Friday, August 29, 2014

US Companies: More Bullish on SE Asia, More Bearish on the AEC

From the sidelines of this week’s ASEAN Economic Ministers’ meeting in Naypyidaw, the Nation reports that US companies are still bullish on Southeast Asia, but bearish on the ASEAN Economic Community (AEC):

As 2015 and the Asean Economic Community approaches, US companies are keeping a close eye for opportunities offered by regional economic integration, although most respondents don't believe that the goals of the AEC will be reached until 2020 or later.

This comes from the 2015 ASEAN Business Outlook Survey published by the American Chamber of Commerce and US Chamber of Commerce, and available here. 

In the survey, 66% of respondents from the American business community expected ASEAN to be more important to their companies’ business operations within the next two years, and 89% expected to increase their investments in ASEAN during the next two years.  However, only 4% of respondents said that ASEAN would reach its AEC goals by end 2015, a drop from 23% who said this in last year’s survey.  Furthermore, 52% of respondents said that the AEC goals would not be reached until 2020 or later, an increase from 31% who said this last year.

Americans are therefore bullish on Southeast Asia, but bearish on ASEAN.  I posted on this split opinion in the American business community last year:

What this reflects is confidence in the Southeast Asian economy but less confidence in the ASEAN institutions.  But it also reflects the focus of American companies in the region on services, rather than manufacturing.  As I have written elsewhere, the AEC will create both a single market in Southeast Asia and a single production base.  The single production base is much more developed than the single market.  In fact, as I have suggested, we already have an AEC in Southeast Asia, only it is focused on the single production base and dominated by the Japanese automotive and electronics companies that have been long present in the region.  In other words, the AEC can be likened to a glass of water, and the Japanese see a half-full glass. 

American companies, on the other hand, are less involved in manufacturing and emphasize services such as legal, financial and distribution.  These are more interlinked to the development of the single market in ASEAN. Yet, as noted elsewhere, non-tariff barriers to trade in goods, services and investment are much more difficult for the ASEAN members and the ASEAN Secretariat to deal with.  Hence the relative pessimism of American companies towards the AEC, because they are looking at a half-empty AEC glass of water. 

Thus, the Amcham/US Chamber poll accurately reflects American corporate sentiments in the region, because American companies have a different outlook on Southeast Asia.  Improving that sentiment will be difficult for ASEAN members, but will result in much greater economic welfare for all of ASEAN’s citizens, not just those involved in the single production base.    In other words, if American companies become happier with the AEC, everyone will be happier with the AEC.

This year’s survey shows that this half-empty, half-full view of the AEC is more prevalent than ever in the American community.   Major reforms to the ASEAN institutions, along with concrete actions to implement AEC commitments, will be needed to improve these bellwether indicators of confidence in the AEC.

Thursday, August 28, 2014

The Real Solution to ASEAN's "Hodge Podge" of Legal Systems

Last week had a piece on how the “hodge podge” of legal systems in Southeast Asia frustrated ASEAN integration.   The author noted that the legacies of colonial and other influences from English, French, Soviet, Dutch and German legal systems retarded ASEAN economic integration (but the author omits the influence of the Spanish legal system in the Philippines).  The article also noted  the purported unprecedented formation this month of a Singapore-based alliance of law firms in the major jurisdictions in ASEAN (although it seemed to overlook a similar Malaysia-based alliance of law firms established in 2011).

Having worked as co-counsel or opposing counsel with both of the lead firms  in these Asian law firm alliances, I have no doubt that increased cooperation among law firms can work to relieve some of the inconsistencies and obstacles that result from the diversity of legal systems in ASEAN. 

However, the article neglects to discuss other ways that regional economic blocs have established to deal with divergent legal systems.  After all, the FT’s home country, the United Kingdom, is part of the European Union (EU), and the various legal systems noted in the FT article also originated in the EU (or otherwise in Europe, in the case of the Soviet legal system).  Yet somehow these differences do not seem to present the “hodge podge” of obstacles that exist in ASEAN.

The reason, of course, is that the EU has a well-developed system of regional institutions such as the Commission, Court of Justice and the like, all based on a cohesive theory of EU law that evolved since the Treaty of Rome.  NAFTA similarly has had to deal with divergent bases of law (English, French and Spanish) but being based on a very detailed treaty and having a robust dispute resolution system, that bloc also has been able to deal with its legal diversity.

In other words, diversity of legal systems need not be a barrier to economic integration, if the regional bloc determines to adopt robust institutions and/or dispute resolution.  Perhaps the article elected not to address this issue because ASEAN currently has decided to do neither, but that does not excuse this oversight. In any event, if the ASEAN Economic Community is to thrive, ASEAN’s leaders need to deal with these institutional and foundational deficiencies.   

Wednesday, August 27, 2014

More ASEAN Around the Horn

In this post I provide some ASEAN updates:

  • Sign-off of ASEAN-India FTA (AIFTA) chapters on services and investment was delayed yet again because the Indian commerce minister decided to deal with a domestic political issue rather than attend the ASEAN Economic Ministers’ meeting in Naypyidaw this week.  The Indian government claims that this delay is merely a formality and that they will sign off during Regional Comprehensive Economic Partnership (RCEP) negotiations later this year in New Delhi.  However, this represents yet another delay in the interminable efforts to add services and investment to the AIFTA (NB: India signed the agreement on September 8).
  • Malaysia, Singapore and Thailand launched the ASEAN Collective Investment Scheme (CIS) Framework.  Under the framework, unit trust/mutual fund managers can offer their products to other participating ASEAN countries; their home countries are responsible for reviewing and regulating their operations and regulators from the other participating ASEAN countries are to recognize the approval by the home country regulator.  Hence the CIS framework is really a mutual recognition agreement. It does not provide for formalized cross-border cooperation in enforcement measures, such as to deal with fraud. A cooperative committee among the relevant regulators to deal with compliance and enforcement should be established, particularly given the potentially large investment amounts involved.
  • Malaysia announced that it would issue 5 year multiple-entry visas for investors by year end, as part of its efforts to improve the foreign investment climate in Malaysia.  Prime Minister Najib Razak also announced “My ASEAN Internship Programme,” an effort to place Malaysian students in internships in other ASEAN countries and vice versa.
  • New Zealand announced a new protocol to the ASEAN-Australia-New Zealand FTA dealing with technical issues.   Trade Minister Tim Groser said “These changes relate to product-specific rules of origin, certificate of origin requirements, and the process for transposition of tariff reduction and origin schedules when the classification documents on which they are based are revised.”

I’ll have more on the ASEAN Economic Ministers’ meeting as soon as possible.

Thursday, August 21, 2014

Labor Mobility Under the AEC Promises Big Gains and Bigger Challenges

Today the International Labor Organization and the Asian Development Bank released a report on labor issues in the ASEAN Economic Community (AEC).  The report noted the major economic gains that could be achieved through the community, through the 14 million new jobs created through economic integration.  However, it does note that only a small portion of the labor force will be affected by labor mobility by the immediate onset of the AEC:

On labour migration, the report found that migration within ASEAN currently focuses on low and medium skilled workers, a flow which is likely to increase in response to demand, particularly in the construction, agricultural and domestic work sectors.  The report also notes that the free flow of skilled workers that will come in with the AEC affects less than 1 per cent of total employment on average and will not satisfy demand. To attract and retain their skilled workers businesses will need to compete on the basis of productivity and develop institutions to better link wages to productivity.

The report also notes that the resulting economic gains will not be evenly distributed unless there are policy changes in the region:

Unless decisively managed this could increase inequality and worsen existing labour market deficits - such as vulnerable and informal employment, and working poverty. To counter this Member States need to develop policies and institutions that support inclusive and fair development. In particular, there is an urgent need to improve the quality, coverage and sustainability of social protection, starting with the establishment of a social protection floor for all.

The report goes on to propose binding commitments by the ASEAN member states that would protect labor rights:

Migrant protection and migration management are among other key issues for ASEAN. If countries are to reap the benefits of labour mobility they will need to prioritize three critical areas: ratifying, implementing and enforcing international Conventions; extending the coverage and portability of social security; and implementing the ASEAN Declaration on the Protection and Promotion of the Rights of Migrant Workers.

As I have posted earlier, these types of policies related to services may eventually become the most controversial aspects of the AEC.  If ASEAN workers obtain these rights under international and ASEAN agreements, what mechanisms will be established to protect those rights under domestic laws and ASEAN agreements?  Will ASEAN workers be satisfied with those mechanisms, and if not, will they seek additional protections and other rights?  Most importantly, are the ASEAN member states and the ASEAN institutions prepared to do any of this?  In all likelihood, not in the immediate future.

Thus, the aims of the ILO/ADB report are noble, but achieving them will have to wait until ASEAN develops stronger institutions to deal with these issues, as I noted earlier:

Because it touches so many key issues for regional integration and development, the movement of natural persons will be the last major hurdle for the AEC and other regional economic integration projects.  However, because of the less mature political and social development within ASEAN, it will take that much longer to achieve in Southeast Asia. 

The labor mobility issue is therefore something to consider for the post-2015 AEC agenda, but given the political and social sensitivities involved, may take years to address.

Wednesday, August 20, 2014

ASEAN Seafood Industry Casts Wide Net In Drafting Industry Standards

In another example of ASEAN’s private sector moving ahead with ASEAN Economic Community (AEC) integration efforts.  Seafood associations in ASEAN have drafted an “ASEAN Shrimp Farming Standard” for the shrimp industry, a major industry in Southeast Asia, as reported here:

A steering committee of 14 industry and non-government stakeholders designed the draft standard to be a workable tool for the shrimp industry in ASEAN to improve the sustainability, environmental and social performance of farming, especially at the small-scale, and receive recognition in key export markets.

The draft standard complements existing national good aquaculture practices and aims to align with internationally accepted environmental and social standards, including the Monterey Bay Aquarium’s Seafood Watch® Programme sustainability assessment criteria and the Aquaculture Stewardship Council standards.

The process for developing the Shrimp Standard for ASEAN aims to align with the ISEAL Alliance’s globally recognised guidelines for setting environment and social standards.

The draft standard is split into farm, hatchery and feed mill standards which cover traceability, shrimp health, sustainable stock sourcing, sustainable feed sourcing, environmental impact management and good labour management.

Unusually for an ASEAN industry-wide effort, the draft standard’s organizers have posted the draft standard on the internet and requested public comment via the internet.  Comments can be posted here and are due by October 10.

Usually ASEAN-wide industry efforts are at an elite level, such as the ASEAN Cosmetics Directive.  That effort resulted from the joint efforts of national-level cosmetics associations over 10+ years.   Only after that long and sustained effort did the ASEAN member states adopt the Cosmetics Directive on a region-wide basis.

Hopefully this more open, broader approach to ASEAN industry wide standardization efforts will be repeated more often, as it will increase the “buy in” by local companies and convince ASEAN member states of the need to adopt such standards.  Broader, public efforts may be easier for industries such as seafood which are export-oriented (e.g., focused on extra-ASEAN exports) and not dependent on intra-ASEAN competition, which will give rise to conflicts within the region.  Nevertheless, private sector-initiated efforts like the Shrimp Farming Standard and the Cosmetics Directive will have a greater chance of adoption within the industry and by the ASEAN member states.

Monday, August 11, 2014

ASEAN Around the Horn

In this post I provide some brief ASEAN updates:

Friday, August 8, 2014

Happy 47th ASEAN Day!

Today is ASEAN Day, the 47h 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.

The audio is available on the below clip:  

Happy ASEAN Day!