ASEAN’s Trade Modernization Agenda?

Last week, ASEAN leaders and economic ministers held a series of meetings in Southern California with one another and with a variety of cutting edge businesses.  These meetings ought to spur officials to redouble efforts to craft an appropriate trade modernization agenda for the region.  A forward-thinking set of policy frameworks can help large and small businesses better capture potential gains from trade.

After the leader’s summit in Sunnylands, officials moved to San Francisco and Silicon Valley.  USTR took economic ministers and trade delegations from ASEAN on a “road show” to highlight different types of companies and technologies at the forefront of innovation. 

These efforts were supplemented by a conference organized by the US-ASEAN Business Council that also discussed additional elements of an appropriate trade agenda, including creating new funding models to foster creative start-up companies and encourage entrepreneurs. 

One challenge for ASEAN is the tendency for officials to try to micromanage the business environment.  Perhaps the single most important take-away from the California experience may have been that government has a critically important role to play to setting in place broad, facilitating policies that foster growth in the private sector and allows companies to flourish.  But heavy-handed interventions or narrowly prescriptive policies are likely to lead in the wrong direction.    

In fast-moving sectors, government attempts to pick and choose appropriate policies, or to select the “right” sectors, firms or industries to support are more likely to backfire than ever before. 

While it is important for governments to encourage companies to take advantage of trade opportunities, officials might more usefully focus their attention on removing policy obstacles and allow firms to find their own pathways to success and failure.  In a world where companies can locate anywhere in the globe, governments simply cannot afford policy roadblocks and time consuming and expensive obstructions to doing business. 

Our own proposal for adding a broad e-commerce perspective to AEC Blueprint 2025 can be found here.  We welcome suggestions from companies for specific items to flesh out the details.

Silicon Valley, of course, represents the current extreme end, perhaps, of innovation built up around the promise of digital connectivity.  However, in a very short period of time, many elements of what appears to be revolutionary today will spread to companies large and small in often far-flung locations. 

The smallest firms can provide services via mobile platforms.  Companies in remote locations will be able to create products using additive manufacturing techniques.  Firms can use various types of platforms to manage everything from client relationships to human resource systems to inventory controls in the most complicated global companies and even across firms that are not directly connected.

Such innovations are not simply a distant prospect or likely to remain the preserve of well-financed major Western players.  These technologies will spread and costs will fall, just as smart phone technology has allowed more and more people to harness tremendous computing power in the palm of their hands today.

The trade agenda in ASEAN (and in most places) has simply not caught up with this rapidly evolving environment.  While the AEC Blueprint 2025 nods in the direction of helping smaller firms, mentions the importance of e-commerce, and says that services are important, none of this is really sufficient for ASEAN member states to effectively harness the new trade modernization agenda that is needed to help businesses compete. 

Instead, ASEAN officials must seriously drill down and create practical policy frameworks to ensure that trade can continue to flourish across the region in the next decade.  This means, most critically, that ASEAN must work on policy areas that have traditionally been considered “off limits.”  For instance, it is no longer possible for a modern trade agenda to leave data, internet and information policy details to individual member states. 

Officials have to understand how globally connected firms do business today. Many of the ideas of how to provide privacy and security, as an example, do not match up with the way that firms actually move information around. 

The charming notion that police could walk into a room and “seize” data does not match the reality of how information actually flows.  No sensible firm would want to house important information in only one location, as it would be extremely vulnerable to disaster.  A fire, flood or earthquake could wipe out a whole firm.    Companies—even small ones—would like to have multiple locations for data storage and seamlessly switch (or have their service provider switch) between them if needed to avoid disruptions in service.

This is not to suggest, of course, that privacy and security are not critically important ideas or that government and companies ought not be concerned with either notion.  It is simply to note here that officials responsible for crafting rules and regulations to ensure privacy and security need to understand how companies actually operate and how they might reasonably be expected to operate in the near term before trying to craft responsible policy solutions. 

ASEAN has got to do a much better job of reaching out directly to companies to determine which policies are creating obstacles and which areas need improvement.  This must include more than annual summit meetings with top level ministers and business councils (welcome though these meetings may be), but must include sustained and ongoing input to working committees at all levels within member states and at the ASEAN level. 

The practical consequence of a failure to create policy frameworks across ASEAN that are in harmony is that businesses will not grow in some member countries.  Companies will not invest in locations that do not provide a facilitating environment.  Innovation will not happen.  Entrepreneurs will not develop, or they will leave and go to some other location to build up their new ideas.  This would be a tremendous waste of the talent and energy found across Southeast Asia.

---Note:  Last week’s post about the TPP timelines led to an excellent query by Alice at UBS in Singapore.  (UBS clients should request their outstanding TPP Timelines research full of excellent graphics.)  Congress will vote on the implementing legislation to bring US laws into conformity with the TPP.  (As soon as possible, please!) Then USTR will start the process of certifying that other TPP members have complied with TPP rules.  USTR will notify Congress of the results of this study.  But Congress does not need to vote on this process.  Once the report is finished and submitted (assuming no major objections), the US domestic procedures are considered to be finished.  If all 12 parties have also finished, TPP entry into force will proceed in 60 days.

Second TPP Note:  The New Zealand TPP Website has released the Spanish and French versions of the texts.  One big change with the overall legal scrub has been the tariff schedules that were adjusted to remove all the complicated reference notes (like B5) and given more standardized formatting.

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

Moving the TPP Ball Forward in Washington

Washington DC:   With the formal signing of all 12 members on February 4, 2016, in New Zealand, the Trans-Pacific Partnership (TPP) has crossed another milestone.  What is up next?

Officially, the member states remain focused on finishing up domestic procedures needed to trigger the entry into force for the whole deal.  In practice, most eyes are focused on Washington.

While domestic approval is not automatic everywhere else, most of the TPP member countries do not face the same set of hurdles as the United States. 

Malaysia, for example, just managed to clear two contentious days of parliamentary debate on the TPP at the end January.  While the government did not, strictly speaking, need MPs to grant approval for the deal, the government had promised a debate before signing the final texts.  In the end, MPs did not block the agreement. 

The country still has to change 26 different pieces of legislation to bring the country into alignment with new TPP requirements.

In most parliamentary systems, getting legislative approval is easier (assuming the government that negotiated the deal is the same government that is asking members of parliament to approve the final agreement). 

Most other TPP members are rapidly moving towards granting approval and making necessary domestic legislative changes to bring the agreement into force.  This likely includes Japan, which appears to want to finish approvals for the TPP ahead of this summer’s elections in the Diet.

The United States, by contrast, has a special problem.  The agreement was launched under a Republican administration, but negotiated under a Democrat.  Traditionally, however, Democrats have been less than enthusiastic about trade.  Hence the President has to get the opposition to do the heavy lifting to get the agreement through the legislature. 

To this mix, add a crazy electoral cycle, as an earlier blog post noted, where even the normally reliable pro-trade Republican party has been stepping out against trade.  Even a former USTR (trade minister), now a Republican Senator from Ohio, Rob Portman, just said he would vote against the TPP.  (Surprisingly, his photo at USTR seems undamaged so far…)

There are three issues of particular concern in DC.  First, the patent length for data protections for biologic drug continues to raise a ruckus. 

Think about that for a moment.  In an agreement that runs to 1200 pages with thousands of pages of specific schedules, the fight is literally over one number—should it be 12 or 8 or 5?  More amazing, this is a fight that has been highlighted for years.  It’s been in our blogs for more than a year with the clear warning that 12 years is simply a non-starter for the other parties. 

Astonishing, no? 

Anyway, issue number two is the onshoring of financial services data.  Until this week, I was not aware that it was the United States that caused this problem in the first place.  I thought there was another (unnamed) TPP member that was pushing for this policy.  No. US Treasury has some obscure rule about data flows for financial services that it wants to maintain for future policy space. 

Again, think about this for a moment—the TPP deal is potentially going to be derailed in Congress over a policy position that US Treasury has taken. 

Third, the “tobacco carve out” is a problem.  Tobacco is not carved out of the deal.  Tobacco is included.  What is carved out is the ability of tobacco firms to sue for expropriation (seizure of assets by government) under the investor-state dispute settlement mechanism. 

In doing the rounds this week in Washington, the consensus among many veteran trade watchers is that much of the fuss can be handled without “renegotiation.”  It appears to have finally sunk in that asking the other TPP member companies to reopen the deal for 3 things will put the US at risk of accepting 33 unpalatable changes in the agreement in return. 

Hence, people are furiously working behind closed doors to figure out some sort of domestic level solutions.  For example, in tobacco, maybe a commitment to not exclude tobacco (or any other sector) from ISDS in any future negotiation?

The general level of animosity in the town is clearly not helping.  Each side is accusing the other of “insufficient” attention.  The few objective observers in DC have said that there have been a lot of meetings between the White House and various members of Congress.  Whether these have been sincere or sufficient or include adequate listening or whatever is clearly a subjective call. 

Executive branch staff members are also fanning out across the country and holding meetings everywhere.  One staff member joked that if there were three people in a Starbucks somewhere who wanted to discuss TPP, he would be there on the next airplane.   The various business organizations are actively and intensively working the ground in some districts. 

The timing of the US vote is going to be interesting.  The idea seems to be to work out the “fixes” to the specific problems and objections of members that can be addressed.  Then the package will be ready to go with all the necessary implementing legislation while everyone furiously counts votes.  The minute the votes are thought to be ready, the whole thing will be put forward.

The earliest date this might happen is probably May.  The ITC has to report on the expected benefits of the agreement with a target date of May 18.  This could be sooner, although if I were the ITC, I would not try to rush what is going to be a highly contested report.

Most people are expecting the vote in the lame duck session.  However, this is risky, as noted earlier.  Timing is tight.  Depending on who wins, it is not automatic that getting it done then is easier.

One other point of note for TPP watchers from this week—even if all 11 TPP parties managed to complete their own “domestic procedures” by summer and the US somehow miraculously got the Congressional votes in June, the deal does NOT happen 60 days later.  This is because the American domestic procedures also include another element—certification. 

The United States has to certify that all parties have sufficiently carried out the necessary legislative steps to implement the deal on day one.  In practice, this means USTR has to notify Congress that, for example, Malaysia did pass the 26 pieces of legislation to comply with TPP rules.  Only when this certification is finished can the United States declare that it has sufficiently completed its own procedures to trigger entry into force.

This process could be speedy, but likely not just 60 days.  Hence, if all 12 parties appeared to ratify in mid-2016, the agreement would likely enter into force around January 2017. 

Of course, lots of things—like the death of a Supreme Court Justice, perhaps—could easily throw the entire process into complete disarray and either speed up or derail the trade agenda entirely.

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

Lots of Trade Deals in Asia: So How?

Asian governments were slower than some to join the free trade agreement (FTA) party, but once they got involved, they have been enthusiastic participants.  Singapore, for instance, has more than 20 active deals with several significant agreements like the Trans-Pacific Partnership (TPP) and a bilateral with the European Union just waiting for ratification to be completed.

Many companies understand that all these trade agreements must provide benefits of some sort that could give them a competitive advantage in the marketplace somewhere.  How does a firm figure out which deal provides the best benefits for which markets? 

Firms seem to have multiple answers to this question, “So how?” 

For some, especially many of the smaller firms at a Singapore Business Federation event last week, government should figure it out and help companies.  Clearly, governments all across the region need to work hard to get more information into the hands of firms.  It does no good at all to negotiate a beautiful deal if no one knows about it.  The terms of the agreement have to be communicated in a language that makes sense to busy business people.

Governments might also usefully work on training their own people about the various trade deals.  It also does not help to have a splendid trade agreement that goes unused because, for instance, the customs officials in a specific port never got the memo about new changes required from an agreement.

While governments should certainly do a better job of making trade agreements accessible, firms that want to be competitive have to figure out how to use the various available tools to their advantage.  Companies have to be willing to invest some resources—particularly some time and, potentially, some money into investigating whether or not trade agreements deliver bottom-line impacts to the firm.

While it is possible to say, broadly, which agreements are “better” than others—with deeper, more meaningful cuts or improved market access or investment protection—the extent of benefits embedded in an agreement can vary between sectors, industries and even firms.  Hence working out which deal is the “best” or offers the firm the greatest savings or access may require substantial knowledge of the firm as well as various agreements. 

As an example, it is possible to imagine an agreement that is broadly not particularly good.  The tariff cuts are generally poor with many tariff lines not included at all.  However, if a firm’s products are included in the portion of lines that got cuts, the deal could be very helpful and deliver substantial bottom line results to the company.  Or, if the agreement has limited market opening in services, but 3 star hotels are opened for investment, then 3 star hotel operators may receive significant benefits out of what might otherwise be a rather disappointing agreement. 

Firms can hire specialists to assist in working out what sort of benefits could be available from different agreements.  In the past, the benefits for firms might have been modest because many of the bilateral agreements in the region were not, frankly speaking, very good for companies.  They often excluded sensitive sectors and—by definition—carved out most of the things that are actually traded between the parties. 

However, the latest generation of agreements can be quite different.  Firms can gain substantial benefits.  The best of the bunch is likely to be the TPP, since the deal is deep and broad and likely covers the sector and industry of interest to most firms.  

The ASEAN Economic Community (AEC) could hold some promise for firms, especially for those companies that are either new to ASEAN or are interested in expanding market access for goods to other ASEAN members.  Do note that the AEC is mostly (for now) about duty-free access for goods.

But the AEC is not the only agreement that can be used in ASEAN.  Firms could also use the provisions in the ASEAN-Australia-New Zealand (AANZFTA) that has significantly better coverage in many areas, including services and investment.  The agreement works not just between ASEAN and ANZ, but also within ASEAN.

The Regional Comprehensive Economic Partnership (RCEP), still under negotiation, also has potential to be useful for firms.  It might, again, provide better inter-ASEAN coverage too for some sectors.

This complexity, however, is partly why firms may need to find a specialist to assist in finding the benefits of various overlapping trade agreements.  These specialist firms can be at least three types:  embedded within the big consultancy firms in the region, smaller specialist companies, or companies that provide software solutions. 

A trade deal will not, of course, solve all problems of competitiveness.  Even the best agreements do not resolve issues with exchange rate shifts, labor or staffing issues, licensing requirements, soaring rents, many business costs and so forth.  But FTAs can be a critical tool in the tool kit that provides advantages, particularly relative to other competitors that may not be using such agreements or be using such agreements effectively.

For most firms, the potential payoff from successfully harnessing a trade agreement could more than offset any costs associated with figuring out how to best use a deal.  This applies not just to larger firms, but also to many smaller companies. 

Companies may also want to develop or acquire some level of in-house knowledge of trade agreements as well.  Without basic understanding of FTAs, for example, companies may struggle to make sense of software solutions or to provide sufficient information to consultancies so they can provide better recommendations on future pathways. 

In the past, developing such information and knowledge may not have been so critical.  But with economic growth slowing in the region and with the potential benefits in various agreements increasing, it is no longer time to ignore trade agreements.  Instead, they should become one piece of the competitiveness arsenal for every company in Asia.

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