ASEAN and the TPP

This week I am attending the Asia-Pacific Council of American Chambers of Commerce (APCAC) Washington Doorknock along with other Amcham Asia representatives.  During the event, Amcham and U.S. Chamber of Commerce representatives meet with U.S. executive and legislative branch officials to discuss issues affecting U.S. companies in the Asia Pacific.   I am speaking at a Mansfield Foundation-sponsored lunch panel during the Doorknock on economic integration in Southeast Asia and the Trans-Pacific Partnership (TPP).

You can read through the rest of this blog to see my skeptical-but-supportive take on the former topic.  What about the TPP, which has direct relevance to ASEAN as four ASEAN members – Brunei, Malaysia, Singapore and Vietnam – are among the TPP negotiating parties?

Well, for a start, the fact that the TPP parties have made this much progress is a positive development.  The TPP began as a four-party FTA made up of Brunei-New Zealand-Chile-Singapore, covering trade in goods, trade in services, IP, ROOs, sanitary and phytosanitary measures, technical barriers to trade, government procurement, and competition policy.  The TPP talks brought in Australia, Peru, Vietnam, Malaysia, and the United States and added new topics such as labor and the environment.

The stated short-term goal is to complete the broad outline of an agreement by the November APEC summit in Hawaii.  The long-term goal is to create an FTA that could encompass the entire APEC membership.  I think the short-term goal is achievable, but there are many obstacles to reaching the long-term goal, mainly related to the U.S. domestic political situation.

Most of the additional issues such as labor and environment were brought in at the insistence of the United States due to domestic interests.  The other TPP parties do not necessarily share these sentiments, but understand that these issues need to be covered to get the agreement done.

More importantly, it is not clear whether the Obama administration could get a TPP package through Congress.  U.S. FTAs previously negotiated by the Bush administration with Korea, Colombia and Panama are still stuck in the legislative approval process, and this impasse is adversely affecting the approval of a new U.S. Commerce Secretary and worker assistance funding.   Neither does the Obama administration have the benefit of Trade Promotion Authority  (TPA) which would allow the TPP partners to know that whatever is agreed upon in negotiations will actually be passed in the final text.  Even when both houses of Congress were Democrat-controlled, Congress was reluctant to give TPA to President Obama.   It is more unlikely with a Republican-controlled House, even though the Republicans are traditionally more supportive of FTAs.

Ultimately the biggest concern is whether the sheer scope and size of the TPP talks, covering a wide variety of issues and countries, will drag down the TPP process just as the WTO Doha Round has been dragged down.  There is deep bi-partisan skepticism in the U.S. Congress about concluding an FTA with a “non-market economy” such as Vietnam.  Indeed, Vietnam is being used as a proxy for pre-emptive discussion on China, if and when China ever joins the TPP. 

Nevertheless, I hope that competition will help convince U.S. policymakers that the TPP is worth pursuing.  If the United States doesn’t move forward, then the EU will, as it has with its own FTA concluded with Korea, and with its own FTA talks with Singapore and Malaysia.  The EU-Singapore FTA talks should be concluded by October 2011, and the Malaysians believe that they can conclude their talks with the EU by early 2012. The EU has stated that they are willing to start negotiations with Vietnam, Thailand and Indonesia in the near future.

I think this should motivate the TPP negotiators such that we will have a broad agreement  on the TPP by APEC Hawaii, but work will necessarily have to continue beyond into the next presidential term due to the electoral schedule and U.S. domestic political concerns. That is not necessarily a bad thing, as the TPP could bring in the entire Asia-Pacific. More importantly to the United States, it’s the only game in town at the moment.  Either way, more time to get things right and convince the skeptics is a worthwhile investment.

Celebrating the Life and Death of AICO

In my law school class on the AEC, I often note that the ASEAN Industrial Cooperation (AICO) scheme is the paradigm for economic integration in Southeast Asia.  In its birth, life and impending death, AICO serves as an example of the best and worst of how ASEAN economic cooperation works.

AICO was created in 1996 to encourage cross border investment and trade within ASEAN, serving as an early harvest of the ASEAN Free Trade Area (AFTA, which in 2010 became the ASEAN Trade in Goods Agreement, or ATIGA).  Companies operating in 2 or more ASEAN members could qualify for the early application of the 0-5% AFTA rates for their production inputs and finished goods if they could demonstrate that the proposal involved resource sharing/pooling and/or industrial complementation. The inputs and outputs also had to have 40% ASEAN content.  Almost all (89 of 129) approved AICO projects involved the automotive industry, as the Japanese companies used the AICO scheme to enjoy major cost savings from the reduced import duties.

The major aspect of AICO is that it created the first ASEAN-specific legal obligation (as opposed to an obligation owed by an ASEAN member state), a major step in the development of the AEC.  After approval of the AICO application, the ASEAN Secretariat would issue an AICO certificate of eligibility which would allow the company to enter goods from the other ASEAN member using the reduced AFTA rates.  The certificate thus created a set of rights and expectations between the company and the ASEAN Secretariat.

Unfortunately, in the days before the ASEAN Charter (and perhaps even now with the Charter in place) a company had no legal recourse should difficulties have resulted with the issuance of the AICO certificate. Fortunately, the ASEAN Secretariat was efficient in the administration of AICO and such disputes did not occur.  Unfortunately, the ASEAN members were not as efficient; I worked on a four-way AICO application that took 2 years to complete, despite the AICO agreement’s stipulated 60 day deadline for processing applications. That was because each of the 4 ASEAN members insisted that the intra-ASEAN trade result in a net surplus to its own benefit, which was mathematically impossible (we had to make some difficult assumptions in each country).  Despite these hiccups, AICO was quite successful and resulted in the high level of regional integration prevalent in the ASEAN automotive industry today. 

With the full implementation of AFTA/ATIGA in 2010, the tariff reductions reached their final level, such that the reduced tariff rates under AICO were equivalent to the AFTA/ATIGA rate., or in some cases a little higher.  This meant that AICO offered no practical advantage over using ATIGA (with the exception of the AFTA/ATIGA rates applicable to Cambodia, Laos, Myanmar and Vietnam, which were allowed a longer period to implement the final ATIGA rates, although there are only 3 AICO projects involving Vietnam). 

Thus, one would think  that AICO would have had no relevance after 2010.  However, Thailand continued to apply AICO, particularly for the importation of complete knocked-down (CKD) automobiles from other ASEAN members.  Importers of CKD vehicles into Thailand would use AICO instead of ATIGA (due to the more complicated customs valuation methodology, I am told), even in instances where the AICO rate was higher than the ATIGA rate.  Furthermore, Thailand interpreted its customs law and AICO as establishing a maximum quantity for importations under AICO, based on the companies’ original AICO applications.  A company importing more than this stipulated quantity would face application of the full MFN rate to the imported excess quantity.  This arguably is inconsistent with the requirements of ATIGA that no import quotas be imposed on intra-ASEAN trade in goods. 

Thankfully, after several months of internal pressure and ASEAN-style consensus building, Thailand agreed with other ASEAN members to terminate AICO and allow it to become superseded by ATIGA, effective later this year. That it did so without resort to the ASEAN Enhanced Dispute Mechanism or other litigation demonstrates that the “ASEAN way of consensus” can indeed work in the administration of the AEC. In this way AICO helped develop the AEC even at the end of its useful lifespan. 

This is why I spend an entire class session of my AEC course on AICO.  To me, it is the equivalent of Cassis de Dijon or Marbury v. Madison; it demonstrates how ASEAN can administer its single market, the AEC, in a manner unique to its own institutional environment.  I hope that ASEAN can continue to apply the lessons learned from the AICO experience.

Extra-ASEAN Sources of Law OK; Indigenous ASEAN Law Would Be Better

This week Cambodia appeared before the International Court of Justice (ICJ) requesting a ruling on the Preah Vihear temple dispute between itself and Thailand.  Indonesia’s foreign minister, acting as a mediator (via Indonesia’s position as ASEAN chair) noted that this did not mean that ASEAN institutions had failed to resolve the dispute, since many aspects of the dispute resulted from the 1962 judgment of the ICJ.

Not only is this correct, but several other intra-ASEAN disputes have gone to extra-ASEAN dispute fora.   This is expressly allowed by Article 28 of  the ASEAN Charter (which Indonesia opposed during the drafting process).  Singapore and Malaysia, and Indonesia and Malaysia, have gone to the ICJ over disputed islands.   Singapore initiated the first use of the WTO dispute resolution process against Malaysia, and there currently is a WTO dispute between the Philippines and Thailand.   

In fact, even in a non-adversarial context, ASEAN members resort to extra-ASEAN sources of law.  For example, ASEAN members have often been reluctant to conduct cross-border customs inspections to verify whether goods qualify for the ASEAN Trade in Goods Agreement (ATIGA), despite the fact that ATIGA expressly authorizes such inspections.  For inspection of automotive industry exporters, ASEAN members have been using a 1958 UN agreement on the automotive industry as legal justification for such inspections.  The agreement allows importing countries to confirm whether the products have been produced in the claimed country of manufacture.  During such inspections, ASEAN authorities have also been checking the cost manufacturing statements and other data for compliance with ATIGA.   

Furthermore, when Canada invokes international arbitration against the United States on countervailing duties on softwood lumber, Mexico uses WTO dispute settlement against U.S. antidumping measures on oil pipe, or Argentina does the same against Brazilian antidumping measures on various products, the credibility of NAFTA or Mercosur is not questioned.  So why does ASEAN’s credibility get questioned when it resorts to extra-ASEAN legal fora? 

The difference is comes from history and expectations.  The NAFTA and Mercosur countries are relatively well-settled in their sovereignty and legal foundations. ASEAN is still quite young, with most of its members enjoying recently-won sovereignty in historical terms.   In this context, the use of extra-ASEAN legal sources is understandable.

The bigger question is whether ASEAN can apply the experience from its use of the ICJ, WTO and other sources of law to the implementation of an ASEAN-specific body of law and dispute resolution.  Extra-ASEAN law can help establish the legal foundations of the AEC, but without an indigenous source of law  and order, investors will either be reluctant to increase their stake in the AEC or demand a higher return on investments.  Not every dispute needs to go to the UN, just like not every dispute in the U.S. needs to go to the U.S. Supreme Court or requires congressional intervention.  ASEAN needs to adapt the extra-ASEAN norms of law and order for its own needs and uses.