Do FTAs Mean Free Trade Agreements or Fear and Trepidation in ASEAN (The Sequel)?

This week the Jakarta Post reported that after finally implementing the ASEAN-Australia-New Zealand (AANZFTA), Indonesian agricultural interests fear the worst from increased competition from Australia and New Zealand.  The Post quoted Indonesian Agriculture Minister Suswono as saying ““We’ll still protect our products so that they will remain competitive in the local market . . . . Our codex standards, halal labeling, and sanitary and phytosanitary standards [SPS] are still feasible as instruments for protection, especially for food items that will enter Indonesia.”

If this sounds familiar, it’s because it is. Two years ago I wrote in the late OpinionAsia website about the fear and trepidation among ASEAN industries facing the implementation of the ASEAN-China FTA (ACFTA), and it is reposted below. Substitute “China” with “Australia and New Zealand” and the analysis would be mostly applicable to Indonesia’s predicament as well.

The positive lesson of 2010 was that the ASEAN members largely avoided using trade remedies and other protection measures as a result of the ACFTA.  Indonesia proposed delays to the ACFTA, which were acknowledged and then rejected by China and the other ASEAN members. Proposals to impose blanket tariffs on Chinese goods also were non-starters.

Will these lessons be applied in the Indonesian agricultural sector? Hopefully, but agriculture is always sui generis. Although the AANZFTA contains provisions against using SPS and other measures as non-tariff barriers, Minister Suswono can point to the restrictive SPS measures imposed by Australia on citrus and tropical fruit as the inspiration for his comments. Plus, last year Indonesia faced a ban on cattle exports from Australia, which was later followed by an Indonesian ban on cattle imports from Australia.

SPS-based non-tariff measures may be the last refuge of protectionists, but they remain alive and well in today’s world. If Australia is indeed worried that Indonesia will implement such measures to protect its agricultural industry, then the first place it should start is at home, by reforming its own SPS measures.

Finally, the other ASEAN trading partner that should take note of this dispute is the EU. A few years ago, I worked on a feasibility study on the proposed ASEAN-EU FTA that indicated that EU processed agricultural exports would benefit tremendously from the FTA. This potential row shows that fear of increased competition from those exports will be a major issue as the EU negotiates its bilateral FTAs with the ASEAN countries.

Anyway, here is the original post on “Do FTAs Mean Free Trade Agreements or Fear and Trepidation in ASEAN”, posted on January 10, 2010:

The start of 2010 was celebrated by some, but many Association of Southeast Asian Nations (ASEAN) industrial interests viewed the new year with great apprehension. For them, January 1 marked the full implementation of the ASEAN Free Trade Area (AFTA) agreement and ASEAN China Free Trade Agreement (ACFTA). The resulting greater market access for goods traded within ASEAN and between ASEAN and China has generated an outcry throughout the regional grouping among those who fear increased competition. How ASEAN copes with this growing mini-crisis of confidence will affect both regional development within ASEAN and the evolution of ASEAN institutions.

Under AFTA and ACFTA, import duties on most goods have now been set to zero percent in the founding ASEAN members of Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand (similar reductions will take effect in 2015 for the other ASEAN members). The lists of items subject to trade liberalization, the revised rates and the implementation dates were agreed upon within ASEAN and between ASEAN and China years ago.

The industrial sectors in Indonesia and the Philippines, and to a lesser extent, Malaysia, vehemently object to greater market access and greater competition - not when the agreements were being negotiated but during the waning days of 2009. The Indonesian government reacted to industry pressure by proposing last week to renegotiate the ACFTA and may seek delays in implementing AFTA provisions. Other ASEAN members may be tempted to use this opportunity to follow suit.

That Indonesia and the Philippines, with active business lobbies and media, reacted so strongly was somewhat predictable. Nevertheless, that business interests in those countries and elsewhere in ASEAN waited until the last minute, months and years after the negotiation, ratification and implementation of the FTAs, reflects fundamental deficiencies within the region’s operating system. Clearly ASEAN governments and institutions such as the ASEAN Secretariat did not adequately prepare the business sector for trade liberalization. The corporate sector should have been more involved in the process from the earliest stages.

Not that the ASEAN business sector is without blame. Some companies in ASEAN benefited from protection at the national level through tariff and non-tariff barriers yet took no action when threatened with their impending phase-out. Despite having advance warning, both the private and public sectors in many ASEAN countries failed to prepare themselves for the impending trade liberalization.

This unease with the FTAs could even threaten ASEAN institutions. The ASEAN Economic Community, which the FTAs and other agreements on trade and investment underpin, is supposed to be the most developed of the three pillars of ASEAN – with the political-security and socio-cultural communities being the others. A breakdown over the FTAs would thus undermine the credibility of the ASEAN integration process.

Fortunately, the ASEAN Charter appears to be influencing the controversy in a positive manner. The ASEAN Charter provides the foundation for a rules-based operating system for the regional grouping. Thus, despite domestic calls for individual ASEAN members to abrogate their FTA commitments unilaterally, none have done so. Although Indonesia has called for a renegotiation of the ACFTA, it has respected the structures and practices of ASEAN by making its request through the ASEAN Economic Community Council, a new body established by the ASEAN Charter. Thus it will be up to ASEAN as whole to determine how to address Indonesia’s concerns, and how to deal with China should the grouping decide to act accordingly.

It must be remembered that the FTAs will benefit many ASEAN industries with increased market access in China, as well as in India, Australia, Korea and Japan - which have also signed FTAs with ASEAN. The FTAs also mean increased investment in ASEAN by these trading partners. The ASEAN Secretariat and national governments need to explain these benefits both to the business elite and to the masses.

The aforementioned FTAs provide ASEAN members with remedies to protect their industries from unfair and/or increased competition in the form of antidumping and safeguard laws. These laws take time to invoke and administer, but trade and investment policies based on the rule of law will benefit all sectors of ASEAN society in the long run.

The current acrimony over the FTAs represents a failure of government-business outreach that needs to be avoided in the future if ASEAN economic integration is to succeed. If ASEAN institutions and member states can also continue to adhere to the rules-based approach set forth by the ASEAN Charter, then indeed the ASEAN Economic Community will succeed as well.

How the AEC Supports Improved Singapore-Malaysia Relations

Last week the Malaysian and Singaporean prime ministers met in Putrajaya for an annual bilateral summit meeting.   Several economic initiatives were announced, including linking Singapore’s subway system to Johor, the sale of electricity by Malaysia to Singapore, alignment of radio frequency spectrum plans for digital broadcast and mobile broadband services, a proposed ferry service, a new work group on industrial cooperation, and cooperation in aviation and airport services between Senai International Airport in Johor and Changi in Singapore as well as education services.  These initiatives follow up on the Malaysia-Singapore deal last year resolving land and water issues.


All this represents a great improvement. Although Malaysia and Singapore have been close economically, domestic political conditions (particularly in Malaysia) made it difficult to resolve long-standing disputes.  Every so often a dispute would arise (the causeway bridge, sand for Singapore land reclamation, Pedra Branca, airspace for defense training, railway land, water, etc.) and sour relations between the neighbors. 


So what happened to change this?  To some extent, increased reliance on legal mechanisms and agreements to resolve disputes helped. The International Court of Justice resolved the Pedra Branca territorial dispute without acrimony, and the ASEAN regional agreements impose obligations and minimum standards on both Singapore and Malaysia.


The major impetus for better relations comes from domestic politics on both sides of the causeway. 


After the last Malaysian general election, the ruling Barisan National coalition is more dependent than ever on Johor for its parliamentary majority.  In addition, the major plausible threat to Prime Minister Najib Razak comes from Deputy Prime Minister Muhyiddin Yassin, whose political base is Johor.  These and other factors motivate the increased efforts to develop Johor state through the Iskandar Malaysia development project. 


The additional factors come from the Singapore side.  Its own general election last year highlighted social and economic pressures in the city-state.  Singapore strives to be an international center in finance and other services, attracting high net-worth global investors and talent like in London.  Unlike London, Singapore does not have a hinterland to provide a larger market or reduce land and wage costs.  As a result, many Singaporeans perceive increased losses of opportunity in employment and education, along with increased living costs.  Hence some portions of the Singapore electorate vented their frustrations by voting against the government.  Economic development and integration with Johor will thus provide Singapore with the hinterland it lost in 1965, and help Singapore alleviate these social and economic pressures.


This confluence of factors, from both Malaysia and Singapore, thus ensure that Iskandar, unlike previous projects in Johor, will be eventually successful.  The “pull” factors in Malaysia are matching up with “push” factors in Singapore.  What the ASEAN Economic Community does is provide the legal and economic framework for cross-causeway cooperation without bumping up against old strictures of sovereignty.  No doubt there will be bumps along the way, but the AEC will allow Malaysia and Singapore to cooperate on mutually acceptable terms.