ASEAN Economic Community

TPP Collapse? Plan B for Everybody Else

Few firms buy and sell goods or services in just one market—even if that one market is huge.  In the long run, larger, more comprehensive agreements are much better for firms than smaller, more limited agreements.  This is what makes the TPP such an important agreement for business.  But, if the deal never makes it out of Capitol Hill in Washington, the remaining TPP countries have many options that can be pursued in the near term.  As Plan B strategies go, these are certainly better than nothing.

Financial Services in Vietnam and ASEAN

Hanoi—Li Minh Hung, the State Bank of Vietnam’s Governor, gave an interesting series of interviews here about upcoming changes for the financial services industry in Vietnam.  He was speaking in the context of an Asian Banker Summit conference aimed largely at the financial services industry in Vietnam and in the region.

A few points were worth highlighting for a wider audience. 

Vietnam, of course, is in a somewhat unique position within the region.  It is a member of the ASEAN Economic Community (AEC).  It has also signed the Trans-Pacific Partnership (TPP).  It also has a series of new bilateral free trade agreements and many of these deals come with new commitments in financial services. 

The gaps between Vietnam’s existing regulatory and competitive environment for the banking sector and what might come in the future could be substantial.  Not all ASEAN member states can boast (or have to worry about) such a constellation of changes on the horizon. 

Nevertheless, it is striking how enthusiastically the government is embracing the challenge.  The Prime Minister came to open the conference here before an audience so large they had to open another overflowing ballroom just to try to accommodate all the interested listeners.  

Governor Le tried to argue that both the AEC and the TPP will lead to a more efficient and sustainable banking sector.

This is not really the case.  The AEC promised “free movement of goods, services, investment, skilled labor, and freer movement of capital.”  The somewhat odd term “freer” came about because the original 2020 deadline for implementation of the AEC was not changed for financial services in ASEAN.  In other words, while the rest of the AEC goals were to have been met on January 1, banking sector changes are not due for another five years.

It is certainly possible that the AEC, by 2020, will include new provisions on financial services.  Or, as hopeful vendors outside the ballroom at the Hanoi Marriott suggest, new technology may create greater market access and opportunities for millions of companies and customers across Southeast Asian markets long before the AEC deadlines kick in.

At the moment, most of the ASEAN-level commitments for banking, insurance and all other financial services sectors are far from creating an open market.  Services and investment commitments, in general, are also poor. 

A trade agreement is not the only way to open markets.  Companies can invest now in some markets that are—on paper at least—not open.  Conversely, some sectors that appear to be “open” are rife with licensing requirements or manpower restrictions or various non-tariff barriers that make apparently open markets impossible to penetrate.

But a trade agreement does make it easier for companies to operate.  Regional agreements are definitely simpler for firms to use and reduce risk and uncertainty.  They can remove much of the burden for staff.

Historically, financial services and telecommunications have been viewed as essential “backbone” services.  These have always been treated differently than other service sectors with slower liberalization and significantly greater caution in rule making.

The TPP is no different.  The agreement has a specific chapter on financial services.  The interlocking nature of the deal means that some of the benefits for the banking industry can also be found elsewhere including in the investment and services chapters. 

When Governor Le talks about the importance of a trade agreement to restructure credit institutions, he really means using the TPP to help Vietnam’s domestic industry level up. 

As of May 2016, he pointed out that Vietnam was host to 50 foreign bank branches, 6 wholly owned foreign-invested banks, 52 representative offices, and 2 joint venture banks.  In the future, these numbers are clearly expected to grow.

Financial service players, however, ought not just be thinking about the potential to set up new branches.  Instead, as the TPP gets set to shift up supply chains in Vietnam, companies should be considering how to play a role across a wide range of financial services that will be needed in the near future.

Such services include finding new local partners, offering up new trade financing for companies in Vietnam (and elsewhere) who currently have no access to such financing or have had poor terms, creating markets for insurance products of all types, and financing products that have likely never been offered in the market before, including products for small and medium sized firms that make up the bulk of the companies in Vietnam. 

Banks should also be ready to finance infrastructure and to support the inbound investment of many different kinds of companies looking to Vietnam and other TPP member countries.

Firms will need to carefully read the TPP commitments, as the financial services chapter contains many country-specific rules and exceptions.  How TPP rules are implemented at the domestic level will also be important.  In Vietnam, the government is now working on a comprehensive reform of the credit institutional system. 

Another promising area of focus for financial service firms that we have been working on is cross border mobile payments as part of the e-commerce negotiations for RCEP.  These talks will bring together 16 countries in Asia, including Vietnam with the rest of ASEAN, China, Korea, Japan, India, Australia and New Zealand.

It is not possible to get smaller firms to participate in e-commerce if they cannot be paid for their goods and services.  Mobile payments provisions were not well developed in the TPP, as the agreement closed some time ago (substantive work on most chapters finished as long ago as two years).  In the world of fintech, two years ago is a lifetime.  Hence, there is ample scope for RCEP countries to consider new provisions to let smaller firms buy and sell goods and services across borders using mobile devices.

We are working on a position paper on the subject now for the next round of RCEP negotiations in New Zealand in mid-June.  If you would like to participate in our efforts, please let us know.  We would very much like to hear from a wider array of companies.

Financial services are a vital part of trade, as Vietnam’s top leadership has recognized.  Building and sustaining a competitive industry is a laudable goal.  Hopefully, other governments across the region will also embrace this challenge in the future.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Scoring Success in ASEAN

Kuala Lumpur—ASEAN officials are wrapping up another long and comprehensive set of meetings in Malaysia.  The more countries become involved in interlocking and overlapping groupings, the more complicated the meeting schedules attached to ASEAN have become. 

The primary purpose of the ASEAN meetings, of course, is to help guide ASEAN member states.  Here in Kuala Lumpur, economic ministers met to discuss progress towards meeting the ASEAN Economic Community (AEC) and other elements of the ASEAN integration agenda.

Officials also met with a variety of counterparts from other countries that are dialogue partners with ASEAN.  Some of the counterparts that are also Trans-Pacific Partnership (TPP) members, including Australia, Canada, Japan, New Zealand, and the United States, held informal bilaterals between themselves and the ASEAN TPP members (Brunei, Malaysia, Singapore and Vietnam) to try to break through remaining issues in the TPP negotiations. 

Minsters from the 16 member countries of the Regional Comprehensive Economic Partnership (RCEP) also met to discuss progress after 9 rounds of talks.

Finally, various industry groups and associations, like the EU-ASEAN Business Council and the East Asia Business Council, snagged a few minutes of the time and attention of trade ministers during assorted sideline events. 

Many of the ASEAN discussions underway are likely to include at least one comment such as, “ASEAN is on track to achieve that AEC at the end of the year, with 80% (or 90%) of the objectives already finished.”  Or, “As the ASEAN Blueprint (or scorecard) shows, we have already accomplished 80 (or 90) percent of our objectives.”

What makes these statements puzzling is that ASEAN dropped the scorecard some time ago.  The last time ASEAN published the results, the scorecard only covered the period through 2011.  There is really no way to know how close or how far ASEAN might currently be from meeting the targets attached to the AEC.

Yet the idea of a scorecard seems rather firmly anchored.  Where did the original impetus for the scorecard come from?

ASEAN faces at least two distinct challenges in implementing commitments.  First, ASEAN’s methods of negotiation are unusual.  The grouping uses something called the “ASEAN – X” (ASEAN minus X) approach.  Under this approach, somewhere between all 10 members and no members actually implement any given commitment. 

This soft, persuasive approach means that members have sufficient flexibility and policy space to move ahead with commitments when they believe the time is right for their specific developmental status and domestic conditions.  The expectation is that all 10 members will eventually arrive at the same set of outcomes, since members that disagreed with the original objective could have rejected the approach or the commitment outright from the beginning. 

The ASEAN-X system, however, means that enforcement of commitments may always be a problem. 

Second, the member states do not like confrontation.  The region has been peaceful for all these decades in part, most argue, from the “ASEAN Way” of handling disagreements.  Such an approach requires discretion and careful dialogue over long periods of time to help build up trust and communication. 

The lack of confrontation means that the usual path of dispute settlement, taken by states in economic partnerships and free trade agreements, is not an option for ASEAN.  Member states are unlikely to agree to allow one another to actually be taken to arbitration by another member over failure to implement ASEAN commitments.  (Note, however, that ASEAN members have, on rare occasions, moved trade disputes over to the World Trade Organization system if the violation of ASEAN commitments can also be viewed as a WTO violation.) 

So, imagine that you are tasked with getting 10 member states to get to the same outcomes if the pathway is flexible and you cannot count on any sort of dispute settlement system to be actually used by members to ensure enforcement of commitments.  What system would you recommend?

One solution is to use some sort of “naming and shaming” approach to call out laggards.  However, if such a system were seen as too harsh and critical, it would never get past the member states. 

Hence, ASEAN defaulted to the creation of a blueprint.  The original blueprint was a fixed number of commitments that ASEAN members had agreed to implement on the path to the AEC.  These commitments were broken down into four broad areas. 

Of most interest to the business community were promises made in the first pillar, “Single Market and Production Base.”  This included commitments towards free flows of goods, services, investment, skilled labor and freer movement of capital.  The blueprint for achieving these objectives was broken down into phases, starting in 2007-2009 and concluding in 2015 with the launch of the AEC.

The commitments would be tracked by the use of an ASEAN Scorecard that could measure progress towards achieving each of the items in the blueprint.  Critically, to get approval of the members, the report card had several interesting features.  The report is an aggregated account of progress—no single member is ever praised or punished specifically for implementing or failing to implement any given commitment. 

The scorecard is a binary system.  Members are given “credit” for progress made towards the objective or are not.  There is no attempt to measure actual implementation.  The member states themselves must provide the information to the Secretariat for tabulation.

At the Secretariat, officials add up (behind the scenes) the check marks for progress and report out either “fully implemented” or “not fully implemented.”  As an example, the first scorecard for free flow of goods showed 9 items fully implemented and 0 items not implemented between 2007-2009.  The record reported in Phase 2, 2010-2011, was more mixed with 23 items implemented and 24 items not fully implemented.  It is not clear what items are even being measured.

This highlights more challenges with the blueprint/scorecard system.  Over time, members added additional items.  This made the scorecard more of a moving target.  A member state might have thought it would receive credit for 80% of commitments in phase 2, only to discover that with new, unmet commitments added to the scorecard, it (and ASEAN) might receive a score closer to 70% or worse. 

The easiest commitments are always likely to go first.  The tougher parts of integration dealing with the more sensitive items are most likely to appear in the blueprint at the end of the process.  Hence, under whatever system members might have devised to address implementation challenges for the AEC, progress towards the end was likely to slow down.

In the years since the last publication of scorecard results, officials and other stakeholders have had discussions about revising the system.  But given the extreme unwillingness of participants to have anything that might appear to be bad news or backsliding on commitments, members appear to have decided to abandon the entire scorecard exercise.  The lack of an actual scorecard now makes repeated references in 2015 to the scorecard and blueprints so strange to hear this week in Malaysia. 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

The Pacific Alliance Turns 3

I was asked to speak this morning at an event from the Latin American Chamber of Commerce in Singapore about the Pacific Alliance (PA) and ASEAN.  There are several striking things about the Pacific Alliance that makes the topic worthy of another blog post this week.

 The Pacific Alliance has brought together four economies in Latin America:  Mexico, Columbia, Peru and Chile. 

The first interesting point to make about the Pacific Alliance is that it is a relative newcomer.   The first week of June, in fact, marks the 3 year anniversary of the launch of the Framework Agreement.  This agreement will be fully in force in early 2016, as domestic procedures to bring it online remain to be sorted.

Second, despite its relative youth, the Alliance has been attracting a surprising amount of attention.  More than 30 other countries have flocked to become observers.   The Alliance has also attracted the attention of its own neighbors, with membership in the cards for several. Costa Rica, for example, has already completed the accession process and is awaiting confirmation of membership from their Parliament.  Panama is in the queue.

To understand the reasons for such intense interest in the PA, it is necessary to look at the sweeping ambition in the organization.  The guiding principles are a commitment to democracy and free trade.  In order to join, members must have in place existing free trade agreements (FTAs) with other members. 

The 8th summit in February 2014 saw members agreeing to drop tariffs to zero just over 90% of products, with the remainder to be phased out over time.  Many of the tariffs between PA members are already low or zero as a result of existing FTAs.

But the PA does not stop at tariff reductions.  It includes interesting and innovative rules of origin (ROOs) that make it relatively easy for firms to use the trade protocol as well as trade and investment promotion efforts.  Regional agreements are easier to use and more beneficial for businesses than bilateral trade arrangements.

Members are also moving towards the free movement of goods, services, capital and people.

In many ways, the sweeping goals of the PA mirror those of ASEAN.  Under the ASEAN Economic Community (AEC), leaders in Southeast Asia have promised free movement of goods, services, investment, skilled labor and freer movement of capital.  The AEC is meant to come into force later this year after more than 20 years of steady progress towards the goal of deeper economic engagement between member states.

To be clear, neither the PA nor the AEC will actually achieve these grand ambitions in the near term.  To reach free movement of goods and services requires a host of complementary policies beyond just dropping tariffs.  At the moment, neither ASEAN nor the PA have implemented many of these supplementary policies. 

But part of what makes the PA worthy of note is how quickly members are moving towards their goals.  For example, the members have dropped visa requirements already, allowing citizens to flow freely as tourists and conduct short-term business visits between PA countries.  The goal is even more ambitious—to allow outside tourists and investors to get one Pacific Alliance visa to cover all members (like the Schengen agreement in Europe) as well as to increase the length of time granted for visa entry to businesses. 

Another notable achievement is the pooling of activities designed to reflect deep integration across members.  The opening of the Latin American Market (MILA) is especially striking, as it brings together stock markets.  Over time, MILA is likely to move towards joint stock listings.  In Singapore and elsewhere, even embassies are joining up—one facility to host multiple members.  

Again, to be clear, ASEAN has no plans underway to either integrate its stock markets or to pool sovereignty to the extent of sharing embassies overseas.  While ASEAN has visa-free tourist travel, it does not intend to create a joint visa or to scrap domestic immigration rules that govern long-term employment entry.

So why have the PA members taken such bold steps towards integration?  Largely because leaders have recognized the structure of the global economy today.  In a world increasingly connected by global value chains or supply chains, it is becoming ever more critical to countries to meaningfully lower barriers to integration.   Current PA members have signed multiple free trade agreements already as part of a process of joining value chains to help spur economic development and growth in the region. 

PA members have had to contend with low levels of integration across Latin America.  Problematic infrastructure, challenging geography, and historical legacies have limited the connections between countries in the region.  The low level of integration with neighbors has made it hard for businesses to plug into value chains. 

Hence from the beginning, PA members have had two objectives—to increase connectivity within PA countries and to attract investment, especially from Asia.  This will allow PA companies to increasingly plug into value chains already active in Asia and to develop new linkages across the region.

Currently, neither ASEAN nor the PA actually trade very much with their own members.  The figures for inter-Latin American trade are extremely low.  Trade levels between PA countries are equally small—in the single digits.  After more than 20 years of integration, the figures for inter-ASEAN trade remain stubbornly stuck at less than 25%. 

On the bright side, the opportunities for improvement in inter-regional trade and investment are significant.  Limited levels of integration should also reduce the pressure on governments from businesses and the market.  ASEAN shows that even with extensive discussions about regional integration and repeated efforts to open markets to one another, the level of direct competition between members may remain relatively muted. 

For the PA, this trend is likely to continue.  The relative lack of infrastructure to connect the markets of members and the sheer geographical distances involved suggest that even completely open markets may not lead to extensive inter-PA trade.  Instead, the objective has to remain building strong linkages with other partners in Asia and to encourage the creation of value chains between Latin American members as well as those that span the Pacific.

This is likely to be hard to do given the current, weak institutional structure of the PA.  Now, leaders largely direct the Alliance from the top.  But it is hard to get serious about implementation without an institution of some sort to pay attention to the nitty gritty details that are critical to real success.  Working groups (19 technical groups already exist) and the use of committees with members and with observers can rapidly get unwieldy. 

However, a focus on meeting the objectives of the PA is likely to be sustained and reinforced by activities elsewhere.  In particular, member commitments to openness and integration are reinforced by promises made in the Trans-Pacific Partnership (TPP).  So far, three PA members (Mexico, Peru and Chile) are also involved in TPP negotiations with four ASEAN countries (Brunei, Vietnam, Malaysia and Singapore).  Between the PA and the TPP, member governments are likely to have a laser-like focus on implementing the kinds of rules and regulatory changes needed to foster the development of value chains for goods and services across the region.

Hence, as the Pacific Alliance heads towards its third anniversary, the future looks bright.  The level of commitment to the goals of freer trade has been enthusiastically embraced by the highest levels of government.  Sustained interest by outside partners suggests that the hunger for improved economic growth and opportunities will continue into the future.

ASEAN Economic Community (AEC): Preparing for Disappointment?

The ASEAN Economic Community (AEC) is set to take off at the end of this year.  Companies around Asia are increasingly paying attention to the creation of this trade arrangement.  But most are likely to be disappointed on January 1, 2016. 

In 2007, ASEAN leaders announced a highly ambitious plan to unite the 10 member countries of ASEAN:  Brunei, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, and Vietnam. 

The original plan called for the creation of an ASEAN Economic Community in 2020.  The plan has multiple elements, including the creation of a single market and production base, a highly competitive economic region, equitable economic development, and a region fully integrated in the global community.  These economic components are joined by a broader agenda of political and security integration.

However, for business, the most important part of the AEC has been the commitment to create "a free market for goods, services, investment, skilled labor and the freer movement of capital."  

Such a goal would have been difficult for nearly any grouping to reach.  For ASEAN, the gaps in economic development in 2007 were significant.  To bring together nations ranging in GDP from Myanmar at just over USD$215 per year to Singapore at more than USD$35,000 would have been challenging under any timeline.

But ASEAN leaders made the task more difficult by moving the deadline forward by five years.  Instead of 2020, the ASEAN Economic Community would take effect in 2015.  (Although this originally meant January 1, 2015, the deadline was then shifted backwards to the end of the year giving members an additional 365 days to succeed.)  Thus member states with an ambitious deadline suddenly faced the conclusion five years sooner than anticipated.

Fortunately, ASEAN has had a mechanism for releasing the pressure.  Members could reach any goal by using pilot projects.  In addition, ASEAN works on the ASEAN Minus X system where somewhere between 10 and 0 members actually move forward with any commitment. 

No one actually checks for implementation.  The ASEAN Secretariat is very small and has no capacity to ensure that members follow through on their various commitments.  Although there is a dispute settlement mechanism in ASEAN, it is not used.

Despite these challenges, ASEAN countries mostly managed to drop all tariffs to zero by 2010.  The “newer” members of ASEAN (Cambodia, Laos, and Myanmar) have until 2015 to finish the job. 

However, tariffs are not the only way that countries can keep out foreign products.  Other kinds of non-tariff barriers are also supposed to be removed from ASEAN countries.  Most of these discussions have moved forward slowly.

Services are supposed to be opened as well on the way towards the AEC.  By 2014, members had agreed on eight “packages” of market opening.  Each package is designed to open up a set of subsectors for other ASEAN firms.  For example, each member might decide to open up hotels, clinics or accounting firms.   Of the 160 subsectors, ASEAN members have already agreed to open up roughly 65.  Not all commitments are likely to be equally meaningful for companies.

The AEC also includes free movement of investment.  ASEAN members have made limited progress towards meeting this goal.

Finally, the AEC also promises the free movement of skilled labor.  This is a highly sensitive topic for most members.  As a result, little progress has been made.  Although members have drafted a few mutual recognition agreements (MRAs) for specific sectors like engineering and architecture, none (or, at best, very few) have been able to take advantage of the provisions.  This is because an MRA does not negate the need for immigration or visa rules.

The deadline for the freer movement of capital was not moved forward to 2015, but remains at 2020.

By the end of 2015, then, what is likely to change in ASEAN?  The opening of goods markets beyond existing tariff reductions has slowed to a crawl.  Efforts to address non-tariff barriers have not moved ahead by much. 

For services, ASEAN members are supposed to complete two more “packages” of services liberalization this year.  While these are meant to result in the free movement of services, it is still likely that ASEAN firms will find challenges in operating around the region.  This is partly because the levels of commitment (unless something drastic happens) are likely to be limited.

Labor and investment are not likely to be significantly opened for the rest of this year. 

As a result, at the end of 2015, the primary difference between now and then is likely to be two additional rounds of services opening and very little else.  For many ASEAN member firms, January 1 is likely to be very disappointing.  While companies are increasingly starting to expect ASEAN to deliver on the sweeping goals promised for the past few years, the free movement of goods (other than tariffs), services, investment, skilled labor and freer movement of capital are likely to prove elusive.