Trade & Investments

To date, ASEAN members have largely completed the reduction of tariffs agreed to under the ASEAN Trade in Goods Agreement, however many members still have significant reservations to their commitments under the ASEAN Comprehensive Investment Agreement. Despite these setbacks, there is clear evidence of significant gains for member countries from the progress that has been made, as ASEAN becomes ever more central to “Factory Asia” supply chains.

ASEAN Trade in Goods Agreement17

ATIGA is the backbone of ASEAN’s trade commitments, containing agreements on tariff liberalization, rules of origin, nomenclature harmonization, administrative procedures and some non-tariff barriers.

ATIGA’s tariff liberalization clauses have no effect on its members’ external tariff schedules and apply only to trade with other ASEAN members. Under ATIGA members are required to reduce import duties to a Common Effective Preferential Tariff of 0-5%. Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand have done so for over 99% of their tariff lines. As of the end of 2014 Cambodia, Vietnam, Myanmar and Laos, who were originally granted a transition period ending 2015, were also approaching an average of 99% tariff elimination.

Under AFTA members are permitted to maintain duties on products classified under a Sensitive List, a Highly Sensitive List and a General Exception List.

Items listed as General Exceptions are those deemed worthy of protection for reasons of national security, public morals, human, animal or plant life and health or cultural preservation. There is no obligation to ever change domestic policies regarding these goods.

The Highly Sensitive classification is, practically speaking, used primarily for major agricultural products such as rice, and in the case of some members for goods deemed morally questionable, such as alcohol. Highly Sensitive goods have tended to see some tariff reductions under AFTA but rates as high as 35% remain after the 2015 deadline.

Goods listed as Sensitive are almost entirely agricultural goods, and the expectation is that applied tariffs would reach 0-5% by the end of 2015.

These lists contributed to significantly more variation in members’ tariff schedules than the collective averages imply, as well as room for the differences to remain after 2015. Singapore, for example, removed all tariffs on ASEAN imports immediately after the accord was signed, whereas Cambodia placed nearly all agricultural products and a large range of industrial manufactures on its list of Temporary Exclusions, allowing it to maintain non-zero rates on a significant portion of its tariff lines past 2015.

Similarly, several states are maintaining rates of 35% on rice and several varieties of seeds indefinitely, in part because tax revenues from trade constitute a significant portion of the less developed members’ government incomes. Nevertheless, average tariff rates are moving ever closer to zero, a substantial improvement over most members’ external tariff rates which can average as high as 12%. The Asian Development bank estimates that 70% of intra-ASEAN trade flows are now tariff free, and that less than 5% of goods are subject to tariffs of more than 10%.

A complete list of the members’ tariff schedules, including their external rates, internal rates when the agreement was reached, and commitments for rates as of the end of 2015 may be found here.18

To qualify for the intra-ASEAN rates, 40% of the goods’ F.O.B value must have been added in an ASEAN economy. Rules of Origin are notoriously difficult to effectively design in such a way that the private sector retains freedom of movement without governments being suspicious that partners are using the agreement to re-export goods they have imported from elsewhere. CEPT rules of origin are still being revised and non-trivial confusion has emerged as member states have interpreted the requirements of the Rules of Origin paperwork, “Form D”19, differently. A significant initiative ASEAN has undertaken to avoid such confusion is a system of self-certification that enables exporters to calculate and declare the value of their goods themselves, based on standardized documentation, once they have been approved by their national governments as a certified exporter.

With so much progress having been made on tariff reduction, the Coordinating Council of ATIGA is increasingly focused on what are referred to as non-tariff barriers to trade (NTBs). NTBs include policies such as quotas, anti-dumping regulation and sanctions. A database maintained by the ASEAN Secretariat on all of the non-tariff measures used by member states can be found here.20 Currently textiles, automotive, and electronics are being prioritized as pilot industries in which NTBs may be identified and removal plans formulated.

One common criticism of ATIGA is that it lacks an effective dispute settlement mechanism as neither the Coordinating Council nor the Secretariat has legal authority to resolve trade disputes. ASEAN’s formal dispute settlement mechanism is the ASEAN Protocol on Enhanced Dispute Settlement Mechanism.21 The mechanism allows member states to seek mediation, but if such efforts are not satisfactory the ultimate recourse is to request the Senior Economic Officials Meeting to form an independent arbitration panel. The Senior Economic Officials Meeting requires full consensus among member states to make a decision, and is thus a crucial chokepoint in the process as the opposing parties of the dispute are unlikely to make full consensus possible. Disputes that cannot be solved bilaterally are thus generally taken to the World Trade Organization for settlement.

Trade Facilitation Measures

The ASEAN Agreement on Customs22 has harmonized and modernised members’ customs techniques and procedures. It covers Customs Tariff Classification, Valuation, Origin Determination of Goods, E-Customs, Customs Clearance, Customs Transit’s Private Sector Engagement, Authorized Economic Operators, Knowledge Based Service, Enforcement and Mutual Assistance, Post Clearance Audit and HR/Admin Development.

The ASEAN Single Window is an initiative to design a single portal through which traders may submit the entire set of regulatory documents associated with cross-border operations.23 The Window sorts the submissions to send the relevant parts to the appropriate agencies and collects the responses, returning them to the trader in a single bundle. Single Window systems lower administrative costs and time delays associated with customs procedures considerably. Members are at different stages of implementation of the Single Window programme, which at this stage processes a few key documents but does not fully remove the necessity of dealing with multiple public entities when crossing intra-ASEAN borders. The progress made on Single Window implementation will be one of the major aspects of evaluating AEC progress at the end of 2015.

Finally, AEC has a broad programme for harmonizing standards and technical regulations across a range of industries.

Information on standards and technical regulations already harmonized or currently under review may be found here24 and a list of concrete measures thus far adopted through the ASEAN Customs Agreement may be found here.25

ASEAN Framework Agreement in Services26

The ASEAN Secretariat reports services as constituting 40-60% of its members’ GDPs. However traditional trade agreements are of minimal benefit to services firms, who are often prevented from trading by domestic regulations such as licensing laws, foreign worker permits and investment ceilings, rather than explicit trade policy. Under AFAS, ASEAN members have agreed to eight packages of commitments regarding the harmonization and deregulation of professional services, construction, logistics, education, environmental services, healthcare, maritime transport, telecommunications and tourism. Like ATIGA, these measures apply only to other ASEAN members.

Initially these agreements were simply a reiteration of commitments already made by the member states under the World Trade Organisation’s General Agreement on Trade in Services. More recent packages have formalised agreements to remove all restrictions on consumption of services by foreigners and, more significantly, to allow foreign investors to hold majority equity positions.

As with the Highly Sensitive List in ATIGA, members are allowed to reserve instances in which they will only provide Most Favoured Nation (MFN) treatment on any of the commitments they make under AFAS. This means they merely agree to treat other ASEAN nations no less favourably than they treat any external partner. Through MFN reservations most members avoid practically implementing many of the measures, particularly those relating to foreign investment ceilings, due in part to powerful services lobbies in many of the nations.

AFAS has also made progress on the mutual recognition of qualifications and licences issued to service providers by their own governments. This is extremely important to facilitate trade in services, especially for SMEs who are often unable to afford the costs associated with acquiring multiple qualifications or licenses in order to operate across borders. Mutual recognition has been established across engineering services, nursing services, architectural and surveying services, accounting, dentistry and medical practitioners.

While these agreements establish a very positive precedent, quantitative research reveals that with the partial exception of nursing the measures have done very little to increase cross border services activities due to the lack of central registration systems and continuing legal heterogeneities.

ASEAN Comprehensive Investment Agreement27

The ACIA aims to provide three pillars of support for intra-ASEAN investment:
(a) Liberalization of investment opportunities across targeted sectors;
(b) Investor protection; and
(c) Dispute settlement.

An “Investor” may either be a natural or judicial person, meaning a citizen or permanent resident of an ASEAN member state, or a legal entity constituted under the law of an ASEAN member state. If the latter, the entity must be able to prove that it undertakes “substantial business” in the nation in which it is legally established as a safeguard against shadow businesses being used to funnel third party capital into ASEAN member states. An “Investment” may be any kind of asset owned and controlled by the investor - meaning stocks, bonds, property rights, intellectual property, contractual claims and/or other financial assets.

The liberalization agenda primarily consists of members granting investors from other member states National Treatment (NT), meaning the same rights as they give local investors. If NT is reserved, then a minimum of Most Favoured Nation treatment is required across five industries and their “related services”. These are manufacturing, agriculture, fishery, forestry and mining and quarrying.

The agreement also requires states to grant ASEAN investors the right to select their own senior management irrespective of nationality, prevent unlawful expropriation whether direct or indirect, and to provide full security services to investors together with the freedom to transfer their funds as they wish. The reality is that the practical significance of the agreement varies widely among member states. ACIA follows a negative listing approach, meaning that full adoption of the substance of the agreement is assumed except for any specifically listed reservations - and all members have listed some reservations.

At the more liberal end of the spectrum Singapore, for instance, listed a total of 13 reservations of NT. These are primarily directed toward protecting state owned enterprises such as Singapore Airlines, Singapore Power and Singapore Technologies Engineering. Issues of national security and crime also justify NT reservations for the production or sale of firearms and other weaponry. Other reservations are necessitated by Singapore’s geographical context, in particular the scarcity of land. Such measures include reservations for mining and quarrying activities and land zoning and urban planning. Finally, there are reservations which stem from Singapore’s political idiosyncrasies, for example reservations on foreign ownership or management of newspapers and publishing houses, or alcohol and tobacco products.

At the other end of the spectrum the Philippines has an extensive list of reservations, many of which are not obviously motivated by non-economic considerations. In particular NT status is not conferred across any of the target industries, nor is the right to choose senior management.

When one takes into account the numerous industry-specific regulations, and that the Philippines is not alone in this regard, it is clear that ACIA remains an agreement in spirit only. Nevertheless, the framework has been established and more liberal members of ASEAN continue to try to persuade others to gradually remove their reservations.

A full list of all the member states reservation lists may be found here.28

ASEAN Economic Community

The ASEAN Economic Community (AEC) blueprint – launched in November 2007 - sets out targets for advancing ASEAN’s economic goals, to be achieved by the end of 2015.29 Four overarching goals were identified in this blueprint, namely:

a) To achieve an ASEAN single market and production base through the free flow of goods, services, investment, and skilled labour as well as the freer flow of capital, with greatest emphasis placed on twelve priority sectors:
• Electronics
• e-ASEAN
• Healthcare
• Wood-products
• Automotives
• Rubber products
• Textiles and Apparel
• Agri-products
• Fisheries
• Air Travel and Transport
• Tourism
• Logistics;

b) To enhance ASEAN competitiveness through competition policy, consumer protection, infrastructure development, taxation, and e-commerce;

c) To promote equitable economic development of ASEAN members; and

d) Integration into the global economy through enhanced participation in global supply networks.

Progress in achieving the free movement of goods aspect of the AEC has been largely achieved and attention is now focused on non-tariff barriers and trade facilitation measures.

 

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