something that should be institutionalized and built upon.

The invitation comes on the heels of an “upgrading” of U.S.-ASEAN relations to a “strategic” level, with a 5 year plan for cooperation on political-security, economic and socio-cultural issues.

Political-security issues include maritime issues (e.g. the South China Sea), terrorism, trafficking in persons and refugees.

Economic issues include the ASEAN Single Window, trade facilitation, investment, support for SMEs, as well as the ASEAN-United States Expanded Economic Engagement (E3) Initiatives (which hopefully can be beefed up to help ASEAN members like Thailand, Philippines and Indonesia build capacity to join the Trans Pacific Partnership (TPP), now that we actually know what would be required by the TPP).

Socio-cultural issues include human rights, climate change, youth and women’s programs, among others.

Although many of these programs already exist, the “upgrade” institutionalizes these aspects of the relationship.  Regularizing the special summit proposed for 2016 would also help with the “upgrade,” expanding beyond the current U.S.-ASEAN summit that is held on the sidelines of the East Asia Summit. 

This is not a new idea. Then-U.S. President George W. Bush proposed a similar U.S.-ASEAN summit to be held at his Crawford ranch. However, that proposal faded away mainly due to objections to the potential participation of the Myanmar military regime.  The Bush administration thus was denied its opportunity to conduct its own “upgrade.” 

Times and sensitivities have changed.  Now that Myanmar appears set to continue its political and economic reform, its participation is much less of an issue.  Furthermore, participation in the 2016 special summit would be an incentive for Aung San Suu Kyi’s victorious party and the military to reach agreement on an acceptable president for Myanmar. 

Moreover, engaging ASEAN as a group allows the United States to continue relations with countries which would be more problematic on a bilateral basis, such as Thailand and its current military government.  For example, the presence of the Thai prime minister at the U.S.-ASEAN summit did not cause any difficulties.  In fact, the U.S. has indicated that Thailand’s military government would not prevent Thailand from joining the TPP.  This reflects the continued balancing between geopolitical concerns and aspirations for the region.

In any event, institutionalizing the “upgrade” in U.S.-ASEAN ties is both welcome and necessary, given the upcoming 2016 elections.  Regardless of who the next U.S. President is after November 2016, he or she will have a better set of tools to work with Southeast Asia.

NB: Since Thanksgiving is celebrated this Thursday in America, here is a link to a Straits Times op-ed I wrote on this very unique holiday.

Wrap-Up of the 27th ASEAN Summit

This weekend ASEAN held the second of its summits for 2015, along with related meetings with ASEAN partners including the United States, China, India, Australia, Korea, Japan and the United Nations.  With regard to the ASEAN Economic Community (AEC), the major development was the formal announcement of the establishment of the ASEAN Community, inclusive of the AEC, ASEAN Political-Security Community (APSC) and the ASEAN Socio-Cultural Community (ASCC) with effect from December 31, 2015.   Although this had been generally anticipated for years, what may seem like a formality to some is still a significant step in the regional integration of Southeast Asia.

Just as important is the declaration of further ASEAN integration, with the next milestone being 2025.  This sets forth Blueprints for the 3 ASEAN Communities under the rubric of “ASEAN 2025: Forging Ahead Together”, along with the Initiative for ASEAN Integration (IAI) Work Plan III (we’ll have a later post analyzing the AEC 2025 blueprint).  The Declaration tasks the ASEAN Secretariat with monitoring and reporting on implementation of the AEC 2025 blueprints.

There were other related developments which we cover in summary below:

• ASEAN Framework Agreement on Services (AFAS) – the Summit confirmed that completing the final rounds of AFAS would extend beyond the anticipated 2015 conclusion date and into 2017. Notably, there was no mention of the ASEAN Trade in Service Agreement (ATISA) so it appears that the start of ATISA talks has been delayed as well.
• ASEAN Integration Report 2015, the ASEAN Investment Report 2015 and AEC 2015: Progress and Key Achievements – these reports were issued, summarizing progress in the implementation of the AEC (we’ll have a later post analyzing these reports). Notably, the last report indicated that ASEAN had met 92.7% of so-called “high priority measures” by October 2015, but had only met 79.5% of total AEC measures as per the AEC Scorecard. 
• ASEAN Solutions for Investments, Services and Trade (ASSIST) – the final statement noted the establishment of ASSIST, which appears to be a revamped version of the ASEAN Consultation to Solve Trade and Investment Issues (ACT), as both are internet-based processes that allow the private sector to make non-confrontational complaints (e.g., anonymous) about trade issues (the ACT had suspended operations due to computer technical issues).
• ASEAN-China FTA (ACFTA) – the parties agreed to upgrade the ACFTA, although there was an initial delay in signing ceremony due to a dispute on its geographical coverage that was eventually resolved.
• Regional Comprehensive Economic Partnership (RCEP) – ASEAN and the RCEP partners set forth a goal of completing negotiations by 2016.
• Timor-Leste’s ASEAN Application – this moved a bit, with the ASEAN Community Council of ASEAN Foreign Ministers and Senior Officials Meeting noting that the Application was a key agenda item, and the final statement stating that ASEAN looked forward both to completion of the three feasibility studies and greater opportunities for Timor-Leste to participate in ASEAN activities (Timor-Leste attended its first ASEAN meeting in October).

The summit also marked Malaysia’s handover of the chair to Laos.  Given that Laos has elected to hold both of its summits in November 2016 (thereby satisfying the requirements of the ASEAN Charter), we will have to wait a year for further developments at the leadership level.  That will give the ASEAN ministerial meetings next year, in particular the AEC, APSC and ASCC Council meetings, that much more importance in the absence of the usual Spring 2016 ASEAN Summit.

In sum, the ASEAN Summit was successful, even though the flashier deliverables such as ASEAN Common Time or a completed RCEP negotiation fell by the wayside for various reasons.  The real legacy of Malaysia’s chairmanship will be the structure of commitments made under ASEAN 2025: Forging Ahead Together.   Now ASEAN has to start implementing them.

Achieving the ASEAN Single Market in Services

Last week the ASEAN Secretariat and the World Bank jointly released the ASEAN Services Monitoring Report, a comprehensive survey of integration of services trade in Southeast Asia, and available here.   The report explains why the current approach to creation of a single market in ASEAN for services has reached its limit, as well as makes suggestions on how to move forward.  This makes the report timely as ASEAN moves on to its post-2015 ASEAN Economic Community (AEC) agenda, including the ASEAN Trade in Services Agreement (ATISA).

Currently, services trade integration is covered by the ASEAN Framework Agreement on Services (AFAS). The AFAS basically adopts the WTO General Agreement on Trade in Services (GATS) as a baseline for integration, with ASEAN members agreeing to apply most-favored-nation (MFN) and national treatment to cross-border services trade. ASEAN members have conducted multiple rounds of negotiations and resulting agreements. 

The report concludes that although the AFAS has helped improve trade in services in ASEAN, it may have reached its limits.   By basing progress on negotiating rounds, progress has become slower and more incremental.  Although AFAS was supposed to complete its rounds by 2015, ASEAN members are preparing to extend its mandate to 2016 and beyond.  Moreover, the report finds that AFAS is focused on explicit barriers to cross-border trade in services, e.g., those measures which could violate the MFN and national treatment obligations.  However, AFAS does not deal with domestic regulatory measures in ASEAN member states which do not clearly violate the terms of AFAS, yet nevertheless create barriers to creating a single market for services in ASEAN.  As a result, AFAS risks being outpaced by services trade integration efforts in the ASEAN FTAs as well as the Regional Comprehensive Economic Partnership (RCEP) agreement.

ASEAN members are well aware of the limitations of AFAS, and so are preparing to negotiate the ATISA, which would deal with services trade in a single undertaking rather than negotiating rounds.  The report does not directly address the inchoate ATISA, but does make several worthwhile recommendations:

• Incorporate GATS norms  -- as the AFAS is based on the GATS, ASEAN should clarify the legal value that WTO panel decisions and interpretive documents have in the administration of AFAS.
• Establish an ASEAN services monitoring system – this would remedy the current lack of information on compliance with AFAS and other ASEAN agreements affecting services trade.
• Provide guidance on ASEAN services trade – the report suggests that ASEAN could provide for nonbinding guidance on ASEAN services trade issues, which would also improve transparency and communications with the private sector; the report also calls for upgrading the current ASEAN Coordinating Committee on Services into a permanent group of experts.
• Improve ASEAN dispute resolution – the report calls for making the current Enhanced Dispute Settlement Mechanism (EDSM) more robust, as well as allowing the EDSM process to issue interpretive decisions that would not be based on a formal dispute between members.
• Address domestic regulatory measures – ASEAN members need to administer such measures in a more cohesive manner to achieve convergence, if not harmonization; the report supports creating a regulatory checklist of principles that would be applied to determine whether domestic measures are consistent with the goal of creating a single market in services, as well as more intensive cooperative efforts on a sectoral basis, particularly for heavily regulated sectors such as aviation.
• Eliminate barriers to establishment – the report calls for removing ceilings on the foreign equity ownership of service providers.
• Apply a negative list approach – the report recommends that any successor agreement to AFAS apply a negative list approach to services, e.g., that its liberalizations would apply to all sectors except those otherwise reserved, such as in the ASEAN Comprehensive Investment Agreement (ACIA). 

Although the report recommends strengthening the ASEAN institutions and processes, it does not suggest whether that should be done by the ASEAN Secretariat or by a standing committee of ASEAN members.  Given that report was co-authored by the ASEAN Secretariat, that is understandable.  In addition, the report does not specifically address movement of natural persons, which again is understandable given its highly sensitive nature.

In any event, it is clear from the report that the current ASEAN approach to services integration has reached its limits.  Whether through ATISA, RCEP or some enhancement of the ASEAN institutions and processes, ASEAN needs to move beyond the current AFAS approach if it is to achieve a true single market for services in Southeast Asia.