Closer Ties, Larger Markets: Examining the ASEAN FTAs
Focus on the Australia and New Zealand Free Trade Agreement
By Joseph Purugganan
The Association of Southeast Asian Nations (ASEAN) has been making significant strides over the past few years towards its own vision of regional integration. The ASEAN Charter which is considered as the most important document after the 1967 Bangkok Declaration that gave birth to ASEAN was signed by all Member states in November 2007. After completing a process of national-level ratification, the charter is set to be formally adopted at the annual high level summit of leaders in Chiangmai, Thailand in December 2008. The Charter embodies the values and principles of ASEAN and defines the structures and mechanisms necessary to realize its vision of one regional community, build upon the three pillars of political and security cooperation, economic cooperation, and socio-cultural cooperation
On the economic front, community building the ASEAN way has gained momentum with the adoption of an ASEAN Economic Community (AEC) Blueprint in 2007, which defines the block’s strategies and plans for enhanced regional economic integration. The fact that the AEC blueprint came ahead of the two others-the political and security blueprint and the socio-cultural blueprint is an indication that economic integration has now become ASEAN’s top priority. This is a far cry from ASEAN’s early years when economic issues took a back seat to politico-security issues faced by the fledgling regional block.
In recent years, the center piece of ASEAN’s approach to economic integration has been its pursuit of free trade agreements (FTA). ASEAN is emerging as the hub for FTA activity in the region with agreements being negotiated and forged with its main dialogue partners.
ASEAN Trade Deals
ASEAN embarked on FTA negotiations with China in 2001 and signed a framework agreement on comprehensive economic cooperation in 2002. The implementation of the framework agreement was laid down in stages. An early harvest programme covering trade in goods came into force in July 2005. Negotiations on a dispute settlement mechanism were finalised in 2004 for implementation in 2005. Negotiations on trade in services were completed and an agreement signed in January 2007 while the China-ASEAN investment agreement is still under development.
ASEAN -Japan Comprehensive Economic Partnership Agreement (AJCEPA) was signed by ASEAN and Japan on April 14, 2008. The comprehensive agreement complements and expands the coverage of the bilateral economic partnership agreements (EPAs) that Japan has forged with five of the largest countries in ASEAN — Singapore (2002), Malaysia (2005), Philippines (2006), Thailand (2007) and Indonesia (2007).
The AJCEPA represents a mandate and a mechanism to push the agenda for further liberalization of goods and services as well as investments beyond the scope and quality of the bilateral EPAs. The agreement pushes for the establishment of a legal framework for such comprehensive economic partnership among the parties which would institutionalize trade and investment liberalization as guiding principle in the regional integration process.
AJCEPA will enter into force December 1, 2008, beginning with Japan and countries that have completed domestic ratification procedures by the end of October 2008.
The negotiations for an ASEAN-Korea free trade agreement were launched in early 2005. By December of that same year a Framework Agreement on Comprehensive Economic Cooperation was signed outlining the measures for comprehensive economic partnership which would include agreements on trade in goods, agreement on services, agreement on investments, and agreement on dispute settlements.
The Agreement on Trade in Goods was signed in August 2006 by nine out of the 10 ASEAN Member states (Thailand initially opted out of the agreement but became a party in August 2008). The agreement on trade n services was signed in November 2007.
The framework agreement on comprehensive economic cooperation was signed in October 2003 launching negotiations for an ASEAN-India Regional Trade and Investment Area (RTIA), which includes a Free Trade Area (FTA) in goods, services and investment, and cooperation
FTA negotiations in goods were concluded in August 2008 and the deal is scheduled to be signed in December on the occasion of the ASEAN Summit in Bangkok.
The agreement on goods is quite ambitious with all parties reducing or eliminating tariffs on more than 90% tariff lines corresponding to about 96% of total trade
The EU-ASEAN Free Trade Agreement is a comprehensive agreement between the European Union and the Association of Southeast Asian Nations (ASEAN) to liberalize trade in goods and services as well as investments.
The negotiations were launched in May 2007 in Brunei and both the EU and ASEAN expect to conclude negotiations in two to three years time. A unique aspect of these negotiations is the region to region approach to the negotiations. The joint committee formed to oversee the negotiations process has had four meetings focused on procedural concerns on how to implement the region-to-region approach.
In January 2008, the office of the Director General for Trade of the European Commission reported that the EU will continue the region-to-region approach while, at the same time, start to explore, on a bilateral level, the contents of the bilateral parts of our agreement and the level of ambition of the individual countries.
The United States unveiled its Enterprise for ASEAN initiative in 2002. EIA is considered as an intermediate step towards forging bilateral FTAs with ASEAN member countries patterned after the US-Singapore FTA. The EIA also sets as a pre-requisite the signing of Trade and Investment Framework Agreements or TIFAs between the US and the prospective ASEAN partner.
The United States concluded an FTA with Singapore in 2003 and is currently negotiating FTAs with Thailand and Malaysia. In addition, the United States recently concluded a TIFA with Cambodia and a bilateral market access agreement with Vietnam as part of its bid to join the World Trade Organization. The United States also has active trade and investment dialogues with Indonesia, Philippines and Brunei and is working with Laos to support its WTO accession.
In August 2006, U.S. Trade Representative Susan C. Schwab and ASEAN economic ministers endorsed an initial work program under the Trade and Investment Framework Agreement. The work program included three initial projects on Implementation of the ASEAN Single Window for customs clearance; Assistance on harmonization of ASEAN pharmaceutical policies and standards; and Development of a U.S.-ASEAN framework on sanitary and phyto-sanitary procedures to facilitate trade in agricultural goods.
Scramble for preferences
The FTA frenzy is by no means confined to the Southeast Asian region. According to the World Trade Organization (WTO), as of July 2007 there have been around 380- 400 regional trade agreements or RTAs that have been notified to the GATT/WTO across the globe. Around 90% of these RTAs are free trade agreements (FTAs) and partial scope agreements while customs unions account for less than 10%.
The surge of bilateral trade deals is often attributed to the collapse of the multilateral negotiations in the WTO. It is interesting to note however, the marked increase in RTAs in the years following the establishment of the WTO in 1994, suggesting that countries pursue these RTAs alongside the multilateral trade negotiations in the WTO.
Rich countries like the United States and the European Union in fact adopt a dual strategy of pursuing bilateral negotiations alongside the multilateral talks in the WTO. The United States has its Enterprise for ASEAN Initiative (EAI), which envisions a network of bilateral FTAs between the US and ASEAN. The EU on the other hand launched its new generation FTAs and economic partnership agreements across Latin America, Africa and the Caribbean and its new partnerships for the 21st Century in Asia which includes FTA negotiations with Korea, India and ASEAN. Former Director General for trade of the European Commission perhaps best described this dual strategy by saying that for the EU “Doha first (referring to the Doha Round negotiations in the WTO) has never meant Doha alone”.
WTO Rules on RTAs
Bilateral or regional FTAs are by nature preferential and discriminatory agreements. When countries enter into such agreements they afford more favorable trading conditions to parties to the agreement. They in effect go against the principle of non-discrimination or most favored nation (MFN) treatment , a cornerstone of the multilateral trading system. WTO Members are however permitted to enter into such arrangements under specific conditions which are spelled out in three sets of rules :
Paragraphs 4 to 10 of Article XXIV of GATT (as clarified in the Understanding on the Interpretation of Article XXIV of the GATT 1994) provide for the formation and operation of customs unions and free-trade areas covering trade in goods. More specifically Article XXIV of GATT states that the purpose of a custom union or an FTA should be to facilitate trade and not to raise barriers to trade.
Furthermore, with respect to FTAs, it specifically prescribes that duties and other regulations of commerce shall not be higher or more restrictive than duties or regulations that already exist before the FTA. It is the understanding as well of the Members that FTAs should cover “substantially all trade” and that the “reasonable length of time” to establish free trade areas should not exceed 10 years.
the so-called Enabling Clause (i.e., the 1979 Decision on Differential and More Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries) refers to preferential trade arrangements in trade in goods between developing country Members; and
Article V of the General Agreement on Trade in Services (GATS ) governs the conclusion of RTAs in the area of trade in services, for both developed and developing countries. Article V which outlines the area of economic integration, sets two pre-conditions for bilateral agreements on trade in services.
The first pre-condition is that the agreements should have substantial sectoral coverage in terms of number of sectors, volume of trade affected and modes of supply. In order to meet this condition, agreements should not provide for the a priori exclusion of any mode of supply.
In terms of sectoral coverage, the GATS already mandates in principle a comprehensive agreement that covers all service sectors, with only two exceptions— services supplied in the exercise of governmental authority. These are services that are supplied neither on a commercial basis nor in competition with other suppliers; and the second exception deal with measures affecting air traffic rights and services directly related to the exercise of such rights.
The second condition is that the agreements should provide for the absence or elimination of substantially all discrimination between or among the parties, in the sectors covered through either the elimination of existing discriminatory measures, and/or prohibition of new or more discriminatory measures.
With these prescriptions, the WTO has in effect set the parameters not just for the substantive elements of bilateral and regional trade agreements by broadly defining their nature and coverage but has also the pace of these negotiations with its prescription that FTAs be established within a maximum period of ten years. In short, for FTAs to comply with WTO rules, they should by ambitious, comprehensive in scope and fast paced agreements.
While ASEAN does not have a common trade policy and in fact its members have oftentimes taken on contrary positions in the WTO negotiations, there seems to be general consensus among ASEAN Member states to pursuit FTAs that generally aim to accomplish three things.
First, these agreements aim for the highest possible degree of trade liberalization not just in goods but including far-reaching liberalisation of services and investment. In accordance with WTO rules, liberalization should be applied to substantially all goods and have substantial sectoral coverage in services. Liberalization in goods entails the reduction and elimination of tariffs and non-tariff barriers (NTBs) while services liberalization entails easing restrictions on entry and operations of foreign-service providers.
Elimination of trade restrictions under these bilateral and regional FTAs are characterized as both progressive- meaning the commitment is not just a one-time reduction of tariffs but a gradual elimination of rates such that they are reduced to zero at the end of the implementation period; and reciprocal- meaning both the developed and developing country or countries entering the agreement are obliged to reduce and eliminate tariffs and NTBs with very minimal flexibilities in terms of coverage and longer implementation periods for developing countries.
The goal of investment liberalization on the other hand is to lessen or eliminate restrictions and rationalize regulations on investments as well as institutionalize investment protection measures. An OECD report concludes that the investment chapters in regional trade agreements, which are essentially derived from bilateral investment treaties, typically provide broad investment coverage, strong protection and non-discrimination commitments and recourse to investor-state international arbitration.
ASEAN FTAs can be classified as GATS-inspired FTAs since they deal with issue of investments through a separate investment chapter as well as under trade in services provision of the agreement particularly under Mode 3 which deals with issue of commercial presence.
These agreements also aim to facilitate trade through the harmonization of rules and standards. FTAs cover a whole range of standards from sanitary and phyto-sanitary requirements and other technical barriers to trade (TBT) to mutual recognition arrangements (MRAs) that deal with regulations that help ensure that goods sold conform to particular health and safety standards . MRAs also cover regulations, certifications and licenses that govern the practice of a particular profession like those that cover healthcare professionals, architects, and lawyers for example.
There are concerns among developing countries however over the objective of harmonizing standards. First of all because compliance to global standards can be a costly exercise requiring both financial and technical support. For the Philippines, developing exporters’ capability to conform to SPS and NTBs would requires improving production conditions, developing laboratory as well as inspection facilities and services and the creation of institutional mechanisms to support exporters.
Another concern of developing countries with regard to standards is that it is often used by developed countries, where these high standards are already in place, as a means to block the entry of exports from developing countries.
In the proposed EU-ASEAN FTA for example, the EU identified the fisheries sector particularly, the tuna sector as sensitive given the strong socio-economic impact that full and immediate liberalisation of tariffs would have on the sector. So while the agreement covers liberalization of this sector, which incidentally is one of the sectors where developing countries like the Philippines seem to enjoy comparative advantage over, the EU has given “emphasis on the importance of compliance with hygiene and health rules in the fishing industry as a means of achieving improved and increased development of the industry in these countries, as well as fair competition with the EU fishing industry” In other words, the compliance to standards is also used to guarantee and protect the competitiveness of developed country exports.
Rules of Origin
Perhaps one of the most important trade rules that FTAs aim to harmonize are those that deal with so called “Rules of Origin” (ROO), which sets the criteria for defining where a particular product was made. This is important because as countries scramble for trade deals with other countries and regions they create a web of trade preferences. ROO becomes critical in defining which goods originate from a country or region and therefore eligible to receive the preferential tariff rates under the agreement. It likewise sets the criteria for eligibility of goods that are not-wholly obtained or produced in the originating country.
In the Rules of Origin under AFTA-CEPT for example, a good which is not wholly obtained or produced is deemed to be originating from a country where working or processing of the good has taken place if at least 40 percent of its content (hereinafter referred to as “ASEAN Value Content” or the “Regional Value Content (RVC)”) originates from that Member State or it has undergone a change in tariff classification at four-digit level (change in tariff heading) of the Harmonised System. Costs associated with materials, labor and overhead are all factored in the formula for computing the RVC.
Another common feature of these ASEAN deals is that they all include a chapter on cooperation which outlines the priority areas of cooperation between parties in support of development goals and the promotion of peoples’ well-being.
In recent years, there has been increased emphasis on trade-related development assistance. The WTO launched in December 2005 its Aid for Trade (AoT) initiative which mandates an increase in trade-related development assistance going to poor countries. The logic of AoT is that development aid should help build the supply side capacity and the trade related infrastructure in developing countries to allow them to maximize the benefits arising from the opening of international trade. AoT is directed towards addressing internal barriers to trade which come in the form of lack of knowledge, excessive red tape, inadequate financing and poor infrastructure.
The chapter on cooperation in these trade agreements therefore effectively subsumes the much broader issue of development assistance under the confines of trade and investment.
In the comprehensive agreement with Japan for example, the chapter on cooperation zeroes in on economic cooperation areas between Japan and ASEAN. AJCEPA defines as priority the fields of energy, environment, tourism, information and communication technologies, agriculture and fisheries, intellectual property rights, trade related procedures, and competition policy.
Ambition and Secrecy
ASEAN has by and large pushed for what can generally be described as WTO-plus agreements. These deals contain chapters on the so-called Singapore issues of investment, competition policy, trade facilitation and government procurement that were already rejected by developing countries in the WTO negotiations.
Aside from subscribing to an ambitious liberalization agenda, another common feature of these FTAs is that they were/are being negotiated in almost total secrecy. Copies of the official negotiating texts are inaccessible to the public and very minimal spaces for public consultations regarding these negotiations are opened up in the process. Often but not always, copies of the final agreement are made public only after the negotiations have been concluded. In the case of the ASEAN-Australia and New Zealand FTA (AANZFTA) for example, the final texts of the agreement remains inaccessible to the public even after the deal has already been sealed.
Market Enlargement: The ASEAN-Australia and New Zealand FTA
In August 2008, the Association of Southeast Asian Nations (ASEAN), Australia and New Zealand (Closer Economic Relations or CER) completed negotiations for the ASEAN-Australia and New Zealand Free Trade Agreement (AANZFTA). The comprehensive agreement was considered by leaders of both ASEAN and CER as an important milestone in their long-standing comprehensive partnership and which would pave the way to enhancing the region’s economic integration and acting as an impetus to deepen and broaden the trade and investment among the twelve participating countries.
Overview of Trade and Investment Relations
Australia was ASEAN’s very first dialogue partner with economic relations dating back to 1974. From a relationship confined to technical assistance on regional projects focused mainly on food, it evolved into much broader economic cooperation spurred by the rapid expansion and growth in the ASEAN region.
Trade in Goods
In 1976 a Memorandum of Understanding on ASEAN-Australia Trade Cooperation was signed paving the way for the expansion of trade relationship between ASEAN and Australia. ASEAN exports to Australia have been growing steadily over the years. From 1997-2003, the value of exports to Australia nearly doubled from US$6.4 billion in 1997 to around US$11.6 billion in 2003. Today the value of total trade between ASEAN and Australia is estimated to be worth around US$31.2 billion with ASEAN enjoying a trade surplus of around US$8 billion.
Australia now ranks as the sixth largest trading partner of ASEAN with exports to Australia now at 4.6 percent of total ASEAN exports. Australia is likewise the 6th principal import source of ASEAN with a share of 2.9 percent of total imports.
In 2007, Australia’s exports to ASEAN rose 1.0 per cent to US$16.6 billion and imports increased 6.6 per cent to US$30.0 billion. Australia’s top merchandise exports to ASEAN in 2007 were crude petroleum (US$1.9 billion), aluminum (US$1.1 billion), gold (US$924 million), copper (US$858 million) and milk and cream (US$ 455 million).
Australia’s major merchandise imports from ASEAN in 2007 on the other hand were crude petroleum (up 1.0 per cent to US$6.4 billion), refined petroleum (up 0.2 per cent to US$3.9 billion), gold (down 15.9 per cent to $1.3 billion), goods vehicles (up 38.89 per cent to $1.3 billion), and computers (down 2.9 per cent to $1.0 billion).
The fastest growing export sectors for Australia are agriculture which rose by 20.2%, minerals and fuels increased 12.0%, and manufactures rose 6.4%, while other goods decreased 4.5%.
Trade in Services
Australian exports of services rose 13.7 per cent to US$4.62 billion with increases in transportation services (up 8.5 per cent), Travel services (up 14.3 per cent), and other services (up 17.7 per cent).
A large portion of services exports has been education-related travel. Of the top ten countries sourcing education services from Australia, five were ASEAN members. They included Malaysia (4th largest), Thailand (6th), Indonesia (7th), Vietnam (9th) and Singapore (10th), which together received $2.2 billion or 17.6 per cent of Australia’s total education-related travel exports to the world.
There was an increase as well in services imports from ASEAN which grew by 11.8 per cent to US$5.6 billion with increases in Transportation services (up 7.4 per cent), Travel services (up 19.9 per cent to US$1.98 billion) and other services (up 11.9 per cent to US$440 million)
Investment relations between ASEAN and Australia have not been as strong as the trade relations between the two partners. Australia’s total foreign direct investment (FDI) in ASEAN in 2006 amounted to US$399 million accounting for less than one percent (0.8%) of total FDI inflows to ASEAN. Only two countries have significant FDI stocks in Australia- Malaysia with stocks of around US$2.6 billion and Singapore with US%3.3 billion worth of FDI.
New Zealand became a dialogue partner of ASEAN in 1975. While trade relations have been generally stable with New Zealand’s exports growing marginally over the last five years, the value of ASEAN trade with New Zealand remains low at around US$4 billion or a share of just a third of a percent of total trade. ASEAN enjoys a US$1.2 billion trade surplus with New Zealand with ASEAN exports valued at US$2.6 billion exceeding imports from New Zealand amounting to US$1.4 billion.
Trade in Goods
New Zealand’s top exports to ASEAN in 2008 include milk powder valued at US$880 million (33 %); Petroleum oils at US$327 million (12 %); malt extract at US$123 million ( 4.8%); butter at US$120 million (4.7 %); buttermilk US$76.4 million (3.0%); and frozen beef valued at US$72.6 (2.8%).
Imports from ASEAN in 2008 on the other hand included non-crude petroleum oil at US$770 million (20%); crude petroleum oils at US$715 million (19.7); light vessels at US $183 million (4.7 %); moving, grading and leveling machinery at US$174 million (4.5 %); trucks and vans at US$161.7 million (4.1 %) and oil cake at US$121.55 million (3.1 %). The only agricultural commodity in the top 20 of New Zealand imports from ASEAN is banana valued at US$25.3 million (0.6 %)
Trade in Services
New Zealand’s services exports are in the fields of, travel, transportation, business services, and other professional services including legal, accounting, management consulting, and public relations services. Global services exports amount to US$6.9 billion slightly higher than services imports which amounted to US$ 6.71 billion in 2008.
New Zealand investments in ASEAN amount to around NZ 368 million. ASEAN foreign direct investments in New Zealand on the other hand amount to NZ 438 million mainly coming from Singapore (87%).
The Path to AANZFTA
The path to closer economic cooperation through the expansion of free trade area between ASEAN and Australia and New Zealand can be traced back to 1997 when the Centre for International Economics (CIE), a private Australian think-thank released a study on the economic benefits of an ASEAN Free Trade Area (AFTA)- Closer Economic Cooperation (CER) FTA. The study which focused mainly on trade in goods found that benefits would relatively be small from a (limited) free trade area which only covers merchandize goods.
By 1999 Ministers of both ASEAN and CER members agreed to explore the possibility of establishing a regional trade agreement that would further integrate trade and investment between the two regions. By the following year, the task force created to pursue the proposal recommended that the FTA be comprehensive in scope and cover trade in all goods and services and investments, including technical barriers to trade and mutual recognition arrangements.
The task force further recommended that the original CIE study of 1997 be expanded to measure benefits not just from liberalization of trade in goods but liberalization of trade in services and endogenous productivity gains associated with trade liberalization.
In September 2002, ASEAN Ministers issued a declaration on the AFTA-CER Closer Economic Partnership (CEP). The declaration outlined six broad goals of the partnership.
a. Deepen and broaden cooperation in all economic fields;
b. Promote greater trade and investment flows regionally and globally;
c. Contribute to trade and investment facilitation through minimizing impediments, reducing costs, and related capacity building;
d. Improve business competitiveness;
e. Narrow the developmental gap and deliver tangible benefits to all participating countries, especially for the newer ASEAN Member Countries; and
f. Promote transparency of regulations and cooperation among relevant authorities.
The leaders also outlined four fields of cooperation in trade and investment facilitation; capacity building; trade and investment promotion; new economy issues; and other areas of cooperation based on a periodic review of priorities.
Formal negotiations were launched in October 2004 in Vientiane, Laos and after fifteen rounds of negotiations the agreement was substantially concluded in August 2008 at the ASEAN-CER Ministerial Meeting in Singapore.
The AANZFTA is a unique agreement that effectively expands two pre-existing regional free trade areas- the ASEAN Free Trade Area and the Closer Economic Relations (CER) between Australia and New Zealand.
Principles of the Agreement
The ASEAN-CER FTA High-Level Task Force defined a set of principles that would govern the ASEAN-Australia and New Zealand Free Trade Agreement.
(a) The AFTA-CER FTA would represent a separate arrangement which would be comprehensive, covering all goods, services, and investments, and would lead to the elimination of all forms of tariff and non-tariff barriers to trade in goods and services. AFTA and CER would maintain their respective identities.
(b) The AFTA-CER FTA should be mutually beneficial to each group and to all member countries of the respective groups;
(c) The pace of liberalization within the AFTA-CER FTA should proceed faster than that agreed within APEC, i.e. 2010 for developed economies and 2020 for developing economies;
(d) Subject to new arrangements that may be achieved within AFTA, the AFTA-CER FTA would not normally go beyond the pace of liberalization which AFTA has already agreed for ASEAN members, i.e. elimination of tariffs for manufactured goods by 2010 for ASEAN-6 and 2015 for the four newer members, with some flexibility. CER would progressively reduce tariffs for ASEAN from the conclusion of negotiations, reaching free trade by 2005;
(e) The AFTA-CER FTA would be open to inclusion of new issues not currently covered by the AFTA or CER Agreements. In these cases, members of either group could decide to exclude themselves temporarily from the agreement;
(f) The AFTA-CER FTA would comprise both developed and developing countries with different needs and levels of development. Hence, the structural adjustment and flexibility needed should also be recognized. The proposed FTA should provide development assistance in the form of capacity-building measures and technical assistance and the adoption of a longer time-frame for the newer members of ASEAN;
(g) The AFTA-CER FTA would be open to accession by any other country or regional grouping that shares the common principles and underlying objectives of the FTA;
Proposed Modalities and Commitments
The objectives of the AFTA-CER FTA are to enlarge the market for the improvement of the efficiency and competitiveness of firms and industries for the economic well being of the peoples of the two regions, to liberalize and facilitate trade in goods and services, to establish a framework conducive for investment, and to establish simple and transparent rules.
The scope of the agreement would be comprehensive to include cover trade in all goods, services (covering all modes of supply), investments, technical barriers to trade and mutual recognition arrangements (MRAs) as well as other areas like electronic commerce not covered in AFTA and CER which could possibly be included in the AANZFTA..
Australia and New Zealand commit to 100 % tariff elimination by 2020 while ASEAN has committed to eliminate tariffs on 96 % of tariff lines under the normal track (90 % elimination by 2013) and the sensitive track one (6 % elimination by 2018/2020). 4 % of tariff lines are eligible to be included in the sensitive track 2 which would be subject to further bilateral negotiations inclusive of 1 % tariff lines for standstill or exclusion.
Rules of origin
The Angkor report mandated the adoption of the much lower ROO threshold for ASEAN of 40% regional value content for goods not wholly obtained and produced in the country.
The Angkor report mandates the adoption of the negative list approach in services. This approach which was adopted as well in the Singapore-Australia FTA, is considered as a more ambitious approach to liberalization of the services sector. The primary assumption in the negative list approach is that unless sectors are included in the list, these sectors would be subjected to liberalization measures. The positive list approach on the other hand, which was the approach adopted in the Thai-Australia FTA and which has been favored by developing countries affords more flexibilities to limit national treatment and market access commitments only to those sectors they feel ready to make commitments in.
The report also mandates that the liberalization in the services sector under the agreement be APEC-plus such that the deadlines for services trade liberalization are set earlier than those agreed upon under APEC.
The Bureau of International Trade Relations (BITR) of the Philippines reported in May 2008 the downgrading of commitments in the services sector and the demand for the inclusion of movement of natural persons (MNP) provisions in the agreement. Another report identifies commitments in professional services like engineering and accounting, education, and construction for large-scale mining development projects covered by Financial and Technical Assistance Agreements (FTAA)
The Angkor report mandates the inclusion of a framework of investment principles and rules which would increase and secure capital flows within the region. The report likewise prescribes an investment Chapter that includes manufacturing, agriculture, mining, fisheries forestry and services incidental to these sectors, and the liberalization of capital flows that is consistent with the Framework Agreement of the ASEAN Investment Area (AIA).
Gains and Pains
There are political and economic motivations for pursuing the FTA. On the political side, the FTA is perceived as strengthening the bargaining position of both ASEAN and CER regions to negotiate more regional and multilateral deals. Externally, the FTA is seen as “signaling device” to generate more trade and investments by enhancing the regions’ standing and credibility as a stable trading partner and host to foreign investments. Internally, the regional FTA also serves as a “commitment device” that paves the way for bolder reforms and internal restructuring of their economies. In the case of ASEAN, AFTA seems to be valued more as a platform to get more deals from outside the region than a genuine desire to develop its own internal market.
On the economic side, the gains include the enlargement of the regional market to a combined total GNP of around US$ 1 trillion bringing in an additional US$48 billion GDP to the region by 2020 , trade creation effects which translates to welfare gains to consumers as a result of access to cheaper imported products, increased efficiency and enhanced competitiveness, industry relocation and increased FDI among others. Increased investment of Australian firms in ASEAN is being touted as a significant gain for the region.
On the negative side, a number of attendant economic costs associated with the FTA were identified in the Angkor agenda. These negative effects include trade diversion -tariff preferences in an FTA diverts trade from more efficient non-members to less efficient members of the agreement, decline in tariff revenue, which in some estimates may reach as high as 41% under an ambitious tariff reduction scenario, and adjustment costs including job losses and displacement of workers.
Special Concern: Mining
Mining is one sector where there is perceived to be, what the Australian Chamber of Commerce and Industry describes as, strong economic and trade ‘complementarity’ between the two regions. On the one hand, Australia—a dominant global player in terms of both minerals trade and investments — is eyeing the expansion of markets for minerals trade particularly in aluminium, gold and copper and pushing for the easing of restrictions on mining-related services and investments. The ASEAN region on the other hand, is seen as a region well endowed with mineral resources but with an underperforming minerals sector reflecting a diverse set of regulatory and institutional constraints.
The AANZFTA represents a key instrument therefore in pushing for liberalization of trade and investments in mining across the two regions in the context of the growing global demand for mineral based commodities.
Trade in minerals and mineral-based commodities, is already quite liberal with Most Favored-Nation (MFN) tariff rates for these products falling between 0-5 percent. Efforts therefore in ASEAN to develop the mining sector have been geared more towards reforming the regulatory environment and enhancing the attractiveness of investment in the minerals sector. Because domestic investments in the mineral sector are often quite limited and constrained, the push is really for infusion of more foreign investments in order to support and sustain long-term, capital intensive mining projects.
A business advisory on trends and opportunities in the mining sector in the Philippines issued by the Australian Government cited the recent legal developments upholding the legitimacy of the Philippine Mining Act and allowing 100-percent foreign participation in mining activities as a positive step towards bringing back investor confidence in the Philippine mining industry.
The Australian Government’s country report on the Philippines for November 2008 further states that “projected investments for mining projects over the next few years total several billion US dollars. There are already around a dozen Australian companies with interests in the mining sector, mostly at the exploration and development stage, making Australia one of the major foreign investors in the Philippines’ mining sector. As well as direct mining investment, there are also export opportunities for Australian mining service providers.
The easing of investment restrictions under the FTA would further facilitate the entry of more foreign direct investments in the mining sector in the Philippines and the rest of ASEAN.
The conclusion of the AANZFTA negotiations in August this year and its eventual coming to force in 2009 would have far-reaching implications on both the Philippine economy and that of ASEAN. AANZFTA adds to the increasingly complex web of trade and investment deals in the region. Civil society organizations and social movements have raised serious concerns against these ASEAN FTAs.
The ambitious agenda to further liberalize trade in goods and services would have profound negative consequences on jobs and livelihoods. While proponents of these deals dismiss job losses and worker displacements as mere temporary adjustment costs that would be offset by the positive trade creation effects of such agreements, any negative effect on employment particularly at a time of serious global economic crisis would have dire consequences on development.
UNCTAD reported that under an ambitious tariff reduction scenario, job losses In South East Asia are projected for non-ferrous metals (6.4%), other manufacturing (2.3%), motor vehicles (6.6%) and electronics (1.7%). In the Philippines, job losses could be expected in the motor vehicles sector, which employs around 39,000 workers, the apparel sector with an even bigger workforce of 370,000, the leather and footwear sector with 69,000 workers, furniture sector with 143,000 workers and plastic products which provides jobs to 54,000 workers.
Corporate Control over Resources
Another issue levied against these FTAs, is that they advance the interests of corporations over the development interests of countries or regions and its peoples. Corporate control particularly of public goods and resources is a particularly critical issue. With the goal of enhancing foreign investments, we would expect governments to be more aggressive and adamant in pushing for policies that would ease restrictions on investments, increase incentives and provide more protection for foreign corporations.
The weakening of domestic investment regulations, including the removal of restrictions that are enshrined in national laws and constitutions, in favor of corporate interests is a particularly serious issue in an environmentally and socially critical sector like mining where the livelihoods, rights, security and well-being of entire communities are at stake and have for decades been seriously contested.
Erosion of Policy Rights
FTAs also have the effect of eroding policy space or the ability of governments to use tariff and other trade-related policies to advance its own development objectives. Under ‘free trade’ regimes, governments lock-in their tariff and trade policies by way of their commitments and obligations under the agreements. The direction of trade policy is often just one way, moving towards the eventual elimination of tariffs and other trade barriers with very limited space and flexibilities for countries to calibrate these policies in line with their own development objectives or to safeguard domestic economies against import surges.
Exacerbating regional asymmetries
The Southeast Asian region has been characterized as a growth area for trade and investments. The countries within the region have a combined Gross Domestic Product of US$ 700 B. The region has registered an average growth rate of 6.4 percent in 2007. ASEAN continued to sustain positive trend for its trade performance with the value of total trade now exceeding US$1.4 trillion. ASEAN FDI flows amount to around US$50 billion.
This impressive economic performance however mask the reality that “Southeast Asia is an economically diverse region, with countries having variable levels of development and capacities to respond to globalization and change, and to the needs of its citizens”
ASEAN is a region of poverty and inequality where on average 30 percent of people live below national poverty threshold levels and where the richest 20 % of the population corner close to 50% while the poorest 20% get less than 10% of national income.
On a regional level, this income inequality is apparent in per capita GDP figures. Singapore is the richest among the ten nation Members of ASEAN with a per capita GDP US$35,000, followed closely by Brunei with US$31,000. A far third would be Malaysia with per capita GDP of US$6,880. On the tail-end is Myanmar/Burma whose per capita GDP is a dismal US$215 or less than 1 % (0.6) of Singapore’s.
There is also a clear imbalance among countries in terms of the share of benefits from this impressive economic growth in the region. Singapore gets a lion-share of both merchandize exports as well as FDI in the region.
While the ASEAN FTAs recognize these asymmetries and hopes to address these by way of differentiated obligations for the least developed countries in the region, these deals nevertheless push for an ambitious trade and investment agenda that could very well exacerbate poverty and inequality among and within countries in the region. ASEAN’s obsession for closer economic relations through these comprehensive and ambitious trade and investment deals may in fact lead to exactly the opposite- a region further divided along economic, political, and social lines.