Southeast Asia in the WTO 9789812307019

Table of contents :
Contents
About the Author
Chapter 1. Background
Chapter 2. Singapore and WTO
Chapter 3. Malaysia and WTO
Chapter 4. Thailand and WTO
Chapter 5. Indonesia and WTO
Chapter 6. The Philippines and WTO
Chapter 7. Other ASEAN Countries and WTO
Chapter 8. Southeast Asia’s Future in the WTO
Tables
Selected References

Citation preview

Southeast Asia in the WTO

Reproduced from Southeast Asia in the WTO, by Razeen Sally (Singapore: Institute of Southeast Asian Studies, 2004). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg>

The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publications, an established academic press, has issued more than 1,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publications works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world. The Southeast Asia Background Series is a major component of the Public Outreach objective of ISEAS in promoting a better awareness among the general public about trends and developments in Southeast Asia. The views and opinions expressed in this series are those of the authors and do not necessarily reflect those of the editor or ISEAS. The books published in the Southeast Asia Background Series are made possible by a generous grant from the K S Sandhu Memorial Fund.

© 2004 Institute of Southeast Asian Studies, Singapore

Southeast Asia Background Series No. 5

Southeast Asia in the WTO Razeen Sally

First published in Singapore in 2004 by ISEAS Publications Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace, Pasir Panjang Singapore 119614 E-mail: [email protected]

• Website: bookshop.iseas.edu.sg

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 2004 Institute of Southeast Asian Studies, Singapore The responsibility for facts and opinions in this publication rests exclusively with the author and his interpretations do not necessarily reflect the views or the policy of the publisher or its supporters.

ISEAS Library Cataloguing-in-Publication Data Sally, Razeen, 1965Southeast Asia in the WTO. (Southeast Asia Background Series) 1. World Trade Organization. 2. Asia, Southeastern—Commercial policy. 3. Asia, Southeastern—Foreign economic relations. I. Title. II. Title: Southeast Asia in the World Trade Organization III. Series. HF1591 S17 2004 ISBN 981-230-268-9 (hard cover) Linographic Services Pte Ltd. Printed in Singapore by Seng Lee Press Pte Ltd.

© 2004 Institute of Southeast Asian Studies, Singapore

Contents About the Author

vi

1

Background

1

2

Singapore and WTO

15

3

Malaysia and WTO

29

4

Thailand and WTO

43

5

Indonesia and WTO

55

6

The Philippines and WTO

67

7

Other ASEAN Countries and WTO

77

8

Southeast Asia’s Future in the WTO

81

Tables

93

Selected References

97

v © 2004 Institute of Southeast Asian Studies, Singapore

About the Author Razeen Sally is Senior Lecturer in International Political Economy at the London School of Economics and Political Science, where he has taught since 1993, and was head of its International Trade Policy Unit. He is Visiting Professor at the Institut D’Etudes Politiques (Sciences Po) in Paris, and Senior Visiting Research Fellow at the Institute of Southeast Asian Studies, Singapore. His research has focused on trade policies and policy-making in developing and transitional countries and on developing country participation in the WTO.

vi © 2004 Institute of Southeast Asian Studies, Singapore

1. Background

1

Chapter 1

Background INTRODUCTION Trade policy is back on the radar screen in Southeast Asia, having been overshadowed by monetary and financial matters since the Asian crisis. This is due primarily to the New Regionalism, the proliferation of initiatives to form free trade agreements (FTAs) in the Asia-Pacific. Singapore blazed the trail, with others now trying to catch up. Not too far away, China has acceded to the World Trade Organization (WTO), crowning the most sweeping set of market-oriented reforms seen in the past decade. And beyond, the WTO finally witnessed the launch of a new round of multilateral trade negotiations in Doha. The round, however, came to a screeching halt with the collapse of talks at the WTO’s Fifth Ministerial Conference in Cancun, Mexico, in September 2003. This fresh crisis raises grave doubts about the future of the WTO and that of the multilateral trading system — with weighty implications for Southeast Asia. Time, therefore, to take a fresh look at Southeast Asia in the multilateral trading system. From the mid-1980s to the early 1990s, a critical mass of ASEAN members was proactive in the GATT (General Agreement on Tariffs and Trade, the WTO’s predecessor) and, notwithstanding internal differences, presented a common front. ASEAN “hung

1 © 2004 Institute of Southeast Asian Studies, Singapore

2

Southeast Asia in the WTO

together”, and to good effect, in the Uruguay Round (the last round of multilateral trade negotiations). A decade or more later, ASEAN members, instead of hanging together, seem to be “bowling alone” in the WTO. Why has ASEAN co-operation broken down in the WTO? Is there a chance of resuscitating it? How, if at all, can ASEAN hang together in the WTO? Or will ASEAN members bowl alone into the WTO’s middledistance future? The focus of this policy essay is the ASEAN-5: Singapore, Malaysia, Thailand, Indonesia, and the Philippines. Brunei and the new members (CLMV: Cambodia, Laos, Myanmar, and Vietnam) do not figure, except by way of background and brief reference. The reasons for this invidious choice are simple. The ASEAN-5 are long-standing and, by developing country standards, reasonably active members of the GATT/WTO. Brunei and Myanmar, while members of the WTO, are hardly active. Cambodia has only just been accepted to join the WTO. Laos and Vietnam are still in the queue for WTO accession.

ASEAN IN THE URUGUAY ROUND None of the ASEAN members were particularly active in the GATT before the Uruguay Round. In common with other developing countries, they had sweeping carve-outs from GATT rules and obligations. By the early 1980s, ASEAN members’ perception of the GATT and their role in it had been transformed, especially by their shift from import-substitution to more liberal, outward-oriented trade policies. Their increasing integration into the world economy (rapidly rising shares of manufactured exports in total exports, increasing ratios of trade to GDP, and high dependence on extra-regional trade) gave them a stronger stake in an open,

© 2004 Institute of Southeast Asian Studies, Singapore

1. Background

3

non-discriminatory, rules-based multilateral trading system. To further their interests — the reduction of tariff and non-tariff barriers to their exports, and defence against arbitrary protection from developed countries — they would have to stop being passive bystanders and become active players at the GATT negotiating table. This meant playing the reciprocal game — in mercantilist language, making concessions to open own markets in return for getting others to open their markets, all underpinned by stronger GATT rules. The prospect of a new round of multilateral trade negotiations helped to concentrate minds. ASEAN members also realized that their inexperience in international trade negotiations put them at a disadvantage. Collectively, they would have more clout: they could bargain better by hanging together. ASEAN was in the vanguard of some twenty developing countries that joined forces with a cluster of developed countries to support the launch of a new round in Punta del Este, Uruguay, in 1986. A “dual-track” approach formed the basis of consensus within ASEAN. Common positions were forged on “first-track” issues where ASEAN members had converging or complementary interests. These were priority areas affecting their exports: market access negotiations to liberalize trade in industrial and agricultural goods; stronger GATT rules on voluntary export restraints (VERs), subsidies, safeguards and anti-dumping measures, and defence of tariff preferences. On the “second-track” new issues where there was internal disagreement, for example, on services, intellectual property rights, and investment measures, ASEAN displayed an open-minded flexibility and moderation that distinguished it sharply from the majoritarian developing country stance (as represented by UNCTAD, or United Nations Conference on Trade and Development). Where there was consensus, ASEAN would speak as a group; otherwise there was an amicable “agreement to

© 2004 Institute of Southeast Asian Studies, Singapore

4

Southeast Asia in the WTO

disagree”, with members going their separate ways but without weakening co-operation overall. None of this would have been possible without stepped-up, reasonably strong co-operation at political and official levels within ASEAN. The cockpit of co-operation was the ASEAN Geneva Committee. ASEAN permanent representatives (ambassadors) to the GATT met at least on a weekly basis; and there were similarly frequent, regularized meetings of less senior Geneva-based officials to review negotiating issues in more detail. Chairmanship of the ASEAN Geneva Committee rotated among the national delegations. Effective ASEAN participation in the round manifested itself in several ways. ASEAN members were well integrated into “Green Room” discussions among the score or so of GATT delegations who were active in the round. In addition, they were active in broad, informal café au lait coalitions, especially in the core market access negotiations. They were also active in some of the narrower, single-issue “Friends” groups. Successful co-operation translated into effective participation in the negotiations and was reflected in a broadly favourable outcome from the Uruguay Round agreements, which were formally ratified by GATT contracting parties in Marrakech in 1994. This fits with the bigger picture: the relatively small minority of developing countries who participated actively in the round (mostly in the middle-income bracket from East Asia and Latin America) gained from it; the inactive majority had little to show. The chief gains for ASEAN, and for East Asia generally, were in market access and rules. There was an average 30 per cent reduction of developed country tariffs on East Asian industrial goods exports, with a very substantial reduction of tariff escalation (higher tariffs on processed goods). This more than compensated for the erosion of their tariff preferences (under the Generalized

© 2004 Institute of Southeast Asian Studies, Singapore

1. Background

5

System of Preferences granted by developed countries to developing countries). Also important was the significant reduction of tariffs on tropical product exports. Given that East Asian countries were major targets for anti-dumping actions, countervailing duties and VERs, stronger disciplines on “contingent protection” were as important to improve export market access and make the business environment less uncertain. Hence the region’s qualified satisfaction with the Uruguay Round agreements on safeguards (which abolished VERs), subsidies and countervailing measures, and, to a lesser extent, on the implementation of GATT Article VI (governing anti-dumping measures). East Asian countries also welcomed the new, stronger agreement on dispute settlement. There were disappointments too. The Agreement on Agriculture and the Agreement on Textiles and Clothing were pretty weak, with hardly any upfront liberalization (a situation that has not really changed to this day). As subsequent events have shown, the weak agreement on the implementation of Article VI has not arrested the proliferation of anti-dumping actions. The ASEAN countries’ own commitments in the Uruguay Round agreements were mixed. They converted agricultural quotas into tariffs and “bound” all of them, that is, they committed themselves not to raise applied tariffs above their GATT bindings. However, bound rates were very high. They bound a greater percentage of their industrial tariffs, but at rates that were quite high and well above actual rates at home. In fact the gap between applied and bound rates was higher than it otherwise would have been due to ongoing unilateral liberalization in ASEAN. Commitments in the new General Agreement on Trade in Services (GATS) were rather weak and did not involve net liberalization. Finally, ASEAN, along with other developing countries, signed up to new, strengthened agreements on trade procedures (on sanitary

© 2004 Institute of Southeast Asian Studies, Singapore

6

Southeast Asia in the WTO

and phytosanitary standards, technical barriers to trade, customs valuation, import licensing, and rules of origin). These formed part of the Uruguay Round’s “single undertaking”, whereas before they were Tokyo Round codes which developing countries did not join. Above all, the Uruguay Round process and final outcome provided the right external environment for ASEAN countries to go further with their own trade liberalization programmes in the late 1980s and into the mid-1990s. This headwind of liberalization also contributed to the ASEAN Free Trade Area (AFTA) initiative and its accelerated timetable en route to completion.

Post-Uruguay Round Three major agreements were negotiated in the first three years of the new WTO: the Information Technology Agreement (ITA); and two Annexes to the GATS, one on financial services, the other on basic telecommunications services. The key deals on the ITA were done in the run-up to and during the WTO’s first Ministerial Conference, held at Suntec City, Singapore in 1996. Tariffs on a range of information technology products were abolished — a major gain for the ASEAN-5 given their increasing integration into global electronics supply chains. However, consumer electronics, an area of significant export interest to East Asia, was excluded. ASEAN commitments in the Annex on Financial Services were weak. However, stronger commitments were made in the Annex on Basic Telecommunications Services, especially by Singapore. This followed on the back of autonomous liberalization of hitherto highly protected domestic telecom sectors.

ASEAN IN THE WTO By developing country standards the ASEAN-5 are relatively well integrated into the WTO. They are among a score or so of

© 2004 Institute of Southeast Asian Studies, Singapore

1. Background

7

developing countries with reasonably well-staffed missions in Geneva, who take an active part in WTO committees and working groups, are actively involved in formal and informal coalitions on particular issues, and have initiated anti-dumping actions and dispute settlement complaints (both complex tasks). All this presupposes a critical minimum of trade policy capacity, which the overwhelming majority of developing countries do not possess. Of course, trade policy capacity within ASEAN varies with levels of development, ranging from Singapore at one end to Indonesia and the Philippines at the other. That said, the ASEAN-5 have been going their separate ways in the WTO. ASEAN co-operation in Geneva has all but broken down. The differential impact of the Asian crisis on the ASEAN countries, and their glaring lack of a collective response, has clearly had a negative effect on ASEAN co-operation in the WTO. That, however, is not the proximate cause. Arguably, the Asian crisis accelerated, and threw into sharper relief, what was happening anyway. Why has bowling alone in the WTO followed hanging together in the Uruguay Round? Non–co-operation in the WTO reflects problems back in the region. First, ASEAN is a more differentiated family than it was a decade or two ago. There are growing inter-country gaps: in living standards, macroeconomic management, microeconomic policies, and the quality of institutions. ASEAN enlargement, taking on board Cambodia, Laos, Vietnam, and Myanmar, is the most obvious sign of wider disparities and greater unwieldiness within the club. But gaps between the old ASEAN members have widened too. These trends point to more distinct and different national trade (and wider economic) policy profiles within ASEAN, especially when broken down issue by issue. Second, trade policy responses to the Asian crisis diverged. Singapore’s response was to accelerate unilateral liberalization of its services sectors. The others, while not reversing previous

© 2004 Institute of Southeast Asian Studies, Singapore

8

Southeast Asia in the WTO

liberalization of trade and foreign direct investment (FDI), were more wary. Defensiveness is particularly evident in services sectors dominated by quasi-monopolistic state-owned and private firms. Third, there are ever-greater external demands on national trade policy capacity. The Uruguay Round agreements cover broader sectoral terrain and bite deeper into domestic regulation. “Second generation” reforms, involving nitty-gritty domestic regulation, are technically complex, take time, entail real financial costs, and enmesh a plethora of decision-makers inside and outside the government. National decision-making is in consequence more complex, slower and differentiated by issue. Decision-making complexity at home, involving more players on WTO issues (especially from regulatory agencies), makes it much harder to forge common ASEAN positions in Geneva. In the Uruguay Round, in contrast, it was easier to reach consensus due to the smaller coterie of trade policy officials and negotiators involved. Fourth, intra-ASEAN divisions since the Asian crisis have been reflected in the slow pace of progress in AFTA. Although the timetable for the Common Effective Preferential Tariff (CEPT) scheme has been brought forward, next-to-no progress has been made on “AFTA-plus” items, particularly the ASEAN Investment Area (AIA) and the ASEAN Framework Agreement on Services (AFAS). It remains to be seen whether external pressures — competitive liberalization in the world economy (especially by China), the switch of investor attention from Southeast to Northeast Asia, the proliferation of bilateral FTAs in the Asia-Pacific — will enable the ASEAN members to overcome their differences and accelerate progress within AFTA en route to the envisioned ASEAN Economic Community (AEC). Fifth, the trade liberalization agenda of the Asia-Pacific Economic Co-operation (APEC) has clearly stalled, severely

© 2004 Institute of Southeast Asian Studies, Singapore

1. Background

9

damaging the credibility of APEC itself. With the benefit of hindsight, the APEC model of “concerted unilateralism’’ — autonomous, non-binding, non-discriminatory trade liberalization ratcheted up through peer pressure within the club — was somewhat hyped. It seems the best APEC can hope for is to be a cheerleader for non-discriminatory unilateral and multilateral liberalization, but perhaps focus more on transparency (through the regularized dissemination of information and exchange of ideas), trade facilitation, and other measures of economic and technical co-operation. Sixth, the explosion of bilateral and plurilateral FTA initiatives — the “new regionalism” in the Asia-Pacific — is very recent, and a direct response to stalled momentum on the WTO, AFTA, and APEC tracks. Singapore blazed the trail, and others are following quickly. The New Regionalism in the Asia-Pacific is embryonic but its acceleration seems to be pre-programmed. One can perhaps expect a more dense patchwork of bilateral FTAs, in the region and crossregionally, with some coalescence into plurilateral, big-block arrangements, again within the region and beyond. This scenario points to the gradual emergence of an East Asian discriminatory trading block, more likely to revolve around China than Japan, having cross-regional linkages with other blocks revolving around the United States and the European Union (EU). Where this will leave the WTO, its supposedly nondiscriminatory rule-base and multilateral liberalization, is very much open to question. The WTO, especially after the failure of the Cancun Ministerial, is crippled and seems unable to advance the pace of multilateral trade liberalization. Indeed, the disconnection between a stalled WTO and ongoing (albeit patchy) unilateral liberalization is evermore striking. In contrast, bilateral and regional trade negotiations, driven from national capitals,

© 2004 Institute of Southeast Asian Studies, Singapore

10

Southeast Asia in the WTO

are more closely aligned with unilateral practice and hold out the prospect of delivering tangible results more quickly. Unless the Doha Round can be put back together soon, and against the odds, an accelerated shift of attention from the WTO to FTAs is to be expected. The WTO, at least as a negotiating forum, is in grave risk of becoming increasingly marginalized and irrelevant.

The Multilateral Track: ASEAN in the WTO The multi-track trade policy context set out above gives a clearer indication why the ASEAN countries are bowling alone and not hanging together in the WTO. An enlarged ASEAN is more unwieldy and internally fractured, especially since the Asian crisis. Two symptoms of internal fracture are a semi-stalled AFTA and Singapore’s go-it-alone bilateral FTAs; going separate ways in the WTO is a third. Problems within the ASEAN caucus in Geneva were crystallized in the immediate run-up to the WTO’s disastrous Ministerial Conference in Seattle. Singapore and Thailand were keen on launching a new “Millennium Round” of multilateral trade negotiations, and accordingly lined up with Pacific countries (notably Hong Kong, Australia, and New Zealand) and others in a loose informal group dubbed Friends of the New Round. Malaysia took a sharply different turn: it joined the arch-sceptics, India, Pakistan, and Egypt, in the Group of 15 (G-15) and the LikeMinded Group (LMG). The G-15/LMG position was that core developing country concerns, chiefly revolving around the problems of implementing Uruguay Round agreements domestically (the “implementation agenda”), should be dealt with before proceeding with a new round. The official Malaysian position was that a new round of further liberalization measures should be narrowly focused on the three core market access items (agriculture, services, and industrial

© 2004 Institute of Southeast Asian Studies, Singapore

1. Background

11

goods); but, unlike Singapore and Thailand, it was unwilling to negotiate new items (especially the four “Singapore issues”: investment rules, competition rules, trade facilitation, and transparency in government procurement). The intra-ASEAN split pre-Seattle was a watershed: ASEAN cooperation in the WTO has been crippled ever since. Divisions persisted after Seattle. In the preparations for the launch of the new round in Doha in November 2001, ASEAN members were more or less active individually, but there was no collective ASEAN position — quite unlike the preparations for Punta del Este in 1986. ASEAN co-operation has been next to non-existent since negotiations proper started in January 2002. Meetings of the ASEAN permanent representatives to the WTO, which used to take place on a weekly basis, are now less frequent. Contacts among lower level officials across the ASEAN missions to the WTO are also not as intensive as they used to be. The fact is that ASEAN members now find it very difficult to agree common positions on any real substance in the WTO. Bowling alone characterized the ASEAN-5 in the run-up to and at the Cancun Ministerial. Singapore and Thailand retained broadly positive and pragmatic stances on the issues. Malaysia, Indonesia, and the Philippines, on the other hand, became increasingly defensive in critical areas such as agriculture, Special and Differential Treatment (S&D — WTO provisions on more favourable treatment for developing countries), and the Singapore issues. Their commitment to a successful round seemed to be less than solid. Intra-ASEAN differences on the main negotiating items abound: •

On agriculture, Thailand is the main demandeur within ASEAN for major multilateral liberalization, and is the only really active ASEAN member of the Cairns Group (of major

© 2004 Institute of Southeast Asian Studies, Singapore

12

•

•

Southeast Asia in the WTO

agricultural exporters outside the United States and EU). At the other extreme, Indonesia is wary of further opening its agricultural markets to imports, and is a reluctant and ill-suited member of the Cairns Group. The Philippines is rather close to the Indonesian position. In between, a rapidly industrializing Malaysia has fewer agricultural interests to pursue in trade negotiations. Thailand, Indonesia and the Philippines are members of the Group of 20-plus, a pan-developing country alliance on agriculture formed just before Cancun and led by Brazil (and including the other developing country majors, China, India, South Africa, and Egypt). The G20’s target is more radical agricultural liberalization in the developed world, but it is equally defensive about developing country liberalization. Indonesia and the Philippines were also part of another new alliance, the Group of 33, which campaigned at Cancun for exemptions of their “special products” (staple goods like rice and sugar) from overall liberalization, and for a “special safeguards mechanism” to protect against import surges in these products. Indonesia chaired the G33 in Cancun. On services, Singapore is the chief demandeur within ASEAN, but the gap between it and other ASEAN members has widened since the Asian crisis. In addition to unilateral liberalization and services provisions in its bilateral FTAs, Singapore is keen for progress to be made in the GATS negotiations. Malaysia, Thailand, Indonesia, and the Philippines, however, seem to be more defensive on their own liberalization of services postAsian crisis, and are consequently more defensive in the GATS negotiations. Malaysia and Indonesia, alongside India, Pakistan, and Egypt, were members of the LMG, which took hardline positions on implementation issues, S&D, and TRIPS (the WTO’s agreement

© 2004 Institute of Southeast Asian Studies, Singapore

1. Background

•

13

on trade-related intellectual property rights). Singapore and Thailand, both in Friends of the New Round, found these positions difficult to accommodate. While in reality Malaysia and Indonesia are more pragmatic and flexible on these issues than their South Asian and African allies, their membership of these groups has perhaps caused a little discomfort for other ASEAN members. On the Singapore issues, as on services, there seems to be a gap between Singapore and the rest. As a highly open economy dependent on inward investment, and now with greater openness in hitherto protected services markets, Singapore has no need to be defensive in new negotiations on investment and competition rules, trade facilitation, and transparency in government procurement. Indeed, these items figure prominently in Singapore’s new FTAs. Thailand occupies an in-between position: it is relatively pragmatic and flexible on the Singapore issues — more so than it is in the GATS negotiations. Other ASEAN members, in contrast, have been noticeably more defensive (especially on investment, also on competition rules, to some extent on transparency in government procurement, and less so on trade facilitation). Malaysia, along with India, led a broad developing country grouping opposed to negotiations on the Singapore issues at the Cancun Ministerial. Indonesia and the Philippines were also members of this G90. This position has changed somewhat since Cancun. Malaysia in particular has displayed more flexibility by indicating willingness to negotiate on trade facilitation while leaving the other three items out of core negotiations.

These are deep cracks within ASEAN in the WTO, almost impossible to paper over; and they make meaningful collective action in the Doha Round extremely difficult to achieve. Moreover,

© 2004 Institute of Southeast Asian Studies, Singapore

14

Southeast Asia in the WTO

the will to overcome differences and find common denominators for co-operation seems to be lacking. With greater experience of multilateral trade negotiations under their belt, ASEAN countries individually feel better able to defend and advance (increasingly differentiated) national positions on their own. The imperative for fledglings to flock together, as was the case during the Uruguay Round, seems to be a thing of the past. This presents such a striking contrast with ASEAN’s hanging together in the Uruguay Round. Therefore, ASEAN collectively is not important in the WTO at present. More important, and consequently more deserving of critical examination, is the individual participation of the ASEAN5 in the WTO, especially in the context of the Doha Round. This is the focus of the following chapters, taking each country in turn and assessing its WTO participation against the background of national trade policy developments.

© 2004 Institute of Southeast Asian Studies, Singapore

2. Singapore and WTO

15

Chapter 2

Singapore and WTO TRADE POLICY FRAMEWORK Singapore, after Hong Kong, has the world’s most liberal trade policies. It is a free port, with zero tariffs on 99.9 per cent of imports (tariffs being applied only on alcohol) and hardly any non-tariff barriers on trade in goods (Table I). There are no restrictions on FDI, with the exception of a few services sectors. Trade remedies (anti-dumping actions, countervailing duties, safeguards) have not been used in recent memory. Singapore is also an extremely globalized economy, with a trade-to-GDP ratio of 300 per cent and inward investment in manufacturing accounting for 70 per cent of total manufacturing investment. It thus conforms in some respects to the original brilliant vision of its founder, Stamford Raffles. Since the mid-1980s, government policy has increasingly emphasized diversification into high-value services and life sciences. Unlike Hong Kong, a range of selective incentives is offered to multinational and domestic enterprises, but mostly in the frame of market-oriented policies. Singapore complies fully with the WTO’s TRIMS agreement (on trade-related investment measures). The Singapore Government has majority or minority shareholdings in a basket of prominent local enterprises (so-called 15 © 2004 Institute of Southeast Asian Studies, Singapore

16

Southeast Asia in the WTO

Government Linked Companies or GLCs). Critics argue that their relations with the government, for example, fiscal and accounting procedures and inter-personal links, are less than transparent. They suggest that the GLCs exercise excessive market power at home, for example, through cross-subsidization, to the detriment of small and medium-sized enterprises in the private sector. The Singapore Government’s extensive micro-intervention in the economy has hardly figured in trade negotiations as it does not involve formal, direct trade barriers. However, this could change if the WTO and FTAs go deeper into competition policy terrain that covers informal, indirect trade barriers embedded in domestic regulation. Indeed, recent bilateral FTA negotiations have begun to go over some of this ground. Singapore has no overarching competition legislation, preferring to deal with competition policy issues on a piecemeal, sector-by-sector basis (rather like Hong Kong). This is about to change. The U.S.– Singapore FTA commits Singapore to enact a competition law and establish a competition authority, with disciplines to ensure that the GLCs do not act in an anti-competitive manner. Until recently, Singapore imposed restrictions on ownership, entry, and operation in several services sectors. This has changed: a combination of unilateral liberalization and domestic regulatory reform has occurred, with a marked acceleration of pace since the Asian crisis. All formal barriers to competition in the telecommunications sector were removed by April 2000, two years ahead of schedule. Foreign ownership restrictions on Internet service infrastructure were lifted in 1999. Liberalization has also occurred in the utilities (water, gas, and electricity). Formal barriers in the contestable parts of the power generation and supply markets have been removed. Liberalization is slower in other areas, notably in domestic retail banking. Most foreign ownership restrictions in financial

© 2004 Institute of Southeast Asian Studies, Singapore

2. Singapore and WTO

17

services have been removed, with phased liberalization of entry and operating restrictions in retail and wholesale banking, insurance, and securities markets. Close to full liberalization has taken place in insurance and securities; it has been significant in wholesale and offshore banking (alongside the removal of restrictions on the internationalization of the Singapore dollar); but it remains rather cautious in retail banking. Qualifying Full Banking licences have been issued to more foreign banks, but the government is intent on preserving local ownership and control of at least one major bank. Major restrictions remain in place in broadcasting, the news media, legal services, and property ownership; and there is restricted recognition of overseas professional qualifications in engineering, architecture, and medicine. In legal services, a limited number of joint ventures between foreign and Singaporean law firms have been approved. Singapore’s WTO commitments, while stronger than in the old GATT, fall short of national practice. The average bound tariff was 9.7 per cent in 1999 (projected to decline to 6.9 per cent in 2005 and then to zero by 2010 in line with ITA and APEC commitments). Only 70.5 per cent of tariff lines are bound (Table I). In the GATS, commitments were made in seven of twelve services sectors; no commitments were made in distribution, education, environmental, health-related and some professional services (such as the law). Singapore has made commitments under the Fourth and Fifth Protocols to the GATS: stronger commitments in the Agreement on Basic Telecommunications Services, including signing up to the core principles of the Telecoms Reference Paper; weaker commitments in the Agreement on Financial Services. Subsequent unilateral liberalization has widened the gap between regulations at home and multilateral bindings.

© 2004 Institute of Southeast Asian Studies, Singapore

18

Southeast Asia in the WTO

RECENT TRADE POLICY DEVELOPMENTS Pragmatism, not ideological fixity or coherence, has been the hallmark of Singapore’s economic policy. Trade policy is no exception. Unilateral measures have proceeded in tandem with bilateral, regional, and multilateral activity. Since 1999, bilateral, cross-regional FTAs have occupied centre stage. FTAs with New Zealand, Japan, Australia, EFTA, and the United States are in operation (the latter being the jewel in the crown as far as Singapore is concerned). Negotiations with Canada have been concluded, and are ongoing or planned with Korea, India, Jordan, Mexico, Chile, and others. Singapore has been lobbying strongly for an FTA with the EU. It is also prominently involved in collective ASEAN negotiations with China, Japan, and India. Singaporean trade policy is, therefore, energetically multi-track. The Singapore Government views strong, WTO-plus FTAs as part of a process of “competitive liberalization” and as a building block for multilateral liberalization through the WTO. In this benign scenario, one could imagine FTAs reinforcing Singapore’s liberal trade policies on both unilateral and multilateral tracks: they would accelerate ongoing unilateral liberalization and increase the transparency of domestic regulation in services (especially through strong commitments in the new U.S.– Singapore FTA); and would be followed by stronger WTO (especially GATS) commitments in due course. Viewed less benignly, FTAs could divert political attention and negotiating resources from the WTO, in addition to creating a “spaghetti-bowl” effect (overlapping FTAs with different and complicated rules of origin). Preferential concessions granted to foreign firms based in FTA partner countries would transfer monopoly rents rather than increase market contestability, especially in services sectors.

© 2004 Institute of Southeast Asian Studies, Singapore

2. Singapore and WTO

19

Whatever the pros and cons of FTAs, Singapore’s advantage is that it has a clear, coherent, well-implemented trade policy strategy set at home, that is, reliant essentially on unilateral measures. FTAs and the WTO are seen as helpful auxiliaries, not as substitutes, for sound policies “from below”.

SINGAPORE IN THE WTO: POSITIONS ON THE ISSUES There is no doubt that, for the last three to four years, the WTO has had to take a backseat compared with FTAs in terms of Singapore’s political attention and negotiating resources. Several concurrent FTA negotiations have been highly resource-intensive, stretching Singapore’s small team of trade officials to the limit. In contrast, manpower devoted to WTO business has not increased, not even after the launch of the Doha Round. However, if and when the round is put back on track, Singapore should be able to channel sufficient negotiating resources in a WTO direction. This is not to say that Singapore is inactive in the WTO. Far from it: as a very open entrepôt economy it remains a firm supporter of a rules-based multilateral trading system, and, like Hong Kong, has tended to punch above its weight in the GATT/ WTO. It hosted the WTO’s First Ministerial Conference in 1996, and has been a consistent and vocal advocate of a new round, with a strong market access focus. Singapore adopts the following positions in the present round (Table II): •

Market access: Liberalization of trade in industrial goods and services is the main priority. Singapore has no direct interest in agriculture; but it is obviously concerned that the deadlocked agricultural negotiations, the centrepiece of the

© 2004 Institute of Southeast Asian Studies, Singapore

20

Southeast Asia in the WTO

round, has blocked movement in other market access negotiations. In the negotiations on non-agricultural goods, Singapore is keen to see the reduction of non-tariff barriers, tariff peaks and tariff escalation, and the elimination of “nuisance” tariffs (low tariffs that are costly to administer but deliver little revenue). Singapore has gained extra export market access from Uruguay Round tariff reductions, the ITA and, more recently, its FTAs, but it is clearly in its interest to see further multilateral liberalization, and preferably the abolition of tariffs worldwide. The United States, supported by some Western Pacific countries including Singapore, proposed the abolition of all tariffs by 2015, but this has encountered predictably stiff opposition from developing countries with high tariffs. Singapore is active in an informal group of WTO members favouring liberalization in non-agricultural goods. Singapore’s stake in the GATS negotiations is stronger than it was in the Uruguay Round. Then it supported the inclusion of services in the negotiating agenda, but was cautious about making commitments, especially due to protection of services markets at home. Now the government wishes to accelerate the diversification of the local economy into services, and has accordingly stepped up autonomous liberalization. Recently concluded FTAs, particularly with the United States and Australia, have a strong services focus. There are stronger interests in exporting commercial services to the neighbouring region, particularly through the internationalization of the GLCs. Singapore, like Hong Kong, is keen on developing its strengths as a logistics hub (for supply chain management and other trade-related services). With the benefit of many years’ participation in the GATS, and with fresh FTA negotiating experience, Singapore now has a more refined, precise appreciation of the issues at hand and national interests in the present WTO services negotiations. Singapore is, therefore,

© 2004 Institute of Southeast Asian Studies, Singapore

2. Singapore and WTO

21

willing to make stronger commitments in the GATS, providing others reciprocate. In general, Singapore seeks stronger commitments from WTO members on market access and national treatment (GATS Articles XVI and XVII), with fewer listed exemptions. It also wishes to promote cross-border e-commerce, with clarification of relevant provisions in several WTO agreements, but perhaps particularly in the GATS. •

•

Rules: Like Hong Kong, Singapore was very active in the rules negotiations (on anti-dumping, safeguards, and subsidies) during the Uruguay Round. As a global city-state it continues to have a big stake in well-functioning rules for international commerce. Singapore should, therefore, be in a good position to be active in the Doha Round negotiations on anti-dumping, subsidies, and dispute settlement. The Doha Ministerial Declaration also stipulates negotiations to “clarify and improve” disciplines on Regional Trade Agreements (RTAs; covered by GATT Article XXIV and GATS Article V). However, given Singapore’s frenetic activity in negotiating FTAs, it is unlikely to have much short-term interest in strengthening disciplines on them. Developing country issues (especially implementation, TRIPS, and Special and Differential Treatment [S&D]): These are pressing issues for the bulk of developing countries in the WTO, but they are of minimal direct concern for Singapore. It has no problems in implementing Uruguay Round agreements; it now has strong and well-enforced intellectual property protection; and, with hardly any GSP tariff concessions left, S&D is of no consequence. Singapore’s main concern with this cluster of issues, as it is for agriculture, is that it has become a “round-stopper”, that is, it has blocked progress elsewhere, particularly in the market access

© 2004 Institute of Southeast Asian Studies, Singapore

22

•

Southeast Asia in the WTO

negotiations on industrial goods and services. It would, therefore, prefer sensible compromises that would accommodate legitimate developing country grievances but without going to the extreme of large-scale or blanket exemptions from WTO rules and obligations. Singapore issues (investment rules, competition rules, trade facilitation, and transparency in government procurement): Broadly speaking, Singapore welcomes these items as part of the new round’s negotiating agenda. Indeed, they figure more prominently as WTO-plus items in its new FTAs. In the process, Singapore trade officials have acquired better knowledge of these issues, with concomitantly greater negotiating capacity. This stands them in good stead to play an active role if actual negotiations are eventually launched.

Singapore’s FTAs contain strong provisions on liberal market access for foreign investments in goods and services, and their subsequent protection once established in the host country, all underpinned by strong dispute settlement procedures. Hence Singapore would have no problem with multilateral negotiations on investment rules. Trade facilitation is a high-priority item for Singapore and part of its strategy to become a global logistics hub. It is an active member of the Colorado Group, an informal Friends Group promoting a WTO agreement on trade facilitation. It is already a signatory to the Government Procurement Agreement (GPA), presently a plurilateral code involving a subset of overwhelmingly developed country WTO members. Thus it would have no issue with new negotiations on transparency in government procurement. Multilateral negotiations on competition rules would also be within Singapore’s comfort zone, given that overarching domestic competition legislation is planned. In any case, a WTO agreement on competition rules, if it eventually materializes, is likely to be rather weak.

© 2004 Institute of Southeast Asian Studies, Singapore

2. Singapore and WTO

23

Given this context, Singapore could arguably have a longterm interest in strong WTO rules on investment, trade facilitation, and government procurement, and perhaps a weaker agreement on competition rules. However, it is well aware that most developing countries, including its ASEAN neighbours, are sceptical and defensive on the Singapore issues. Indeed, sharp disagreements among WTO members on this issue-cluster precipitated the collapse of the Cancun Ministerial. If the Doha Round ever recovers from the disaster at Cancun, Singapore may have an interest in a developed-developing country compromise that would launch negotiations intended to arrive at initially light, de minimis agreements, perhaps on trade facilitation and possibly (though less likely) on transparency in government procurement, but not on investment and competition (both, particularly investment, being politically more sensitive). This was in fact the compromise that was in sight but not quite clinched in Cancun. Eventual agreements could encompass core principles and codes of conduct based on transparency, peer review, and enhanced technical assistance and capacity building for developing countries. Binding obligations subject to dispute settlement could be a matter for negotiations, but with long transition periods for developing countries.

TRADE POLICY CAPACITY FOR PARTICIPATION IN THE PRESENT ROUND Singapore’s good trade policy capacity stems from reasonably small, compact, and joined-up government. As in Hong Kong, trade policy is effectively depoliticized and treated in technocratic fashion. This is highly exceptional: trade policy is politicized almost everywhere in the world, and particularly so in developing countries. Depoliticized trade policy in Singapore means that the

© 2004 Institute of Southeast Asian Studies, Singapore

24

Southeast Asia in the WTO

bureaucracy, largely insulated from interest group pressure, can speedily implement policy objectives. The Ministry of Trade and Industry (MTI) co-ordinates trade policy, with input from other ministries and statutory boards (regulatory agencies usually housed within ministries). During the 1990s an unusual trade policy-making model was developed: the MTI provided generalist officials who concentrated on overall coordination, while specialist negotiators on specific issues came from the Trade Development Board (TDB — a statutory board housed within the MTI that performed a combination of trade promotion, trade facilitation, and trade policy functions). As a result of reorganization in 2001/02, the specialist trade policy functions of the TDB (renamed International Enterprise Singapore) have been repatriated to the MTI. The trade policy decision-making circle has widened since GATT days. This is due to the breadth and complexity of the Uruguay Round agreements, Singapore’s hosting of the WTO’s First Ministerial Conference in 1996, the WTO negotiations on the ITA and the GATS Annexes, and, not least, the demands of negotiating new FTAs. The most visible sign of a bigger trade policy operation is the involvement of other parts of the government. The Ministry of Foreign Affairs (MFA) has traditionally been involved in “strategic” aspects of trade policy. The Ministry of Finance and the Monetary Authority of Singapore (the central bank) have been involved since the Uruguay Round on the financial services aspects of the GATS. Various ministries and statutory boards have been drawn in on newer trade policy issues that go deeper into domestic regulation (for example, in services sectors and on intellectual property, technical standards, mutual recognition of professional qualifications, public procurement, mobility of corporate personnel and inward investment).

© 2004 Institute of Southeast Asian Studies, Singapore

2. Singapore and WTO

25

Singapore’s recent FTA negotiations have been especially resource-intensive on the trade-related new issues mentioned above. For a small country like Singapore, bilateral negotiations with a major, well-resourced power — notably the United States — puts the spotlight on questions of regulatory detail to a much greater extent than multilateral negotiations involving a large number of players. Servicing such negotiations has spread trade policy capacity from the MTI to other parts of the government. The result is better, in-depth domestic awareness of the fit between trade policy and the wider national economic strategy, with trade policy correspondingly rising higher up the scale of economic policy priorities. Such enhanced trade policy capacity could be transposed to WTO negotiations, especially on the more complicated non-border regulatory issues. This is indeed the experience of other countries that have invested heavily in FTA negotiations, such as Chile and Mexico in Latin America. This has not been an issue for Singapore so far, given the absence of progress in the Doha Round. However, if multilateral negotiations get out of the present rut, one should expect more active Singapore participation, bringing in parts of the government beyond the MTI to a greater extent than before. Singapore should also be well-placed to participate effectively in informal issue-based coalitions (Friends Groups) involving its FTA partners. Although the WTO has had to cede pride of place to FTA negotiations in the last few years, Singapore trade policy on the multilateral track retains two advantages: the role of the minister; and that of the Geneva mission. First, Singapore has a prominent, high-profile trade minister, Brigadier-General (NS) George Yeo, who manifestly leads his ministry from the front and has made his mark on the international stage. Singapore often advertises itself as an “honest

© 2004 Institute of Southeast Asian Studies, Singapore

26

Southeast Asia in the WTO

broker” in the WTO. It has a strong stake in a well-functioning WTO system, but as a small player it is not a big demandeur on many issues. This enables it to use its good offices to narrow differences between conflicting parties, especially across the developed-developing country divide. BG Yeo has played this honest broker role to good effect, particularly in chairing the highly sensitive agricultural sessions at WTO Ministerial Conferences. Indeed, he played an instrumental role in the lead-up to the new round: first in convening an informal “mini-ministerial” meeting in Singapore in October 2001; and then in brokering the compromise wording on agriculture in the Ministerial Declaration that, more than anything else, allowed the new round to be launched in Doha. BG Yeo was one of the crucial players in the Cancun Ministerial. His frenetic, round-the-clock attempts to broker a deal between opposing camps in the agricultural negotiations elicited concessions, particularly from the EU. Sadly, this was not quite enough to prevent the overall failure of the Ministerial. Second, Singapore has a small but competent mission in Geneva (covering all international organizations in town, not only the WTO), with officials who come from the MFA and MTI. Singapore’s permanent representatives to the WTO have on occasion played prominent roles, especially when Singapore hosted the WTO’s First Ministerial Conference. (Singapore’s permanent representative chaired the WTO’s General Council in that year.) Nevertheless, there is room for improvement as regards Singapore’s participation in the WTO, and in Singapore trade policy-making more generally — in two respects. First, the lack of business input is the Achilles heel of Singapore trade policy-making. There are, of course, various formal and informal consultation mechanisms in place to enable business in

© 2004 Institute of Southeast Asian Studies, Singapore

2. Singapore and WTO

27

Singapore — MNEs, GLCs, and the local private sector — to feed into trade policy. Recently, the three chambers of commerce came together in the form of the Singapore Business Federation (SBF), which is supposed to represent local business interests better visà-vis the government and on the international stage. However, the plain fact is that business constituencies, particularly the local private sector, are passive: they take the lead from government rather than feeding their market intelligence and preferences systematically into public policy-making. This is not surprising, given the contours of the Singapore governmentled model from the late 1950s. But it does put trade policy-making at a disadvantage, particularly in unbalanced FTA negotiations with major powers. Whereas U.S. negotiators, for example, set out well-informed positions based on real-world business information and preferences, Singaporean negotiators, with no real-world business experience, have little feedback at home. The government hopes that the SBF will change matters, but one has doubts: the SBF, like much else in Singapore, is the result of a government initiative, not one from business. Second, Singapore could be a better honest broker and good citizen in the WTO — not just in the form of the minister at WTO Ministerials, but on a day-to-day basis in Geneva. It has periodically performed such a function, for example, being active in rules negotiations during the Uruguay Round and providing a few experienced dispute settlement panellists. It could do more in terms of the WTO’s day-to-day operating effectiveness. What the WTO needs is more good citizens.

© 2004 Institute of Southeast Asian Studies, Singapore

Chapter 3

Malaysia and WTO TRADE POLICY FRAMEWORK Malaysia has long had relatively liberal trade policies by developing country standards, indeed more markedly so since further trade and investment liberalization from the mid-1980s. It is one of the twenty most globalized economies in the world: trade accounts for 223 per cent of GDP; FDI accounts for between a quarter and a third of overall private investment; and the accumulated stock of FDI is close to a half of GDP. The average tariff is 9.2 per cent (Table I), but once weighted by the volume of imports the average rate of duty comes down to 1.3 per cent. This is due to often duty-free concessions on imports related to domestic investment, production and export incentives, much of it aimed at multinational enterprises (MNEs). However, the tariff structure is distorted by high tariffs and tariff escalation on sensitive items (for example, cars, car parts, motorcycles, textiles and clothing, alcohol, and some food products). Non-tariff barriers include opaque, discretionary, and administratively burdensome import licensing procedures, a government monopoly on rice imports and production subsidies to agriculture. Non-tariff protection has come down since the late 1980s, but it may have picked up again after the Asian crisis. Malaysia is a sparse user of anti-dumping duties and has not resorted to other trade remedies.

29

30

Southeast Asia in the WTO

Malaysia has been open to FDI in manufacturing, but on a selective and discriminatory basis. Foreign ownership was limited to 30 per cent of equity, but this was often honoured in the breach, with 100 per cent ownership allowed in the electronics sector, for instance. In mid-2003 the Malaysian Government announced the full liberalization of equity holdings in manufacturing projects, in response to a sharp drop in recent inward investment and the switch of investor attention to China. Protection in services sectors is much higher, with closer adherence to the 30 per cent foreign ownership limit combined with other onerous restrictions on entry, establishment, and operation by foreign services providers. As for professional services, there are tight restrictions on non-citizens and the recognition of overseas professional qualifications. A protectionist trade-inservices policy is tightly bound up with the New Economic Policy (NEP), the Malaysian Government’s long-standing comprehensive affirmative action programme in favour of the ethnic Malay majority. The NEP stipulates that ownership of enterprises above a certain size must be split 40:30:30 between Bumiputeras (Malays and a few other groups qualifying for affirmative action), other Malaysian citizens, and foreigners respectively. The Malaysian Government is heavily involved in the economy with an array of industry and firm-specific incentives targeted at ethnic Malays (through the NEP) and MNEs. Protection is high in a few sectors, notably the car industry. The state has majority and minority stakes in selected enterprises (most visibly Proton in cars and Petronas in oil and gas), although state ownership in the economy has diminished with successive waves of privatization from the 1980s. Malaysia’s average bound tariff in the GATT is 19 per cent, well below the developing country average but still more than twice its average applied tariff (Table I). GATS commitments are

© 2004 Institute of Southeast Asian Studies, Singapore

3. Malaysia and WTO

31

weak. There is no national treatment commitment on banking and insurance, no bindings on securities, and only partial acceptance of the Reference Paper in the Agreement on Basic Telecommunications. Commitments on commercial presence are usually restricted to joint ventures with a maximum foreign equity limit of 30 per cent. Malaysia is a signatory to the ITA, but with a longer phase-out (to 2005) of tariffs on some sensitive products. In 2001, WTO members granted Malaysia an extension, until end2003, to phase out its local content provisions on cars (in line with the TRIMS agreement).

RECENT TRADE POLICY DEVELOPMENTS On one hand, given its high degree of dependence on trade and FDI, Malaysia has a strong stake in a liberal, rules-based multilateral trading system. On the other hand, ethnicity-based politics at home, biased in favour of the Malay majority, spills over into protectionism, now especially in the services sectors. Malaysian policy-makers have usually reconciled the demands of globalization and the dictates of domestic politics through “businesslike pragmatism”, though often masked in Third World political rhetoric. Businesslike pragmatism no longer adequately characterizes Malaysian trade policy. Indeed, the period stretching from the outbreak of the Asian crisis to just after Seattle was a sharp departure from previous practice. The prime minister, Dr Mahathir Mohamad, made repeated statements that seemed to hark back to the New International Economic Order in the 1970s, and also appealed to a post-Cold War anti-globalization audience across the world. The overall effect was to put trade policy on a defensive footing: though pre-crisis trade and investment liberalization was not reversed, its forward momentum came to a halt post-crisis. Malaysia became more defensive in the WTO in the run-up to

© 2004 Institute of Southeast Asian Studies, Singapore

32

Southeast Asia in the WTO

Seattle: instead of supporting a new round alongside Singapore and Thailand, it joined the developing country sceptics led by India, Pakistan, and Egypt. However, there was at least a partial return to Malaysia’s traditionally flexible and pragmatic trade policy stance, represented within the government by the influential trade minister, Dato Seri Rafidah Aziz, and her ministry (Ministry of International Trade and Industry — MITI). This coincided with domestic policy reforms since 2000/01, and heightened anxiety that foreign investor attention was switching to China at Southeast Asia’s expense. Malaysia, therefore, had to advertise its (relatively) liberal trade policy credentials, and back it up with concrete action in a more competitive regional and global policy environment. Consequently, Malaysia adopted a noticeably more constructive approach to the preparations for a new round preDoha than it had done pre-Seattle. Rather than following Indianstyle blocking tactics, it played its part in trying to launch a new round on what it considered the right terms. Malaysia quietly differentiated between “offensive” issues it wished to see progress on (notably negotiations on reducing industrial tariffs); others on which it was “defensive” (such as services and the Singapore issues); and still others on which it was willing to compromise and trade off (such as the implementation agenda). Since the launch of the Doha Round, Malaysian trade policy has oscillated unpredictably between traditional pragmatism and the Third Worldism redolent of the 1997–2001 period. Official policy, seemingly influenced by the Penang-based Third World Network, has sometimes veered in the latter direction, for example, on developing country and Singapore issues in the present round. At other times it has displayed the realism and pragmatism associated with the trade minister and MITI, for instance in the recent initiative to allow full foreign ownership in manufacturing

© 2004 Institute of Southeast Asian Studies, Singapore

3. Malaysia and WTO

33

projects. The result is somewhat ad hoc trade policy that sends mixed and contradictory signals to other governments and foreign investors. This was reflected in the run-up to and at Cancun. Malaysia’s vociferous opposition to negotiations on the Singapore issues prevented it from effectively promoting its offensive positions on market access. After Cancun, and after the accession of Datuk Seri Abdullah Ahmad Badawi to the premiership, Malaysian trade policy seems to have swung back a little to pragmatism and flexibility. Antiglobalization rhetoric has been toned down. In particular, Minister Rafidah has displayed new flexibility on the Singapore issues and renewed commitment to the Doha Round. Another recent development in Malaysian trade policy concerns FTA negotiations. Malaysia has long eschewed bilateral FTAs, preferring to rely on unilateral liberalization, AFTA, and the WTO. Its multilateral credentials are reasonably strong. Initially, it met Singapore’s turn to FTAs with arch-scepticism, although it has reconciled itself to new realities. The Malaysian Government’s understandable fear is that if it stands above the fray, it will be shut out of bilateral and plurilateral FTAs negotiated around it. Hence it is part of ASEAN initiatives and negotiations with third countries (notably China). Indeed, after some hesitation, the government appears to have chosen to proceed with FTA negotiations. Negotiations with Japan have started; and a Trade and Investment Framework Agreement with the United States (often a prelude to FTA negotiations) is to be concluded. The Malaysian Government may adopt a more pragmatic stance on FTAs than it is in the WTO. It may be willing to concede substantially more in bilateral negotiations, especially with the United States on, for example, investment, services, and intellectual property issues, than it is doing in the WTO. This

© 2004 Institute of Southeast Asian Studies, Singapore

34

Southeast Asia in the WTO

raises the prospect of a schizophrenic trade policy, with an increasing mismatch between bilateral and WTO tracks. A moribund Doha Round after Cancun would probably point to more focus on FTAs at the expense of the WTO, with negotiating resources being diverted accordingly. As a recent convert to FTAs, Malaysia has not quite got to the stage of thinking hard and strategically about what it wants from FTAs and how they fit into national economic and political priorities. Failure at Cancun should concentrate minds in Kuala Lumpur.

MALAYSIA IN THE WTO: POSITIONS ON THE ISSUES Building on its Uruguay Round experience, Malaysia is an active ASEAN member of the WTO. Market access is manifestly a priority given that it is a relatively small economy with high levels of trade and FDI penetration. However, Malaysia’s market access focus is not unambiguous: it has a mixed bag of offensive, defensive and ambivalent positions in the WTO. Malaysia adopts the following positions in the present round (Table II): •

Market access: Reducing peak tariffs, tariff escalation, and nontariff barriers on industrial goods is Malaysia’s top priority in the round. In the Uruguay Round, Malaysian negotiators focused on reducing developed country border barriers to its industrial goods exports. This time, high border barriers in other developing countries are as much in its sights. For example, Malaysian exports to India are hampered by average tariffs of over 30 per cent (bound at over 50 per cent in the GATT). Taking a basket of forty-two (high, middle, and lowincome) developing countries in the WTO, the average applied tariff on manufactures is about 17 per cent, twice Malaysia’s

© 2004 Institute of Southeast Asian Studies, Singapore

3. Malaysia and WTO

35

level (probably with a much wider gap once comprehensively import-weighted). The average developing country GATTbound tariff for manufactures is 42 per cent compared with Malaysia’s average of 20 per cent. The incidence of peak tariffs, tariff escalation, and non-tariff barriers in most developing countries is also higher than it is in Malaysia. Hence, if the Doha Round gets back on track, Malaysia can be expected to be even more active than it was in the Uruguay Round in non-agricultural goods negotiations by tabling requests to many more WTO members, including several developing countries. This fits into the broader picture of increasing differentiation among developing countries in the WTO, with more South-South negotiations taking place than in previous rounds. Malaysia has a strong interest in a “formula” approach to tariff-cuts that would deliver greater reductions in relatively high tariffs, not least in other developing countries. On the other hand, the North-South polarization of debate at Cancun and a moribund Doha Round do not bode well for inter-developing country negotiations to liberalize South-South trade. Agriculture is of declining importance as a negotiating issue. That said, one of Malaysia’s priorities is to increase market access for its palm oil exports, especially by reducing high tariff protection in other developing countries (India once again figuring prominently on the list). Market access for processed tropical product exports (for example, palm oil, rubber, wood) is also important. Domestic programmes protect (overwhelmingly Malay) farmers in rural areas through a combination of tariffs, subsidies and other non-tariff barriers. Malaysia remains a member of the Cairns Group, though not a very active one. It generally supports Cairns Group positions, but would like flexibility to maintain subsidies to rural farmers through a “food security/development box” included in any future multilateral agreement.

© 2004 Institute of Southeast Asian Studies, Singapore

36

Southeast Asia in the WTO

Malaysia is defensive in the GATS negotiations — arguably more so than was the case in the Uruguay Round — due to high levels of protection of services markets at home. Other WTO members are putting pressure on Malaysia to open its services sectors, but resistance from domestic services providers is strong. However, gradual unilateral liberalization is in train in some sectors, particularly telecommunications. This might presage more flexibility in the GATS in the future. •

•

Rules: Malaysian goods exports are hampered by anti-dumping measures and other trade remedies in developed and other developing countries. Malaysia took a keen interest in rules negotiations during the Uruguay Round. It should have a strong stake in more robust WTO rules, particularly in “clarifying and improving” disciplines on anti-dumping measures, but so far it has not played an active role in this component of the Doha Round negotiations. Developing country issues: Malaysia has a rhetorical commitment to LMG positions on implementation issues, S&D, and TRIPS, which accords with the government’s Third World foreign policy credentials. In reality, Malaysia’s perception of its own interests in this issue-cluster is somewhat different to that of India, Pakistan, Egypt, and most others in the LMG — and, more generally, different from low-income and least-developed countries in the WTO.

As an advanced middle-income developing country, Malaysia has few problems in implementing Uruguay Round agreements. Only two implementation issues — on anti-dumping and subsidies — are of real concern. It is, therefore, willing to be flexible providing it gets concessions in negotiating areas of more pressing concern (notably industrial goods). Similarly, Malaysia has been gradually improving intellectual property protection at home; and, with

© 2004 Institute of Southeast Asian Studies, Singapore

3. Malaysia and WTO

37

rising real incomes, TRIPS is of less concern than it was during the Uruguay Round. Finally, with dwindling GSP concessions S&D is not nearly as important as it used to be. As a result of trade- and FDI-led growth, Malaysia has a keener appreciation that it can advance its export interests best by being active at the negotiating table, not by relying excessively on S&D. In common with most developing countries, Malaysia retains a general commitment to S&D, that is, flexibility with, and in some cases exemptions from, common rules and obligations, but it is far from being a hardliner on it. •

Singapore issues: Malaysia has been wary of new negotiations on the Singapore issues. Indeed, alongside India, it was a defensive hardliner on this front. It co-led a broad grouping of developing countries opposing negotiations on this issuecluster in Cancun. Its defensiveness here has been motivated partly by Third Worldist ideology; and, as in the GATS negotiations, by a desire to preserve discretionary policies at home that discriminate between sectors, and between local and foreign enterprises.

Malaysia can live with TRIMS obligations (though it has secured an extension on local content measures on automobiles). However, it would be very uncomfortable with an investment rules agreement that would impose additional constraints on selective industrial policy measures related to FDI (on ownership, entry, establishment, and operation requirements, including the use of subsidies and tax breaks). Malaysia does not have overarching competition legislation, though it is beginning to creep in on a sector-specific basis, notably in telecommunications. Externally-set competition rules obligations constraining discrimination in favour of particular sectors and firms would not be within the government’s comfort zone. Nor for the same reasons would most favoured nation (MFN)

© 2004 Institute of Southeast Asian Studies, Singapore

38

Southeast Asia in the WTO

and National Treatment obligations on government procurement be acceptable. Negotiations on a full-blown government procurement agreement are not part of the mandate for the Doha Round, but a work programme and possible negotiations on transparency in government procurement are built in. Even this may cause difficulty, given present Malaysian practice that is not as transparent as it could be. Trade facilitation is an exception: Malaysia has turned out to be more open to WTO discussions on this issue than on the other three. In short, the Singapore issues have presented a problem for the Malaysian Government, partly because they are seen to intrude too far into its discretionary industrial policy terrain. It should also be borne in mind that much of the latter is bound up with the NEP, that is, discrimination in favour of ethnic Malaycontrolled enterprises. Since Cancun, Malaysia has shifted position from hardline defensiveness to compromise. It has accepted in principle negotiations on trade facilitation, providing the other three items are taken out of the Single Undertaking or dropped altogether. This was made possible by the EU’s drastic scaling down of negotiating ambition. Before Cancun, it aggressively demanded negotiations on all four Singapore issues. Now, it has reconciled itself to just trade facilitation in core negotiations. Malaysia’s new flexibility on the Singapore issues is a sign of renewed commitment to the Doha Round, and more generally a sign of a partial return to traditional pragmatism in the GATT/ WTO. Whether this will be consolidated remains to be seen.

TRADE POLICY CAPACITY FOR PARTICIPATION IN THE PRESENT ROUND Malaysia has rather good trade policy capacity by developing country standards. Professional standards seem to be higher in a

© 2004 Institute of Southeast Asian Studies, Singapore

3. Malaysia and WTO

39

few ministries, including MITI and Bank Negara (the central bank) than in the rest of the civil service. As mentioned earlier, MITI tends to represent the outward-looking, pro-liberalization camp within the government, and strongly supports active Malaysian participation in the WTO. MITI co-ordinates national trade policy, but sectoral ministries and regulatory agencies sometimes take the lead in WTO negotiations which directly affect their areas of competence. This is mainly the case in the GATS negotiations. The Ministry of Primary Industries also leads in negotiations on tropical product exports. MITI’s senior officials and negotiators tend to rise through the ministry’s ranks: they are trade policy specialists, unlike MTI generalist officials in Singapore who follow the British pattern of rotating between ministries. During the Uruguay Round, Malaysian participation was restricted to a small circle of MITI officials in Kuala Lumpur and in the Geneva mission, with little input from other quarters except Bank Negara on the financial services negotiations. Now the circle is wider: Malaysia has a four-strong mission to the WTO, staffed with MITI officials and separate from Malaysia’s UN mission in Geneva; there is more input from other parts of government on non-border regulatory issues; and consultation with business (for example, the ethnic chambers of commerce and the National Association of Manufacturers), hardly evident during the Uruguay Round, has been stepped up. MITI co-ordinates an inter-ministerial committee on the WTO, below which are working groups dealing with technical issues. The latter involve business and other nongovernmental participation. WTO units have also been established in some other ministries. MITI also deals extensively with FDI policy, though perhaps its “lead” is less clear-cut than it is in trade negotiations. The Malaysian Industrial Development Authority (the equivalent of Singapore’s Economic Development Board) serves as a one-stop

© 2004 Institute of Southeast Asian Studies, Singapore

40

Southeast Asia in the WTO

investment approval agency for foreign investments in manufacturing. FDI policy is co-ordinated by the high-level interministerial Foreign Investment Committee. Since the Asian crisis, economic policy-making has become more centralized in the Prime Ministers’ Department, especially in the secretariat to the National Economic Action Council (NEAC), a consultative body set up in 1998. The NEAC secretariat deals largely with domestic policy issues, but it does occasionally step into trade policy terrain. The strengths of Malaysian trade policy-making are twofold: an active and forceful trade minister, Rafidah Aziz, who carries weight within the government; and a lead ministry and WTO mission that, by developing country standards, are well-resourced and reasonably effective. However, three specific weaknesses come to mind. First, input from and co-ordination with other ministries and regulatory agencies still leave much to be desired. With the exception of MITI, ministries and agencies lack knowledge of trade policy issues and are usually more defensive than MITI in WTO negotiations. In the GATS negotiations, Malaysian defensiveness on liberalization and regulatory reform comes particularly from the sectoral agencies which provide the lead negotiators. Second, business input, while improving, is still lacking. The various business associations do not provide the detailed and systematic information and advice that policy-makers need to formulate positions and negotiate effectively in Geneva. Third (and related to the first two points), hard and detailed analysis of negotiating issues, from inside and outside the government, is thin on the ground. This puts Malaysian WTO negotiators in a relatively weak position compared with counterparts from developed countries and a handful of advanced developing countries.

© 2004 Institute of Southeast Asian Studies, Singapore

3. Malaysia and WTO

41

More generally, the Achilles heel of Malaysian trade policy since the Asian crisis has been its semi-retreat from the proliberalization, pro-market access pragmatism that previously prevailed. Inflexibility and over-defensiveness in the WTO, for example, on the Singapore issues, have followed in the wake of periodic outbursts of anti-globalization, Third Worldist rhetoric. This has sent mixed signals abroad and constrained MITI’s negotiating flexibility to advance market access positions. Ultimately, it has prevented Malaysia from achieving its potential as a constructive citizen in the WTO. That said, since Cancun, and with a new prime minister in place, the Malaysian Government has shown signs of greater flexibility in Geneva. If this is consolidated, and if the Doha Round recovers momentum, Malaysia should be in a reasonably good position to play an active role. This depends on clear and constructive political direction from Kuala Lumpur. It requires clear signals in favour of globalization and (relatively) liberal trade policies on all negotiating tracks. Within this frame, Malaysian negotiators could vigorously pursue market access priorities while displaying flexibility on defensive positions (services, the Singapore issues, and the LMG agenda). This they can do in formal negotiations, but also in informal broad-based and issue-specific coalitions. For example, Malaysia should be active in a Friends Group, keen to make significant reductions in industrial tariffs. Such an approach would then complement and not contradict pragmatism and flexibility in future FTA negotiations. In sum, it is to be hoped that the recent change of leadership will speed up and lock in a return to traditional businesslike pragmatism in Malaysian trade policy — in the WTO as well as on other negotiating tracks.

© 2004 Institute of Southeast Asian Studies, Singapore

42

Free Trade Agreements in Southeast Asia

© 2004 Institute of Southeast Asian Studies, Singapore

4. Thailand and WTO

43

Chapter 4

Thailand and WTO TRADE POLICY FRAMEWORK Thailand retains relatively high protection by the standards of other ASEAN-5 countries, despite trade and investment liberalization in the 1980s and 1990s. Its average applied tariff is approximately 16 per cent — almost twice as high as that for Malaysia, Indonesia, and the Philippines (Table I). Thailand also has greater tariff dispersion and escalation, with forty-six different rates and peak tariffs on agriculture and food products, alcoholic beverages, cars and car parts, and textiles. Import surcharges were levied in the wake of the Asian crisis, followed by piecemeal trade liberalization. Non-tariff barriers were reduced through the 1990s but are still not insignificant, especially in the form of a complex licensing system. Thailand has hardly ever used anti-dumping measures or other trade remedies. The Foreign Business Act provides the legislative framework for FDI, with foreign equity limits of 49 per cent in services sectors, unless otherwise indicated, and of up to 100 per cent in manufacturing. FDI in manufacturing is encouraged, as it is in Malaysia. The Thai Board of Investment (BOI) is the lead agency on FDI and reports directly to the Prime Minister’s Office. It operates a complex system of selective incentives to attract inward investment in goods sectors, and often grants 100 per cent foreign ownership. 43 © 2004 Institute of Southeast Asian Studies, Singapore

44

Free Trade Agreements in Southeast Asia

Thailand also resembles Malaysia in having a protectionist trade-in-services policy. Ownership, entry, establishment, and operating restrictions are higher and more rigid in services sectors than they are in manufacturing. In telecommunications, there are two quasi-monopolistic state-owned operators which effectively control domestic and international services. Concessions have been granted to large, well-connected local companies for wireless and fixed-line operations. The planned corporatization and privatization of the state-owned operators have been delayed due to political wrangling. In 2001, the Thai Parliament passed legislation limiting foreign ownership in local telecoms firms to 25 per cent, but the government is attempting to increase the ownership limit back to the previous 49 per cent. Two independent regulatory agencies are supposed to be established to oversee the telecoms and broadcasting sectors, but this has proved politically messy, with allegations of nepotism and corruption in making appointments. Regulation of licensing, terms of interconnection, and standards setting remain opaque and discriminatory. The state-dominated telecoms sector also keeps the costs of e-commerce artificially high and hampers its development. The Communications Authority of Thailand, the state-owned international services operator, has mandatory shares in licensed Internet service providers. Financial services have been liberalized as a result of the IMF’s structural adjustment programme agreed with the Thai Government in 1998. Full foreign ownership of banks and other financial companies is allowed for ten years. After that period, new local injections of capital are intended to take foreign ownership down to 49 per cent. Four out of thirteen commercial banks in Thailand are now in majority foreign ownership. However, foreign-controlled banks are subject to tight operating

© 2004 Institute of Southeast Asian Studies, Singapore

4. Thailand and WTO

45

restrictions: they can have a maximum of three branches, only one of which can be located in Bangkok; other restrictions include high minimum capital requirements and narrow limits on employing expatriate management personnel. Tight restrictions also apply in professional services. Foreign participation is confined to joint ventures and minority shareholdings in local firms. In public procurement a “Buy Thai” policy is in operation, with domestic bidders given a preferential price margin. Foreign investors complain of excessive red tape and corruption in customs administration. More generally, government regulation lacks transparency. For example, policy changes are usually made by ministerial announcement, often without forewarning or adequate explanation. This reinforces the impression of unpredictability and incoherence in policy-making. The new, liberal-minded Thai Constitution, promulgated in 1997, introduces checks and balances intended to promote transparency and public accountability. It has set in train a major programme of regulatory reform, among which are the establishment of an independent National Counter-Corruption Commission and new competition legislation. The results, however, leave something to be desired. Thailand’s average bound tariff in the GATT is about 29 per cent (26 per cent for industrial products, 34 per cent for agriculture) with 36 per cent of tariffs unbound (Table I). Bound tariffs are below-average by developing country standards, but still noticeably higher than average by East and Southeast Asian standards. Thailand is a member of the ITA and has eliminated MFN tariffs on products that account for about a quarter of total trade. Local content measures on car assembly and car parts were removed by 2000 in line with the TRIMS agreement. However, Thailand was granted a WTO waiver to extend local content measures in milk and dairy production to end-2003.

© 2004 Institute of Southeast Asian Studies, Singapore

46

Free Trade Agreements in Southeast Asia

Thailand’s GATS commitments are generally weak. In the Annex on financial services, it eliminated the 25 per cent limit on foreign equity in line with the IMF-induced liberalization of domestic financial services. In the Annex on basic telecommunications services, foreign-owned operators are not allowed to establish companies locally but can own up to 40 per cent of equity in registered Thai companies supplying services for which concessions have been granted. Direct foreign competition, that is, through rights of local establishment, will be permitted by 2006, though still subject to equity limits. Thailand is a signatory to the Reference Paper on basic telecom services.

RECENT TRADE POLICY DEVELOPMENTS Successive military and civilian governments since the 1950s have had varying combinations of populism and technocratic competence, with the latter concentrated in the central government departments charged with macroeconomic policymaking. In the context of democratic populist politics, catering to disparate rent-seeking interests inevitably undermines the autonomy and professionalism of government technocrats, as well as downgrading serious analysis of strategic policy choices. Tensions between technocratic and populist approaches to policymaking have increased under the current Thaksin administration. The government is especially defensive when it comes to liberalization and domestic regulatory reform in services. Moreover, protectionist policies are couched in the rhetoric of economic nationalism. This sends mixed signals to foreign investors, and thus sometimes jars with the Thai Government’s attempts to attract FDI and boost trade. Thailand has several new FTA initiatives, and indeed was the first ASEAN member to follow Singapore on this track. Negotiations

© 2004 Institute of Southeast Asian Studies, Singapore

4. Thailand and WTO

47

with Japan and Australia have been completed, as has a sectoral deal with China. Negotiations with India, Bahrain and Peru are ongoing. The key FTA negotiations — with the United States — started in mid-2004. Thailand is also active in collective ASEAN negotiations with China, Japan, and India. Like Malaysia, Thailand’s defensiveness on services liberalization and domestic regulatory reform does not augur well for strong, Singapore-style, WTO-plus FTAs. The United States, however, will exert very strong pressure to conclude a U.S.–Singapore style FTA. Given a moribund Doha Round and much higher prime ministerial priority in favour of FTAs, political attention and negotiating resources have been diverted away from the WTO and in the direction of several, concurrent, resource-intensive bilateral negotiations. This trend was evident pre-Cancun, but has since accelerated. So far Thai policy on FTAs has relied on ad hoc initiatives, but without reflection on the issues and a strong sense of overarching strategy. Policy-makers in Bangkok should focus more on what exactly Thailand wants from its FTAs and how they fit into national political and economic priorities.

THAILAND IN THE WTO: POSITIONS ON THE ISSUES Thailand has a mix of offensive, defensive, and ambivalent positions in the WTO, but it differs from Malaysia’s profile in important respects. Thailand has the following positions in the present round (Table II): •

Market access: Topping the list of Thailand’s priorities is worldwide agricultural liberalization to open markets for its

© 2004 Institute of Southeast Asian Studies, Singapore

48

Free Trade Agreements in Southeast Asia

exports of staple products such as rice and sugar. Its profile thus fits with that of other major agricultural exporters in the Cairns Group, in which Thailand is the only really active ASEAN member. The Cairns Group position in the agricultural negotiations (to which Thailand subscribes) is that there should be significant reductions in peak tariffs, as well as the abolition of export subsidies and trade-distorting domestic subsidies. Furthermore, food safety and other standards, as well as “non-trade” policies (for example, to protect animal welfare and rural development), should not be used as measures of “disguised protection”. The Cairns Group expects the main offenders, the EU and other “Friends of Multifunctionality” such as Japan, Korea, Norway, and Switzerland, to bear the biggest burden of adjustment. Thailand is more flexible than the Latin American and Australasian Cairns Group members on a “development box” to allow developing countries flexibility to subsidize domestic agriculture. However, it is concerned that this should not allow developing countries to substantially restrict market access. Thailand, after all, is keen to reduce developing country (in addition to developed country) barriers to its agricultural exports. In particular, it is worried about proposals by net food-importing developing countries — including Indonesia and the Philippines within ASEAN — to exempt “special products” from liberalization in their markets. Staple products that Thailand exports, such as rice and sugar, figure prominently on this list. However, Thailand does not have unblemished free trade credentials in agriculture: it retains high tariffs and some nontariff barriers to protect import-competing agricultural production at home, particularly in food processing industries. Thailand joined the G20 before Cancun to compensate for the weakness of the Cairns Group and put more pressure on

© 2004 Institute of Southeast Asian Studies, Singapore

4. Thailand and WTO

49

developed countries to liberalize agricultural trade. However, since FTA negotiations with the United States were announced, its membership of the G20 has become less than active. Thailand is more ambivalent than Singapore and Malaysia on industrial goods. It would like to see multilateral liberalization for its manufactured exports (especially textiles, clothing, and car parts), but, with relatively high tariffs at home on importcompeting manufactures, it is also defensive. That said, Thailand stands to gain overall from multilateral liberalization of nonagricultural goods and is playing a broadly constructive role in this arena of the Doha Round. Like Malaysia, Thailand is generally protectionist on services. With the exception of tourism, it is defensive in the GATS negotiations — indeed more so since the Asian crisis. Along with other ASEAN countries — with the singular exception of Singapore — it is campaigning for an emergency safeguard mechanism in the GATS to protect against a surge of imports in exceptional situations. •

•

Rules: Thailand would like to see stronger GATT disciplines on anti-dumping actions, which obstruct its goods exports. Accordingly, it has been involved in an informal Friends Group on this issue. As a major fisheries exporter, it is a demandeur for significant reductions in (mainly EU, Japanese, and Korean) production- and trade-distorting subsidies that lead to overfishing and depletion of fish stocks. Thailand was active in “Friends of Fish”, an informal coalition of WTO members campaigning for stronger GATT disciplines on fisheries subsidies. However, with increasing fisheries subsidies at home, its enthusiasm on this Doha Round issue seems to have waned. Developing country issues: Unlike Malaysia, Thailand is not particularly concerned about burnishing its Third World foreign policy credentials; and it has few problems with

© 2004 Institute of Southeast Asian Studies, Singapore

50

•

•

Free Trade Agreements in Southeast Asia

implementation and S&D. In terms of rhetoric and substance, these issues are simply not of great moment to Thailand. Hence it was not a member of the LMG, and indeed was involved in Friends of the New Round. However, given an acute AIDS problem at home, Thailand supported an agreement on TRIPS that would allow generic imports of essential medicines in public health emergencies. Singapore issues: Thailand would not feel comfortable with strong agreements on investment, competition, and government procurement, given protectionist practice, discretionary industrial policies and sometimes opaque domestic regulation at home. Nevertheless, it is generally pragmatic and flexible on this issue-cluster, and is probably willing to compromise providing there is progress elsewhere, particularly in agriculture. Thailand has ambitious competition legislation in place (though highly politicized, of uncertain scope, and with major enforcement problems). This should make it easier to accommodate eventual negotiations on a framework competition agreement in the WTO. Thailand is reasonably comfortable with trade facilitation, though less so on investment. Trade and environment: Bits and pieces of the trade and environment agenda are included in the Doha Round at the behest of the EU. Negotiations have started in some areas (clarifying the relationship between WTO rules and specific trade obligations in Multilateral Environmental Agreements (MEA); improving links between the WTO and MEA secretariats; and liberalizing trade in environmental goods and services); and a Work Programme is underway in other areas (the effect of environmental measures on market access; relevant provisions in the TRIPS agreement; and labelling requirements for environmental purposes).

© 2004 Institute of Southeast Asian Studies, Singapore

4. Thailand and WTO

51

The trade and environment aspects of the Doha Round are more important to Thailand than to Singapore and Malaysia due to Thailand’s core objective of securing market access for its agricultural exports. It is particularly concerned about the use, by the EU and others, of onerous sanitary and phytosanitary (SPS) standards (covered by the WTO’s SPS agreement), and product-labelling requirements (covered by the WTO’s technical barriers to trade [TBT] agreement), to restrict agricultural imports. The Doha mandate specifically precludes reopening the WTO’s SPS agreement to allow for more flexible recourse to trade-restricting standards. Nevertheless, Thailand, along with other Cairns Group members, fears that the EU is trying to do precisely that by linking environmental issues to the agricultural negotiations.

TRADE POLICY CAPACITY FOR PARTICIPATION IN THE PRESENT ROUND Thai trade policy capacity is clearly better than it is for most developing countries. The Ministry of Commerce (MOC) leads on trade policy through its Department of Business Economics. Within the latter, the Bureau of Trade Negotiations co-ordinates WTO-related policy with other ministries and regulatory agencies, consults with business and liaises directly with Thailand’s mission to the WTO in Geneva. The latter, with twelve trade policy officials (the majority from the MOC), is the largest of all ASEAN missions to the WTO and separate from Thailand’s UN mission in Geneva. In fact the Thai mission to the WTO is as large as that of Brazil, one of the three developing country heavyweights in the WTO (alongside India and China). An inter-ministerial committee headed by the deputy prime minister (who is also the finance minister) co-ordinates

© 2004 Institute of Southeast Asian Studies, Singapore

52

Free Trade Agreements in Southeast Asia

international economic policy overall. The permanent secretary of the MOC heads an inter-ministerial committee on trade policy, under which are sub-committees that deal with technical issues. The latter have some business representation. Trade policy measures, for example, changes in applied tariffs, are frequently enacted through regulations and notifications not requiring legislative approval. The Joint Standing Committee on Commerce, Industry and Banking, which groups the major trade associations, has a Joint Sub-Committee on the WTO. The government consults the latter as well as the individual chambers of commerce. The National Economic and Social Development Board conducts assessments of public policies across-the-board, but it is not really involved in trade policy-making. It appears to be less important under the present government. Prime Minister Thaksin has modified the trade policy operation within the government by appointing three new Thailand Trade Representatives (TTRs), supposedly modelled on the USTR. The TTRs — all political appointees — are involved in a combination of trade promotion and trade policy. They are not installed in the MOC but report directly to the prime minister. The precise role of the TTRs in trade policy and their division of labour with the MOC seems to be unclear. In addition, the Ministry of Foreign Affairs seems to be acquiring more influence in trade policy, not so much on WTO affairs as in new FTA negotiations. It takes the lead in the FTA negotiations with Japan and the United States. Thai trade policy capacity is stronger than it was in the Uruguay Round (also true of Singapore and Malaysia). Thailand has more than fifteen years of active involvement in multilateral trade negotiations behind it, endowing its negotiators with a more detailed and refined understanding of WTO issues and how they fit into national economic policy. The decision-making circle has

© 2004 Institute of Southeast Asian Studies, Singapore

4. Thailand and WTO

53

widened: there are more negotiators in Geneva, more staff dealing with the WTO in the MOC, more input from other ministries and regulatory agencies on non-border issues, and more consultation with business. In addition, the trade policy profile within the government and internationally was boosted by Dr Supachai Panitchpakdi, now Director-General of the WTO but before that commerce minister and deputy prime minister in the previous Thai Government. That said, there are several weaknesses. While the trade policy operation is hardly understaffed, there are not enough experienced and savvy officials and negotiators. Input from other parts of the government and from business is still weak. Where it exists, it is weighted in favour of ministries, regulatory agencies, and stateowned and private companies with specific protectionist interests to defend. Furthermore, there is little serious and detailed analysis of negotiating issues. For these and other reasons, Thailand’s large mission to the WTO does not punch as forcefully as it should do, and certainly not nearly as forcefully as the Brazilian mission of the same size. If the Doha Round gets back on track, Thailand should be an important player in it. It has had a broadly constructive stance in the negotiations so far, which was also evident in Cancun. It should be in a position to advance its priorities in the round, especially agricultural liberalization (through the Cairns Group and perhaps G20) and rule-strengthening (for example, through involvement in Friends Groups). At the same time, it should display willingness to compromise on its defensive and ambivalent positions, especially in services. On the other hand, the Thai Government has neglected the WTO in favour of ill-focused FTA negotiations. Thailand needs to conduct a serious reassessment of national trade policy priorities, partly in order to pursue better focused FTA negotiations, and partly to be more active and effective in the WTO.

© 2004 Institute of Southeast Asian Studies, Singapore

54

Southeast Asia in the WTO

© 2004 Institute of Southeast Asian Studies, Singapore

5. Indonesia and WTO

55

Chapter 5

Indonesia and WTO TRADE POLICY FRAMEWORK Indonesia has had a rolling programme of trade and investment liberalization since the late 1980s. By developing country standards, its trade policies have swung from high protection to openness in a comparatively short period. Its average unweighted tariff has come down to 7.3 per cent (Table I). About 70 per cent of tariff lines now have duties in the 0–5 per cent range. A threeband tariff structure (0–5–10 per cent) should be in place by 2003, albeit with higher tariffs and tariff escalation on some products (such as transport equipment, beverages, wood, furniture, and agriculture). Non-tariff barriers, however, are higher than in other ASEAN-5 countries, but have come down through the 1990s. Perhaps most visibly, tariff and non-tariff barriers on cars and car parts, previously very high due to the promotion of a National Car Programme, have been drastically reduced. Until recently, Indonesia hardly ever used anti-dumping measures or other trade remedies. However, it has resorted to anti-dumping actions in the last few years and has adopted new safeguards legislation. Indonesia was hardest hit by the Asian crisis and had to be rescued by an IMF bailout package. The Structural Adjustment Programme agreed with the Indonesian Government in 1998 significantly accelerated the pace of liberalization and domestic

55 © 2004 Institute of Southeast Asian Studies, Singapore

56

Southeast Asia in the WTO

regulatory reform. Non-tariff barriers (especially discretionary import licensing arrangements) were substantially reduced. Entrenched domestic monopolies on plywood, cement, paper, cloves, and other products were abolished. All import-restricting local content measures were phased out. Tariff and non-tariff barriers on agricultural imports were brought down. Most noticeably, the state-owned National Logistics Agency (Bulog) had its monopoly on importing rice, wheat, sugar, and other bulk food products removed. Lastly, full foreign ownership was allowed in banking, insurance, securities, and in the retail and distribution sectors, with other sectors (telecommunications, the utilities, and transport) further opened to inward investment. Significant privatization in banking and telecoms kicked off in 2002, with more planned. A new investment law guaranteeing National Treatment was due to be enacted in 2003. A Competition Commission was established in 2000 to implement anti-monopoly legislation passed in 1999. However, there has been a return to protection in some sensitive sectors, especially steel, rice, and sugar. High specific duties, new discretionary import licenses, production subsidies, price supports, and price controls have all been used. Ownership, entry, establishment, and operating restrictions remain in several services sectors. They are especially prohibitive in professional services. A new Telecommunications Law was enacted in 2000. The state-owned operator, PT Telekom, has been partially privatized and lost its monopoly on domestic fixed-line services in 2002, eight years ahead of schedule. It was due to lose its monopoly on long-distance services by 2003, two years ahead of schedule. Clearly, formal barriers to market access have come down considerably, but the weakness and deterioration of domestic institutions are now bigger obstacles to trade and inward

© 2004 Institute of Southeast Asian Studies, Singapore

5. Indonesia and WTO

57

investment. Foreign investors complain inter alia of: arbitrary interpretation of laws and weak enforcement of contracts by a corrupt and incompetent judiciary; ineffective enforcement of intellectual property rights; opaque and arbitrary government procurement practices; and slow, cumbersome and unpredictable procedures for obtaining permits to operate locally. Generally speaking, corruption remains rife and public administration is probably weaker than it was pre-Asian crisis. Since the downfall of the Soeharto regime and the transition to political democracy, local and provincial authorities have gained powers at the expense of the central government. Overlapping competences and frequent regulatory changes have created extra uncertainty for foreign investors and raised the prospect of new protectionist barriers at local and provincial levels. Indonesia implemented all its Uruguay Round commitments in timely fashion, including the phase-out of local content measures. Unusually for developing countries (and other ASEAN members of the WTO), it bound about 93 per cent of its tariffs, although at a high rate of 40 per cent. The average bound tariff is 30.4 per cent, well above (declining) applied rates (Table I). GATS commitments are generally weak. The gap between commitments in the Annexes on financial services and basic telecommunications services, on one hand, and applied practice, on the other, has widened considerably due to unilateral liberalization since the Asian crisis. For example, in the Agreement on Basic Telecommunications Services, foreign equity in local firms in most segments is capped at 35 per cent, and commercial presence is restricted to joint ventures and joint operations under management contract. Rights of establishment for foreign suppliers are guaranteed for international services by 2005, for long-distance domestic services by 2006, and for local fixed-line services by 2011. However, these pre-commitments have been

© 2004 Institute of Southeast Asian Studies, Singapore

58

Southeast Asia in the WTO

overtaken by faster-paced liberalization after the enactment of the Telecommunications Law in 2000.

RECENT TRADE POLICY DEVELOPMENTS Indonesia’s rolling liberalization programme seems to be roughly on track, though with greater pressures for agricultural protectionism. Unhappily, this must be placed in the post-Asian crisis context of acute political and economic instability, with brittle and eroding institutions. A turbulent transition to democracy, the weakening authority of the central government, violent eruptions in some regions, and constant fire-fighting on the economic front, all preclude a clear focus on trade and wider economic policy priorities. Thus trade policy appears more ad hoc than it did before 1997. In such inclement circumstances, it is too optimistic to expect even substantial liberalization to have major beneficial effects, at least in the short-term. Moreover, measures of liberalization and regulatory reform are not as “home-grown” as they were before the Asian crisis; in particular, the IMF package in 1998 is widely seen as a set of policies imposed on a crippled Indonesia from outside rather than one with solid support at home. In short, recent reforms do not have sufficient domestic “ownership” (to use the World Bank jargon): they lack political credibility. This raises serious questions about the sustainability of Indonesia’s by now relatively liberal trade policies. Indonesia also faces the alarming prospect of being bypassed by a developing patchwork of bilateral FTAs knitted around it in Southeast and East Asia. It is, of course, part of collective ASEAN economic co-operation and FTA initiatives involving China, Japan, ANZCERTA, India, and others. The new U.S.–Singapore FTA has innovative provisions for goods manufactured in Batam and

© 2004 Institute of Southeast Asian Studies, Singapore

5. Indonesia and WTO

59

Bintan, and trans-shipped through Singapore, to have duty-free access to the U.S. market. But it is striking that bilateral FTA initiatives revolve around Singapore, Thailand, and Malaysia. A politically and economically battered Indonesia, despite its large internal market, is of less interest to potential FTA partners such as the United States, Australia, Japan, and China. The danger is that Indonesia will be shut out of preferential market access in new FTAs, and be more exposed than FTA insiders to contingent protection (anti-dumping actions and the like) against its exports. For these reasons, the Indonesian Government wishes to launch FTA negotiations with Japan, the United States, and others.

INDONESIA IN THE WTO: POSITIONS ON THE ISSUES Indonesia is less active than Singapore, Malaysia, and Thailand in the WTO. Given immense problems at home, it is also increasingly defensive on negotiating issues in the present round. This was clearly evident in Cancun, especially on agriculture. In fact there is a basic contradiction between significant unilateral liberalization and protectionist positions in the WTO — another indication that recent policies at home owe more to external (especially IMF) pressure than domestic enthusiasm. Indonesia’s positions on individual issues tend to be less well defined than they should be. The following is a summary of Indonesia’s broad positions in the round (Table II): •

Market access: In agriculture, Indonesia needs more market access for its tropical product exports, especially for rubber and palm oil. This includes market access to other large developing country markets such as China and India. Otherwise it is defensive.

© 2004 Institute of Southeast Asian Studies, Singapore

60

Southeast Asia in the WTO

Political sensitivities on protecting rural agriculture, particularly rice farmers, are acute — more so with recent unilateral liberalization and democratization. Indeed, President Megawati Sukarnoputri has made the protection of rural agriculture a top political priority. Policy-makers are, therefore, extremely wary of multilateral liberalization that would further open the domestic market to imports. Hence Indonesia supports strong S&D, for example, in the form of a Development Box that would protect subsidies to rural farmers. In particular, along with about a dozen other WTO members, it has tabled a negotiating proposal to exempt a list of “special” staple products, such as rice and sugar, from liberalization in net food-importing developing countries. At the Cancun Ministerial, Indonesia chaired a group of thirtythree developing countries campaigning for special product exemptions, as well as for a Special Safeguards Mechanism to protect against import surges in these products. Indonesia is also a member of the newly formed G20. This defensive position has become Indonesia’s overriding priority in the Doha Round. Within ASEAN, this puts Indonesia in head-to-head opposition with Thailand, whose top Doha Round priority is to prise open foreign markets for its agricultural exports. This stance makes Indonesia stick out as a reluctant and illsuited member of the Cairns Group. On economic grounds, its membership makes little sense: indeed it would be more suited to membership of the EU and Japanese-led Friends of Multifunctionality. However, strategic political considerations, especially foreign policy links to Australia, seem to keep Indonesia on board. Indonesia would like to see multilateral liberalization of industrial goods, given its export interests in labour-intensive products such as textiles and clothing. It is concerned that the planned phase-out of MFA quotas by 2005 will be delayed, and subsequently followed by a cascade of anti-dumping and safeguard actions.

© 2004 Institute of Southeast Asian Studies, Singapore

5. Indonesia and WTO

61

Indonesia, like Malaysia and Thailand, is defensive in the GATS negotiations. This has always been the case, but it may now be reinforced by way of reaction to the IMF-induced opening of domestic services markets in the wake of the Asian crisis. Like other ASEAN members except Singapore, it favours an emergency safeguards mechanism in the GATS. Its only “offensive” position in the GATS negotiations is on mode four of supply (commitments on the cross-border movement of workers on temporary contracts), in which it wishes to see more access for its workers abroad. However, overall negotiating weakness means that Indonesia is not a forceful demandeur on this issue. •

•

•

Rules: In common with other ASEAN countries, Indonesia has a stake in more robust WTO disciplines on anti-dumping actions. Developing country issues: Indonesia was a member of the LMG. It subscribed to common LMG positions on implementation, S&D, and TRIPS. However, it is more in the pragmatic Malaysian camp than in the hardline Indian, Pakistani, and Egyptian camp. Like Malaysia, it has few implementation concerns (largely revolving around anti-dumping and subsidies) and is willing to compromise providing it gets concessions elsewhere. Singapore issues: Like Malaysia, Indonesia is defensive but not hardline on these issues. It was a member of a broad grouping of developing countries opposing negotiations on this issuecluster in Cancun. If the Doha Round gets back on track, Indonesia may be amenable to compromise providing eventual agreements are not too intrusive, and providing it receives concessions in other negotiations. That said, Indonesian positions on the Singapore issues are far from well defined.

© 2004 Institute of Southeast Asian Studies, Singapore

62

Southeast Asia in the WTO

TRADE POLICY CAPACITY FOR PARTICIPATION IN THE PRESENT ROUND Indonesian trade policy capacity has become weaker and more ad hoc since the Asian crisis. During the Uruguay Round, ASEAN cooperation compensated somewhat for Indonesia’s lack of political direction, bureaucratic resources, and experience in the GATT. Now, at a time of vulnerability and instability at home, there is no ASEAN crutch to lean on in the WTO. The Ministry of Industry and Trade (MIT) leads on trade policy. It is the product of a merger of previously separate trade and industry ministries in 1995. The minister for trade and industry reports to the co-ordinating minister for economic policy, who reports directly to the president. Responsibility for FDI is housed in the Investment Co-ordinating Board (BKPM), a nondepartmental agency which reports directly to the president. The latter chairs an Economic Stabilization Council, the highest decision-making body on economic affairs. Indonesia’s WTO mission has a staff of six professional officials. The permanent representative and many of the lead negotiators come from the Ministry of Foreign Affairs (MFA), with technical and specialist staff on particular issues coming from the MIT. There have been major changes in government organization on the wider economic policy-making front since the Asian crisis. A National Economic and Financial Resilience Council, reporting directly to the president, is charged with implementing IMFinduced reforms. The formal autonomy of Bank Indonesia (the central bank) has been strengthened. A Privatization Board is now responsible for the management and privatization of state-owned assets. The Indonesian Bank Restructuring Agency (IBRA) has responsibility for restructuring ailing banks. A new National Investment Team has been established to restore business confidence and promote inward investment.

© 2004 Institute of Southeast Asian Studies, Singapore

5. Indonesia and WTO

63

Traditionally, technocratic competence and a preference for market-oriented reforms resided in the central government departments dealing with macroeconomic policy. Ministries and agencies handling microeconomic policy had less professional competence and were more interventionist and protectionist. The ministries of trade and industry, for example, had a strong stake in protectionism as they were heavily involved in controlling exports, imports, and domestic licences. The tussle between liberal technocrats controlling macroeconomic policy and interventionists controlling microeconomic policy waxed and waned during the Soeharto regime, with the former gaining the upper hand (albeit in fits and starts) from the early to mid-1980s. Through the 1990s until the Asian crisis, knowledge of trade policy issues and their fit with the national economy improved by degrees as a result of unilateral liberalization, experience gained from Uruguay Round negotiations and the AFTA process. A handful of competent, experienced, outward-looking technocrats in the MIT and MFA emerged. Since 1998, however, political and economic instability, generating an atmosphere of crisis and fire fighting in economic policy, has unravelled some of these hardwon gains. Indonesia’s competent and experienced trade policy officials, in Jakarta and in the WTO mission, now have to work in a more forbidding internal and external environment. On the home front, ministers of trade and industry since 1998 have changed frequently and have been too distracted with domestic matters to focus on WTO issues and priorities. Within the MIT and in the WTO mission, knowledge and experience of nitty-gritty trade policy is not as deep as it should be. It is very thin on the ground in other parts of the government, which are in any case distracted by other events. Hence inter-agency co-ordination on WTO issues is poor — probably worse than pre-Asian crisis. Before 1998, business input

© 2004 Institute of Southeast Asian Studies, Singapore

64

Southeast Asia in the WTO

in trade policy was in the form of clientelistic relations geared to protecting local cartels, usually under the patronage of the Soeharto family network. Soeharto patronage has gone and many cartels have been abolished, but the clientelistic nature of business– government relations remains entrenched. Moreover, there is nextto-no awareness of WTO issues in business. Lastly, analytical input in trade policy, either from governmental or non-governmental sources, is barely evident. It is, therefore, not surprising that Indonesia’s negotiating positions in the WTO lack precision and depth. Limited trade policy capacity is compounded by trends in the WTO post-Uruguay Round, and especially by the breadth and complexity of the present round. As mentioned earlier, the Uruguay Round agreements go wider in sectoral coverage and deeper into non-border issues than was the case in the GATT, and are now housed in an evermore legalistic WTO. Furthermore, the Doha Round, with its twenty-one issues and eight negotiating groups, has a breathtakingly broad and complex agenda. Indonesia would have found it difficult enough to participate actively without the complications of the Asian crisis; but with weaker policy capacity now, it is simply overwhelmed. There are too many issues to cover simultaneously, too many meetings to attend; and not enough time and resources to focus on priority issues, formulate own negotiating positions, table proposals, and analyse the cost-benefit implications for Indonesia of other members’ negotiating proposals. The resulting frustration accounts in some measure for Indonesia’s ad hoc defensiveness on many negotiating issues in the round. Understandably perhaps, Indonesian negotiators do not want to support proposals and sign up to agreements they do not understand, cannot digest, and fear would lead to unwelcome political and economic consequences at home.

© 2004 Institute of Southeast Asian Studies, Singapore

5. Indonesia and WTO

65

Indonesia thus finds itself slipping into “developing country syndrome” in the WTO: weak trade policy capacity at home; inability to participate effectively in the WTO; overwhelmed, frustrated, defensive, and reactive in Doha Round. Before the Asian crisis, the picture was brighter due to a combination of ASEAN co-operation and improving trade policy capacity at home. Now it is bleaker. Indonesia stands to lose more than Singapore, Malaysia, and Thailand from the collapse of the Doha Round and the accompanying diversion of attention to FTAs. The latter are of more interest to foreign partners and, domestically, are in a stronger position to negotiate good deals. The sad irony is that Indonesia, whose defensiveness on agriculture contributed to problems in the round and at Cancun, will be hit harder than more advanced developing countries by a crippled and sidelined WTO.

© 2004 Institute of Southeast Asian Studies, Singapore

66

Southeast Asia in the WTO

© 2004 Institute of Southeast Asian Studies, Singapore

6. The Philippines and WTO

67

Chapter 6

The Philippines and WTO TRADE POLICY FRAMEWORK The Philippines is a late liberalizer by Southeast and East Asian standards. Protection persisted under the Marcos regime; and attempts at liberalization by the Aquino administration in the 1980s were half-hearted and piecemeal. Only with the Ramos administration (1992–98) was there catch-up trade and investment liberalization — at a frenetic pace. During this period, FDI and exports in manufacturing rose rapidly; exports of electronics, cars, and garments accounted for over 70 per cent of total exports by 1999. Perhaps most visible was a new liberal trade and FDI regime for electronics located in Special Economic Zones. Broadly speaking, the Ramos reforms remain in place, though the enthusiasm for further liberalization under the subsequent Estrada and Arroyo administrations seems to have waned. On trade in goods, the Philippines has moved from high protection to a rather liberal regime in a remarkably short period. A four-year Tariff Reform Programme was established in 1991. Then followed landmark reforms: two Executive Orders issued by President Ramos in 1995 and 1996 that set in train radical tariff cutting through to 2004. MFN tariffs were to be harmonized down to a two-band structure (3–10 per cent) by 2003, with a uniform 5 per cent tariff put in place by 2004. Higher tariffs (up to 30 per

67 © 2004 Institute of Southeast Asian Studies, Singapore

68

Southeast Asia in the WTO

cent) on some agricultural goods will continue after 2004. There has been slippage in reducing tariffs on some import-competing manufactures, especially on cars. A 30 per cent tariff was in place on finished car imports in order to promote local assembly production, but the government intends to bring this down to the uniform 5 per cent tariff by 2004. Tariff reform continues, but with reversals en route. The average MFN tariff came down from 26 per cent in 1992 to 10 per cent in 1999, and is now just above 5 per cent (Table I). Ninety-six per cent of tariffs were already in the 0–5 per cent range by 2002. However, the government is slowing down the tariff reduction programme. In 2003 it suspended AFTA commitments to reduce tariffs on petrochemical and plastic products. With elections in 2004, and with domestic business pressure for more import protection, the Arroyo administration’s commitment to the Ramos tariff reforms seems to have waned noticeably. Non-tariff barriers on goods have also come down considerably over the past decade and are low compared with Indonesia and Thailand. There are strict quantitative restrictions on rice imports, for which a state trading company retains a monopoly. The Philippines is a sparse user of trade remedies, though it has had recourse to anti-dumping actions more than other ASEAN-5 countries. New legislation on safeguards allows the Philippine Government to increase tariffs on manufactures and impose quantitative restrictions on agricultural goods when faced with import surges that threaten injury to domestic producers. It is feared that safeguard actions will be used readily to protect domestic producers after the uniform tariff is in operation. Protectionism is much higher on FDI and trade in services than it is on trade in goods. Restrictions on foreign ownership are written into the Philippine Constitution, which has two “negative” lists. List A bans foreign involvement in smaller-scale retail trade

© 2004 Institute of Southeast Asian Studies, Singapore

6. The Philippines and WTO

69

and the mass media, for example. It restricts foreign equity to a maximum of 30 per cent in advertising agencies, and 40 per cent in natural resource extraction, education, the public utilities, and government procurement contractors. List B restricts foreign ownership on the grounds of national security and the defence of public health, safety, and morals. It also protects local small and medium-sized enterprises with a foreign equity limit of 40 per cent. Foreigners are barred from owning land. Only Philippine citizens can practise in the licensed professions. Constitutional restrictions also apply to foreign ownership in services. There is a foreign equity limit of 30 per cent in telecommunications services, and 60 per cent in securities firms. Up to 100 per cent foreign equity is permitted in insurance firms, albeit with post-establishment operating restrictions. In banking, ten licensed foreign banks can own up to 60 per cent of new or established local subsidiaries, but Philippine-owned domestic banks must control at least 70 per cent of total banking assets. Licensed foreign banks are also limited to six branch operations. Although market access barriers have come down considerably over the past decade, the beneficial effects of liberalization are blunted by political and economic instability, as well as by historically weak institutions. Foreign investors complain inter alia of: arbitrary enforcement of property rights and contracts; weak protection of intellectual property; corrupt and over-bureaucratic customs administration; opaque and arbitrary government procurement practices; and corruption and red tape in income tax payment, the allocation of local operating permits, and the administration of government incentives. There is no overarching competition legislation, but what exists to cover certain sectors does not seem to be well-enforced. The average GATT-bound tariff is 28 per cent, now well above (declining) applied rates (Table I). Just over half of all tariffs are

© 2004 Institute of Southeast Asian Studies, Singapore

70

Southeast Asia in the WTO

bound — less than the ASEAN average of about 70 per cent. In the Agreement on Agriculture, the Philippines delayed the tariffication of rice until 2005. A WTO extension on local content and trade balancing provisions for cars was granted, but it was due to be phased out by 2003 (in line with the TRIMS agreement). Use of GATT Article XVIII (B) (protection of infant industries) was disinvoked in 1997. GATS commitments are weak — even weaker than for other ASEAN countries in terms of market access and national treatment commitments. Foreign equity limits of 51 per cent apply in financial services, and 30 per cent in telecom services. The Philippines has partially adopted the principles of the Reference Paper in telecom services. However, it has not yet formally ratified its commitments in the GATS Annexes on financial and basic telecom services.

RECENT TRADE POLICY DEVELOPMENTS Although the Philippine external liberalization programme has gone far (though with diminishing political commitment), it must be seen in the context of political-economic instability and brittle institutions. The Philippines has not suffered nearly as much as Indonesia from the Asian crisis, but political and economic conditions have worsened since the end of the Ramos administration. Historically, Philippine governments have been populist and clientelistic. Business–government relations have been dominated by a landholding oligarchy, which has left little room for the development of a technocratic culture within the government. Attempts at fostering such a culture were frustrated during the Aquino administration. There was more success during the Ramos administration. The president gave clear political direction for his

© 2004 Institute of Southeast Asian Studies, Singapore

6. The Philippines and WTO

71

radical liberalizing reforms, with strong backing to leading technocrats to make sure they were pushed through. The following Estrada administration seemed a reversion to type: it was more populist and clientelistic, with a concomitant downgrading of technocrats in the government. The present Arroyo administration initially attempted to change course, but with mixed results. Signals on trade and FDI are not as positive and clear-cut as they were under the Ramos administration. There is more defensiveness concerning further liberalization, and indeed less enthusiasm for the existing liberalization programme. FTA initiatives have also appeared on the Philippine radar screen. The government is studying the possibility of bilateral FTAs with the United States, Japan, and China, in addition to being involved in collective ASEAN FTA and economic co-operation initiatives. As with Malaysia and Thailand, the main motivation appears to be defensive: the Philippine Government fears being shut out of FTAs negotiated around it. However, given political and economic problems at home, one wonders whether major potential FTA partners would be all that interested in such linkups with the Philippines.

THE PHILIPPINES IN THE WTO: POSITIONS ON THE ISSUES The Philippines, like Indonesia, has never been among the most active of developing countries in the GATT/WTO. It seems to be ambivalent about the present round, complaining of the burdens of implementing Uruguay Round agreements and exhibiting defensiveness on several negotiating issues. This was clearly evident in Cancun. It contrasts with ongoing, pre-programmed unilateral liberalization — an indication perhaps of policy drift post-Ramos.

© 2004 Institute of Southeast Asian Studies, Singapore

72

Southeast Asia in the WTO

Like Indonesia, Philippine positions on individual negotiating issues are not as well defined as they should be. The following is a broad summary of Philippine positions in the round (Table II): •

Market access: The Philippines wants better market access for its tropical product exports. It is a member of the Cairns Group, but it is not particularly active and indeed appears uneasy with common liberalizing positions. Like Indonesia, it is defensive on further opening its own markets to agricultural imports, particularly with the protection of rice farmers in mind. Hence it supports the exemption of Special Products from liberalization in net food-importing countries. Accordingly, it was part of a group of thirty-three developing countries campaigning for special product exemptions and a special safeguards mechanism at the Cancun Ministerial. It is also a member of the new G20.

The Philippines has a strong interest in significant multilateral liberalization in industrial goods, particularly the reduction of tariff peaks and tariff escalation on its labour-intensive manufactured exports (such as textiles and clothing). However, it is not proactive in the non-agricultural goods negotiations in the Doha Round, mainly due to pressure from domestic business constituencies for import protection. The Philippines is defensive in the GATS negotiations, especially given the politically sensitive and controversial issue of constitutional restrictions on foreign ownership in services sectors. Like other ASEAN members except Singapore, it supports an emergency safeguards mechanism in the GATS. •

Rules: The Philippines has a strong interest in seeing improved WTO disciplines on anti-dumping actions and fisheries subsidies.

© 2004 Institute of Southeast Asian Studies, Singapore

6. The Philippines and WTO

•

•

73

Developing country issues and Singapore issues: The Philippines is ambivalent-to-defensive but not hardline on these issueclusters. For example, strong agreements on the Singapore issues would pose a problem given constitutional restrictions on foreign equity, partial and malenforced competition legislation, and opaque and discriminatory public procurement practices. Accordingly, it was part of a broad developing country grouping opposing negotiations on this issue-cluster in Cancun. However, if the Doha Round recovers momentum, the Philippine Government may be amenable to compromise on these issues providing it receives concessions elsewhere. Trade and environment: The Philippines is very concerned about costly and burdensome sanitary and phytosanitary (SPS) and technical barriers to trade (TBT) provisions in developed countries that it believes constitute disguised protection and obstruct its agricultural exports. It has a strong interest in seeing that the EU and other Friends of Multifunctionality do not tie food safety and labelling requirements too closely to the market access negotiations on agriculture (in order to further restrict agricultural imports).

TRADE POLICY CAPACITY FOR PARTICIPATION IN THE PRESENT ROUND Philippine trade policy capacity is not particularly strong. It now lacks an ASEAN crutch to lean on in the WTO. The Department of Trade and Industry (DTI) leads on trade policy. Its Bureau of International Trade Relations is responsible for bilateral, regional, and multilateral trade negotiations. The DTI also has responsibility for industrial planning and investment

© 2004 Institute of Southeast Asian Studies, Singapore

74

Southeast Asia in the WTO

policy through the Board of Investment and the Philippine Economic Zone Authority (which promotes investment in Special Economic Zones). The Bureau of Product Standards, the Intellectual Property Office, and the National Consumers’ Affairs Council also come under the authority of the DTI. The Philippine mission to the WTO has five professional staff (more than Singapore, less than Thailand, and about the same size as the Malaysian and Indonesian missions). The secretary (minister) for trade and industry co-chairs an interdepartmental cabinet-level committee on trade policy, which reports to the National Economic and Development Authority (NEDA), the agency primarily responsible for co-ordinating social and economic policy. The NEDA Board is chaired by the president. The Tariff Commission, attached to NEDA and the Office of the President, provides analysis and advice on tariff-related matters. A WTO/AFTA Advisory Committee, reporting to the Office of the President, oversees government and private sector compliance with global and regional trade commitments, and conducts information and educational campaigns on trade policy issues. It is chaired by the secretary for trade and industry and has private sector representation. In the Philippines’ U.S.-style Constitution (of which the postMarcos 1987 Constitution is the latest version), the president has considerable discretionary competence in the exercise of constitutional and statutory powers, for example, through decrees and Executive Orders. Within broad limits specified by the Congress (the legislature), the president can alter tariff rates, import and export quotas, and initiate trade remedies such as antidumping and safeguard actions against other countries. The key trade liberalization measures of the 1990s were launched by Executive Orders.

© 2004 Institute of Southeast Asian Studies, Singapore

6. The Philippines and WTO

75

Experience and knowledge of trade policy issues does not run deep. It is thin on the ground outside the DTI in other parts of the government, and also in the private sector. Arguably, competent and experienced trade policy officials have to work in a less positive environment than was the case in the Ramos administration. Policy-makers are too distracted by greater political and economic instability at home to focus on trade policy priorities. National policy and analytical input to Philippine negotiators in Geneva thus leaves something to be desired. To compound the problem, Philippine negotiators are overwhelmed by a wider and deeper WTO, and by the breadth and complexity of the present round. They are unable to keep up with the workload, analyse other members’ negotiating proposals, and formulate ones of their own in the various negotiating groups and work programmes. This accounts in large part for Philippine passivity, frustration, and defensiveness in the round. Like Indonesia, the Philippines suffers from Developing Country Syndrome in the WTO. Philippine defensiveness on agriculture contributed to problems in the round and failure at Cancun. In common with Indonesia, it stands to lose more than more advanced developing countries from a crippled WTO and the accompanying diversion of attention to FTAs. Political and economic weakness and instability at home place it in a weaker position to negotiate good FTA deals compared with Singapore, Malaysia, and Thailand.

© 2004 Institute of Southeast Asian Studies, Singapore

76

Southeast Asia in the WTO

© 2004 Institute of Southeast Asian Studies, Singapore

7. Other ASEAN Countries and WTO

77

Chapter 7

Other ASEAN Countries and WTO Of the ASEAN members not of central concern to this study, Myanmar and Brunei are members of the WTO, Cambodia has recently been accepted into the organization, and Laos and Vietnam are still in the queue for accession. Myanmar, a founding member of the GATT and the WTO, is almost totally inactive. Its small mission in Geneva seems to concentrate on other international organizations in town while neglecting the WTO. There has been no Trade Policy Review (TPR) of Myanmar to date. As a least developed country it is not subject to regular TPRs. Brunei Darussalam is hardly active in the WTO, though, unlike Myanmar, it has had one TPR. Its average MFN tariff is 3.1 per cent, the lowest in ASEAN next to Singapore. However, non-tariff barriers are not insignificant and there are restrictions on FDI. Brunei is basically an oil-dependent economy controlled by the state. New legislation depends on Emergency Orders issued by the sultan. Government regulation, by international standards, is not exactly transparent and predictable. Brunei has not even formally ratified its Uruguay Round commitments through adoption in national legislation. Cambodia concluded negotiations to accede to the WTO 77 © 2004 Institute of Southeast Asian Studies, Singapore

78

Southeast Asia in the WTO

before Cancun, while Laos and Vietnam are still negotiating. Working Parties for accession negotiations were set up for Cambodia in 1994, Laos in 1998, and Vietnam in 1995. WTO membership makes sense for all three countries, in the first instance as a means of reinforcing and accelerating their transition from Plan to Market. This entails further liberalization of trade and FDI, and implementation of market-compatible trade procedures, all legally bound in WTO agreements. This should help to reallocate domestic resources more efficiently, especially by removing the protectionist bias against agriculture in the rural areas, and thus feed into higher growth and poverty reduction. Moreover, WTO membership will increase export market access and reduce exposure to non-tariff protection, underpinned by dispute settlement mechanisms. Progress in accession negotiations has been slow, partly due to the sluggishness of domestic economic reform programmes, and partly to the complexity of WTO accession procedures and the increasing demands placed on acceding members. The long drawn-out accession negotiations with China (and to a lesser extent Taiwan) illustrate the point. Accession depended on national political will to undertake deep-seated market-oriented reforms, not only in reducing external barriers to trade and FDI but also concerning the domestic regulatory infrastructure. In addition, accession procedures were onerous: established WTO members made tough and relentless demands in order to gain market access for their firms; and the process of reviewing domestic legislation and regulatory mechanisms, and bringing them into line with WTO agreements, was complicated and protracted. Since late 2002, it appears that Cambodia was put on a fast track to WTO accession. WTO members manifestly relaxed their demands and lowered the bar to Cambodia’s prospective accession. Accession negotiations were concluded in mid-2003 and

© 2004 Institute of Southeast Asian Studies, Singapore

7. Other ASEAN Countries and WTO

79

Cambodia, along with Nepal, was welcomed into the fold at the Cancun Ministerial Conference — as the first least developed countries to accede since the organization came into being in 1995. This is intended as a symbolic gesture to developing countries, especially when many of them are complaining that their needs and demands are not being taken seriously in the Doha Round. Vietnam is different. Unlike Cambodia, it is a big and promising market of great interest to exporters and investors from existing WTO member countries. Negotiations are, therefore, likely to follow a China-style trajectory: demands for market access and regulatory reform as a condition of WTO membership will be tough — much tougher than those for Cambodia. A higher bar for accession points to protracted negotiations lasting to 2005 and perhaps beyond. Lao accession negotiations are some way behind.

© 2004 Institute of Southeast Asian Studies, Singapore

80

Southeast Asia in the WTO

© 2004 Institute of Southeast Asian Studies, Singapore

8. Southeast Asia’s future in the WTO

81

Chapter 8

Southeast Asia’s Future in the WTO The ASEAN-5 are bowling alone with different degrees of effectiveness in the WTO. Participation in the WTO is more effective than it is for the bulk of developing countries, but with big differences among the ASEAN-5. Chief among the factors hindering ASEAN co-operation in the WTO are differences in national trade policies and trade policy capacities, exacerbated by the Asian crisis, and an enlarged, internally unwieldy ASEAN with slow-moving regional economic co-operation. Such differences were clearly on display in the Doha Round and in Cancun. This state of affairs still leaves an important question unanswered: is there room for stepped-up ASEAN cooperation in the WTO post-Cancun, especially if the Doha Round is put together again? Even in an optimistic scenario, ASEAN co-operation in the WTO is bound to be more limited than it was in the Uruguay Round: the common denominators of the past are no longer extant and there will be less hanging together. A final glance at the negotiating issues in the present round illustrates the point: •

Market access: Effective ASEAN co-operation is unlikely: national differences on agriculture and services are too large. Differences are narrower on industrial goods: all ASEAN-5 81

© 2004 Institute of Southeast Asian Studies, Singapore

82

•

•

Southeast Asia in the WTO

countries have a stake in multilateral reductions in tariff peaks, tariff escalation, and non-tariff barriers. However, manufacturing protectionism on the home front remains, particularly in Thailand. Rules: Here there is more potential for ASEAN co-operation, following Uruguay Round precedent. Then, ASEAN members shared common ground on tightening GATT disciplines on anti-dumping and countervailing measures, safeguards, and subsidies. Now, ASEAN members remain sparse users of trade remedies but their exports still suffer from contingent protection elsewhere. Thus they have a common interest in stronger WTO rules coming out of this round, particularly on anti-dumping measures and subsidies. Indeed, this issue-cluster is perhaps the biggest common denominator remaining for ASEAN in the WTO. Developing country issues: The ASEAN-5 will not be able to return to the common ground they shared on S&D during the Uruguay Round. Internal divisions on this issue-cluster are reinforced by membership of different multi-country coalitions (Malaysia and Indonesia in the LMG, Singapore and Thailand in Friends of the New Round). Nevertheless, Malaysia has been relatively pragmatic in the LMG. One could imagine ASEAN members converging on mid-range compromise positions: dealing with remaining implementation issues; and S&D based on differential transition periods for implementing WTO agreements and with increased technical assistance, but without a return to blanket exemptions and carve-outs from common rules and obligations. However, Indonesian and Philippine defensiveness in agriculture, particularly their insistence on Special Product exemptions from liberalization commitments, makes such intra-ASEAN compromises difficult to achieve. The general polarization of debate along North-

© 2004 Institute of Southeast Asian Studies, Singapore

8. Southeast Asia’s future in the WTO

•

•

83

South lines on display in Cancun also does not help matters. Singapore issues: Here there have been divisions between Singapore and the more sceptical rest, with Thailand occupying a pragmatic position in between. However, as with the developing country issues, converging positions on compromise solutions are imaginable. This would probably entail negotiations on soft, evolutionary, not overly intrusive agreements on trade facilitation, with the other three issues placed outside the Single Undertaking. Moreover, trade facilitation is the one Singapore issue where there is common interest among the ASEAN-5. On the latter, ASEAN cooperation in the WTO could be stronger and move in tandem with AFTA and APEC initiatives. Malaysia’s post-Cancun flexibility, in line with an emerging WTO consensus to focus core negotiations on trade facilitation alone, should make intra-ASEAN convergence on the Singapore issues easier. Trade and environment: Next to rules, this is perhaps the other remaining common denominator among the ASEAN-5. All except Singapore are agricultural exporters and have a common interest in ensuring that health and safety measures (covered by the SPS and TBT agreements) are not used as backdoor regulatory barriers to restrict imports.

Taking stock, stepped-up but limited ASEAN co-operation is within the bounds of the possible — if the Doha Round is put back on the rails. It would focus on rules, trade facilitation, SPS and TBT measures (to prevent greater regulatory protectionism, especially against agricultural exports), and perhaps industrial goods, with gradually converging positions on developing country and Singapore issues. It would involve more information sharing and informal consultations. Two or more ASEAN members could

© 2004 Institute of Southeast Asian Studies, Singapore

84

Southeast Asia in the WTO

co-operate more actively in the context of broader issue-based Friends Groups, for example, on industrial tariffs, e-commerce, and rules. This would complement the WTO activity of the ASEAN-5 individually, in formal negotiations and in multi-country coalitions. However, even to get to that stage would require more political will in national capitals and with the ASEAN heads of mission to the WTO than is presently the case. The more active and better positioned ASEAN members, such as Singapore, Malaysia, and Thailand, would have to take the lead in fostering stronger group co-operation. Furthermore, the entry of Cambodia to the WTO, and the prospective accession of Vietnam and Laos, is going to make it even more difficult to find ASEAN common denominators on the issues. Given such political complications, perhaps one should not expect too much from ASEAN co-operation in the WTO anytime soon. Moreover, failure in Cancun and the probable switch of attention and resources to FTAs will make it extra difficult to revive even limited co-operation in the WTO. Another question to ask is what environmental factors might favour ASEAN co-operation, whether in the WTO (if the Doha Round gets back on track) or on other trade policy tracks, especially AFTA and ASEAN plus FTA initiatives. The main factor is a much more competitive global and regional policy environment. In particular, the policy gap between China and Southeast Asia has narrowed sharply over the past decade. During the 1990s, China unilaterally undertook the most important and far-reaching package of trade and investment liberalization measures seen anywhere in the world. Tariffs and non-tariff barriers to imports, export barriers, and foreign investment restrictions were reduced significantly; the role of state trading monopolies was whittled down; and payments were also liberalized. These measures, coupled with domestic reforms to

© 2004 Institute of Southeast Asian Studies, Singapore

8. Southeast Asia’s future in the WTO

85

liberalize the internal market, opened vast swathes of the Chinese economy to market-style competition. China’s strong WTO accession commitments — the strongest of any developing country in the WTO — represent the crowningpoint of this process of internal and external liberalization. By 2005, average tariffs will be bound at 9 per cent for manufactures and 16 per cent for agricultural goods. China’s average tariffs are already coming down to Southeast Asian levels (at the lower Malaysian and Indonesian ends of the scale rather than the high Thai end of it). Moreover, China has bound its tariffs in the WTO at very close to applied rates. This means its bound rates are well below those of ASEAN countries (except Singapore). In addition, China’s GATS commitments are reasonably strong — much stronger than the ASEAN countries’ weak commitments. The contrast between China and less outward-oriented developing countries in other regions (such as India) is of course even more striking. Taiwan has followed a similar trajectory to China: strong WTO commitments have followed major unilateral liberalization. Taiwan has bound its average tariffs at 4 per cent and 12 per cent for industrial goods and agriculture respectively; and it has made strong GATS commitments. The message China in particular is sending to other WTO members and to foreign investors is therefore clear: it is liberalizing fast and locking in reforms through WTO commitments, while the momentum of liberalization and associated regulatory reform in Southeast Asia has slowed down post-Asian crisis. These trends should concentrate minds in ASEAN. If the momentum of liberalization and regulatory reform is not revived, trade and FDI will continue to shift northeast at Southeast Asia’s expense. Restoring policy competitiveness, on the other hand, would allow Southeast Asia to benefit from shifting comparative

© 2004 Institute of Southeast Asian Studies, Singapore

86

Southeast Asia in the WTO

advantage and retain foreign investor interest. Policy competitiveness requires undertaking further unilateral measures of liberalization and pro-competitive domestic regulatory reforms. The unilateral track can be reinforced by liberalization on other tracks, such as AFTA, bilateral and plurilateral FTAs, and proactive national participation in the WTO. Ideally, limited ASEAN co-operation in the WTO, along the lines indicated earlier, would complete the picture. But this depends on a revived Doha Round. In the absence of that, ASEAN co-operation will have to be focused elsewhere.

ENVOI: SOUTHEAST ASIA, THE WIDER REGION, AND THE MULTILATERAL TRADING SYSTEM Two final points need to be made by way of conclusion. First, Southeast Asia needs the WTO. For several understandable reasons, regional attention is switching to FTAs. The danger is that the ASEAN-5’s interest and participation in the WTO will weaken as a result. This would be unfortunate. Southeast Asian countries are relatively open economies dependent on extraregional trade and FDI. Their integration with the wider world economy gives them a very strong long-term stake in a liberal, non-discriminatory, rules-based multilateral trading system: a patchwork of overlapping and discriminatory FTAs in Asia-Pacific and beyond is not enough. Therefore, the ASEAN countries must do their best to ensure that FTAs are not impediments to multilateral liberalization; they cannot afford to see the WTO wither on the vine. Bilateral and regional arrangements should be adjusted to the requirements of the global trading system, not the other way around. Second, the WTO needs Southeast Asia. More broadly, the WTO needs the active participation of its members from East and

© 2004 Institute of Southeast Asian Studies, Singapore

8. Southeast Asia’s future in the WTO

87

Southeast Asia. What can countries in the region do to support the WTO system, especially at a time of post-Cancun crisis? This brings me to the intergovernmental politics of the WTO; what should be its fundamental purpose into the middle-distance future; alarming trends post-Uruguay Round that threaten the viability of the organization; and the coalitions ASEAN members should forge, in East Asia and beyond, to move the WTO in the right direction. The United States and the EU remain the most important political actors in the WTO; and U.S.–EU co-operation is the necessary (but far from sufficient) condition of success in the Doha Round and beyond. However, from Uruguay Round days, the GATT/WTO has also depended on strong involvement from about twenty-five other developed and first-division developing countries. Canada, Japan, Australia, and New Zealand from the OECD come to mind. In the developing country camp, India, Brazil, and now China stand out, but this group also includes other Latin American countries (notably Mexico and Chile) and many East Asian countries (the ASEAN-5 plus South Korea, Hong Kong, and now Taiwan). Second and third-division developing countries, an absolute majority in the WTO numbering about ninety, have limited to very limited trade policy capacity and are much less active. Some of them, especially in multi-country coalitions, have become more active since Seattle, but they face distinct limits to sustained, proactive participation. A rough headcount shows that East Asia accounts for nearly half of the score of really active developing country members in the WTO. This translates into real and potential influence, both in terms of individual activity and in multi-country coalitions (broad-based café au lait coalitions, and narrower issue-based coalitions such as the Cairns Group and informal Friends Groups). The accession of China and Taiwan to the WTO, both with well-

© 2004 Institute of Southeast Asian Studies, Singapore

88

Southeast Asia in the WTO

staffed and increasingly active Geneva missions, should reinforce East Asian influence. Most promisingly, China — quite in contrast to India but more like Brazil and South Africa — is showing every sign of constructive engagement in the WTO. Its unilateral reforms, accession commitments and clear-cut comparative advantage in labourintensive manufactured exports give it a strategic market access focus in the WTO. Post-accession it has been serious, businesslike, indeed ultra-pragmatic. It has balanced offensive and defensive positions, been willing to compromise and trade off, forged alliances with like-minded partners, eschewed confrontation and inflammatory rhetoric, and generally been a good citizen. This was evident throughout the round pre-Cancun and in Cancun. It fits hand-in-glove with China’s broader foreign policy shift to constructive engagement with the world outside, accompanied by more nuanced and sophisticated diplomacy. East Asian countries, with China at centre stage but also with an important Southeast Asian component, are thus well positioned to exercise considerable influence in the WTO, in the Doha Round and beyond. But for what purpose? It cannot be said too often that a liberal multilateral trading system is life-blood for East and Southeast Asia. This means a WTO focused on market access, that is, progressive liberalization of trade and investment in goods and services, underpinned by transparent, non-discriminatory rules. This raison d’être is traditionalist in the sense that it relies on a GATT-like compass, but it is also reformist in that it ranges wider (broader sectoral coverage than the GATT) and ventures deeper (procedural disciplines to make trade-related domestic regulation more transparent). It is, in short, a constitutional package for open markets, a helpful auxiliary (“from above”) for corresponding measures undertaken unilaterally (“from below”) and through bilateral and regional FTAs (“in between”). © 2004 Institute of Southeast Asian Studies, Singapore

8. Southeast Asia’s future in the WTO

89

Unfortunately, the present reality does not reflect the kind of WTO the region needs. The WTO today is mired in drift and deadlock, buffeted by hostile forces without and fractured within by sharp and bitter intergovernmental divisions. The collapse of the Doha Round in Cancun raises grave doubts about the future of the WTO as a vehicle for trade liberalization. The central problem is that the WTO’s negotiating mechanism has been crippled since the late 1990s. The launch of the Doha Round was a blip-on-the-screen, but largely because of the perception of global crisis in the wake of September 11. Since then, the WTO seems to have reverted to recent type. The heart of the matter is that, with an increasing and overwhelming developing country majority, the WTO is coming to resemble the UN system. A much bigger organization compared with the old GATT, having to accommodate a breathtaking range of interests and preferences, has made effective decision-making elusive. The U.S. and EU foot-dragging on liberalizing agriculture, textiles, and clothing markets; developing country demands for exemptions from common rules and obligations in the name of S&D; adversarial grandstanding, long-winded speechifying and procedural nit-picking, have all substituted for hard policy choices through diplomacy and negotiation. All this was on unseemly display in Cancun. Not surprisingly, many decision-makers are coming to the conclusion that the WTO is rapidly becoming a marginalized, irrelevant talking-shop. The proliferation of bilateral and regional FTAs can only become more pronounced if the WTO does not get out of its rut. In the absence of a strong and effective WTO, FTAs will splice up the world economy into opaque and discriminatory trading blocks operating more on the basis of power relationships and less on the basis of rules. This would particularly put the squeeze on poor and weak developing countries — the vast majority in the developing world — by excluding them from preferential access to the markets of the major powers. © 2004 Institute of Southeast Asian Studies, Singapore

90

Southeast Asia in the WTO

None of these trends serves the interests of East and Southeast Asia. The region needs a WTO refocused on market access, that is, the progressive reduction of trade barriers according to transparent and non-discriminatory rules. To make meaningful policy choices, the region also needs a WTO that rediscovers an effective negotiating mechanism. This is less a matter of changes to formal decision-making procedures than a matter of intergovernmental politics. Put bluntly, the WTO can only work if there is at least the informal recognition of a two- or multi-tiered system in which a minority of member-governments make the key decisions. This would but reflect asymmetrical and hard-boiled political and economic realities outside Geneva. Basically, the 30-plus WTO members (counting the EU as one) who are already integrated or are integrating into global trade and production networks should do the deals. This group comprises the OECD plus twenty to twenty-five “first-division” developing countries (prominent among which are China, India, and Brazil). Within ASEAN, Singapore, Malaysia, and Thailand are definitely part of this first division, but Indonesia and the Philippines are on the borderline. The rest of the membership — nearly 100 low-income and least developed countries — have huge, intractable domestic problems; about half have states that have collapsed or are close to collapse. Individually and in coalition-formation, they are in no position to contribute positively to the WTO in the foreseeable future. Hence, they should be given a free ride through generous S&D — on the understanding that they will not be central to WTO decision-making and do not block overall progress. To help move the WTO in the right direction, the countries of the region must put their shoulders to the wheel. This requires sustained national political attention, sufficient trade policy resources, constructive stances on negotiating issues, and coalitions with like-minded members. ASEAN co-operation will not be a

© 2004 Institute of Southeast Asian Studies, Singapore

8. Southeast Asia’s future in the WTO

91

prominent feature of coalition activity. But ASEAN members should be active and creative on an individual basis in forging multiple coalitions with other WTO members keen to promote market access and stronger multilateral rules, on discrete issues and across-the-board. Coalitions will differ issue by issue, but they should prominently involve other East Asian countries as well as Australia and New Zealand. FTAs should be leveraged to forge stronger bonds with like-minded partners in the WTO. Future FTA initiatives could also be used to build new alliances in the WTO, particularly with Latin American countries and South Africa. India should be engaged, too — provided it shifts its stance in the WTO from defensiveness and inflexibility to pragmatism and flexibility. The fulcrum of alliance-formation, however, should be strategic partnerships with the two major powers who now favour a strong market access-oriented WTO: the United States and China. Economic and wider geopolitical shifts (a more assertive United States on the global stage and a more assertive China on the regional stage), point in this direction.

© 2004 Institute of Southeast Asian Studies, Singapore

96

Free Trade Agreements in Southeast Asia

© 2004 Institute of Southeast Asian Studies, Singapore

Tables

93

Tables TABLE I Tariff Levels Country

Applied

Singapore1 Malaysia2 Thailand3 Indonesia4 Philippines5 Developing countries Latin America/Caribbean Asia Sub-Saharan Africa Middle East/Mediterranean Developing countries average6

Bound

0 9.2 16 7.3 5

9.7 19 29 30.4 28

13 21 20 23 19

38 37 74 46 49

% Unbound 29.5 35 36 7 40

Notes: Applied = Simple average applied rate. Bound = Simple average bound rate at the end of implementation of Uruguay Round Agreements. % Unbound = proportion of total tariff lines unbound. 1. WTO Singapore Trade Policy Review (TPR) 2000; USTR National Trade Estimate Report on Foreign Trade Barriers: Singapore 2003. 2. WTO Malaysia TPRs 1997, 2001; USTR National Trade Estimate Report on Foreign Trade Barriers: Malaysia 2003. 3. WTO Thailand TPR 1998; USTR National Trade Estimate Report on Foreign Trade Barriers: Thailand 2003. 4. WTO Indonesia TPRs 2003, 1998; USTR National Trade Estimate Report on Foreign Trade Barriers: Indonesia 2003. 5. WTO Philippines TPRs 1995,1999; USTR National Trade Estimate Report on Foreign Trade Barriers: Philippines 2003. 6. Average for 42 developing countries having had WTO TPRs Sources: WTO Trade Policy Reviews; USTR National Trade Estimate Report on Foreign Trade Barriers; Constantine Michalopoulos, Developing Countries and the WTO (London: Palgrave, 2001), pp. 48, 52 (Tables 4.1 and 4.3).

93 © 2004 Institute of Southeast Asian Studies, Singapore

Market Access

Top priority: industrial goods and services

Top priority: industrial goods + palm oil exports. Defensive on services

Top priority: agriculture. Mixed on industrial goods. Defensive on services

Country

Singapore

Malaysia

Thailand

© 2004 Institute of Southeast Asian Studies, Singapore

Stronger disciplines on anti-dumping

Stronger disciplines on anti-dumping

Stronger disciplines on anti-dumping

Rules

No major concerns. Flexible

Few implementation/ SDT/TRIPs problems but promotes LMG positions. However, more flexible than LMG hardliners.

No problems

Developing Country Issues

Reasonably flexible

Defensive, especially on investment. More flexible post-Cancun, especially on trade facilitation.

Comfortable. Trade facilitation a priority

Singapore Issues

The Doha Development Agenda: National Positions on the Issues

TABLE II

Concerns about SPS and TBT barriers to agriculture and fisheries exports

—

—

Trade and Environment

94 Southeast Asia in the WTO

Market Access

Defensive, particularly on agriculture, but also on services. Wants access for industrial and tropical product exports

Defensive on agriculture. Also on services. Mixed on industrial goods. Wants market access for industrial and tropical product exports

Country

Indonesia

Philippines Stronger disciplines on anti-dumping and fisheries subsidies

Stronger disciplines on anti-dumping

Rules

Defensive but not hardline

Promotes LMG positions. But more flexible than hardliners

Developing Country Issues

TABLE II – continued

Defensive but not hardline

Defensive but not hardline

Singapore Issues

Concerns about SPS and TBT barriers to agriculture and fisheries exports

—

Trade and Environment

Tables 95

© 2004 Institute of Southeast Asian Studies, Singapore

92

Southeast Asia in the WTO

© 2004 Institute of Southeast Asian Studies, Singapore

Selected References

Selected References Athukorala, Premachandra. “Malaysian Trade Policy and the 2001 Trade Policy Review”. The World Economy, pp. 1297–317. Trade Policy Review: Indonesia 1998, WT/TPR/S/51, 5 November 1998 (Geneva: WTO, 1998). Downloaded from . Summaries of the latter available at , . Trade Policy Review: Indonesia 2003, WT/TPR/S/117, WT/TPR/G/117, 28 May 2003 (Geneva: WTO, 2003). Downloaded from . Trade Policy Review: Malaysia 2001, WT/TPR/S/92, 5 November 2001 (Geneva: WTO, 2001). Downloaded from . Summaries of the latter available at , . Trade Policy Review: Singapore 2000, WT/TPR/S/67, May 2000 (Geneva: WTO, 2000). Downloaded from . Summaries of the latter available at , . Trade Policy Review: Thailand 1999, WT/TPR/S/63, 17 November 1999 (Geneva: WTO, 1999). Downloaded from . Summaries of the latter available at , . 97 © 2004 Institute of Southeast Asian Studies, Singapore

98

Free Trade Agreements in Southeast Asia

Trade Policy Review: The Philippines 1999, WT/TPR/S/59, 27 August 1999 (Geneva: WTO, 1999). Downloaded from . Summaries of the latter available at , . 2002 National Trade Estimate Report on Foreign Trade Barriers: Indonesia, Office of the US Trade Representative, . 2002 National Trade Estimate Report on Foreign Trade Barriers: Malaysia, Office of the US Trade Representative, . 2002 National Trade Estimate Report on Foreign Trade Barriers: Philippines, Office of the US Trade Representative, . 2002 National Trade Estimate Report on Foreign Trade Barriers: Singapore, Office of the US Trade Representative. . 2002 National Trade Estimate Report on Foreign Trade Barriers: Thailand, Office of the US Trade Representative, . 2003 National Trade Estimate Report on Foreign Trade Barriers: Indonesia, Office of the US Trade Representative, . 2003 National Trade Estimate Report on Foreign Trade Barriers: Malaysia, Office of the US Trade Representative, . 2003 National Trade Estimate Report on Foreign Trade Barriers: Philippines, Office of the US Trade Representative, . 2003 National Trade Estimate Report on Foreign Trade Barriers: Singapore, Office of the US Trade Representative, . 2003 National Trade Estimate Report on Foreign Trade Barriers: Thailand, Office of the US Trade Representative, .

© 2004 Institute of Southeast Asian Studies, Singapore