Hong Kong and the ACFTA

As reported earlier, Hong Kong has asked to accede to the ASEAN-China Free Trade Agreement (ACFTA).  The ASEAN Economic Ministers meeting in Cambodia this week will consider the request, with the ASEAN Summit in November making the final decision. 

The Singapore Straits Times today (link after the pay wall) reports that Singapore and other ASEAN member states want Hong Kong to sweeten its offer.  According to the article, a study conducted by the Asian Strategy and Leadership Institute (ASLI) projects that Vietnam, Cambodia, Malaysia, the Philippines and Thailand would benefit, in descending order of magnitude.  Singapore would be the only ASEAN member state adversely affected, according to ASLI.

As Hong Kong and Singapore are similarly strong in services and capital, Singapore would face increased competition within ASEAN in these sectors if Hong Kong were to accede to the ACFTA. This was noted by Mr Lee Yi Shyan, Singapore’s Senior Minister of State (Trade and Industry):

"Given the similarities between Hong Kong and Singapore, an amount of competition is unavoidable. The question is, how can we find a way to strike a win-win situation?  And if Hong Kong alone cannot make that offer, then we will see if the China side can provide some of the potential benefits to make this a more favourable deal for Asean members." This, he said, could include looking at how China's services industry can be opened further to Asean companies.

Such an augmented offer would not necessarily benefit Singapore, which already has its own FTA with China with deep and broad commitments in services and investment, but benefit all of ASEAN.

Mr. Lee also expressed concern that Hong Kong’s joining an existing FTA sets a precedent:

"This is an important technical and procedural question as there are very few precedents.  Would it mean a renegotiation of an FTA already in existence?"

For example, what would happen if North Korea re-united with South Korea?  Would the North Korean territory immediately accede to the ASEAN-Korea Free Trade Agreement?   When the Federal Republic of Germany (e.g., West Germany) absorbed East Germany, East Germany immediately was covered by the EU treaties, so this is a valid, if not immediate, concern.

I would add two other possible areas of concern for Singapore that arise from the proposed Hong Kong accession.

First, to some extent, the market access and dispute resolution commitments of the ACFTA exceed those provided by the ASEAN Framework Agreement on Services (AFAS) and the ASEAN Comprehensive Investment Agreement (ACIA) for ASEAN members.  If Hong Kong were to accede to the ACIA, it could result in the discouraging prospect (for Singapore) of Singapore’s main regional competitor for trade and capital operating within ASEAN but with better protection and access than Singapore itself has under AFAS and the ACIA. This represents a fundamental need in the AEC, the need to mesh together the ASEAN internal market agreements with the ASEAN FTAs with its trading partners.   In other words, this is an indigenous ASEAN problem that ASEAN needs to resolve on its own, which does not arise from Hong Kong or China.

Second, if Hong Kong were to accede to the ACFTA, its companies would have access to the investment protection and dispute resolution provisions of the ACFTA.  Philip Morris Asia (PMA), a Hong Kong company, has used similar provisions under the 1993 Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Protection of Investments to bring an investment arbitration proceeding against Australia’s law requiring plain packaging for tobacco products.    Hence, theoretically, PMA could bring a similar action under Article 14 of the Agreement on Investment of the Framework Agreement on Comprehensive Economic Co-operation between ASEAN and the People's Republic of China, part of the ACFTA, against labeling requirements imposed by Singapore, Thailand and other ASEAN member states on tobacco products. The possibility of opening themselves up to a Hong Kong-based arbitration claim must be on the minds of ASEAN officials.

These considerations, together with the overall tensions between ASEAN and China regarding the South China Sea territorial dispute, may delay Hong Kong’s accession to the ACFTA. Eventually these will issues will be resolved, but perhaps not by the ASEAN Summit in November.

Compliance with U.S. Burma Sanctions: On the Ground in Yangon and Naypyidaw

This year’s suspension/relaxation of Burma sanctions by the West is a prime example of the real impact of economic sanctions.  For example, although the United States suspended most sanctions on July 11 and is now allowing U.S. investment in Myanmar, the operating environment did not change overnight.   

Instead, investors are faced with a country in transition, as both Myanmar and the international community attempt to re-engage after years of economic isolation.  Compliance measures imposed by multinational companies will take months to revise, while enterprises in Myanmar attempt to learn international best practices.  Partial suspension means that investors must scrutinize possible dealings with companies and persons on the U.S. “Specially Designated Nationals”  (SDN) list, as well as the possibility that the U.S. and other Western countries could reimpose the sanctions in full.  Overhanging everything are both the 2015 Myanmar elections and very real possibility that President Thein Sein and opposition leader Aung San Suu Kyi will not be able to see through the entire transition to normalcy.

Myanmar’s transformation is underway

As a participant in the first official American trade delegation to Naypyidaw (others have been to Yangon) this month, I had first-hand experience with this country in transition.  For years I have had personal ties to the country, but until July 11 I could advise clients to consider business with Myanmar.  This article offers some personal observations on how to deal with the country and the Burma sanctions.

1. What’s in a Name? -- The government refers to the country as Myanmar.  In dealing with the government and other official entities in the country, it is best to call the country “Myanmar” and not “Burma”.

Ed at the Myanmar Ministry of Commerce

2. Financial Considerations --  pre-July 11, U.S. Burma sanctions forbade any financial transactions with Myanmar, and post-July 11, they still apply to SDNs.  Compliance measures imposed by banks, in particular the U.S.-based SWIFT system, mean that credit cards and ATM cards do not work in Myanmar. Even attempting to use such cards in Myanmar can result in their deactivation by the bank.  Until the banks modify their compliance measures, cash is king, and should be in crisp and clean US$ 100 notes without a “CB” in their serial number.

3. SDNs – For U.S.  companies at least, determining whether their potential business partner is on the SDN list or linked to an SDN is a crucial and daunting task.  The lack of information and the limited business support resources from the U.S. Embassy in Yangon mean that U.S. companies will need additional support from experienced hands in Myanmar to help in due diligence efforts.  The universe of such persons is quite limited, but growing.  More importantly, the U.S. government will eventually tailor the Myanmar designees on the SDN list over time, as a result of better understanding of the business situation and the amendment of U.S. legislation.  Until then, the issue of “dealing” with SDNs will remain the primary regulatory issue for U.S. companies.  The situations presented thusly can be prosaic (e.g., flying between Yangon and Naypyidaw involves flying on airlines owned by SDNs, so don’t do this) or unique (does appearing a photograph with an SDN constitute “dealing”?   Without a quid pro quo transaction, probably not). 

US Ambassador to Myanmar Derek Mitchell and Speaker of the Lower House of the Myanmar Parliament Thura U Shwe Mann

4. Legal System --  Myanmar’s legal system appears both familiar and foreign.  The legal system is based on the old British India colonial system of common law.   Laws and legal education are in English.  However, during the Ne Win era, the common law principles of stare decisis and hierarchy of courts were largely discarded.  The use of English as the language of law and legal education also serves to insulate lawyers from the rest of Myanmar society.  Hence like other developing countries, domestic litigation should be avoided and arbitration clauses are a necessity.  In any event, foreign investors should also wait for the passage of the much-discussed foreign investment law before investing in the country.

5. Trading – U.S. Burma sanctions never prevented the sale of goods to Myanmar, only that U.S. companies could not engage in financial transactions with the country (e.g., they couldn’t get paid).  As a result, U.S. companies sold to Myanmar through ASEAN-based trading companies.  The July 11 relaxation now allows U.S. companies to be paid directly.  However, the U.S. ban on imports from Myanmar remains in place through July 2013 at least, and perhaps until 2015 if renewed by Congress.

6. Civil Society – The July 11 relaxation mandates that U.S. companies investing in Myanmar must submit an annual corporate and social responsibility (CSR) report.  Unique to Myanmar, this requirement actually may serve to differentiate the U.S. “brand” in Myanmar and help U.S. companies deal with corruption and governance issues.  However, civil society in Myanmar is wildly diverse, with various ethnic and religious groups and a newly assertive media, complicating CSR efforts.

In sum, it is still early days for Myanmar’s transition, but the process appears to be lively and ongoing.  Many regulatory pitfalls involved in foreign investment remain, but with careful scrutiny and patience, Myanmar offers both economic potential and the opportunity to help its long-suffering people.

Happy 45th ASEAN Day!

Today is ASEAN Day, the 45^h anniversary of the founding of ASEAN on August 8, 1967 with the signing of the Bangkok Declaration by Indonesia, Malaysia, the Philippines, Singapore and Thailand.  These founding members were later joined by Brunei (1984), Vietnam (1995), Laos (1997), Myanmar (1997) and Cambodia (1999).

In celebration of ASEAN Day, today’s AEC Blog entry forgoes the usual commentary and instead provides the lyrics and tune of the ASEAN Anthem:

Raise our flag high, sky high 
Embrace the pride in our heart 
ASEAN we are bonded as one 
Look-in out to the world. 
For peace, our goal from the very start 
And prosperity to last. 
We dare to dream we care to share. 
Together for ASEAN 
we dare to dream, 
we care to share for it's the way of ASEAN.

Audio is available here.  Happy ASEAN Day!