Deepest concerns over EU withdrawal of EBA scheme

March 28,2019

Reader’s Letter

https://www.phnompenhpost.com

European Commissioner for Trade Cecilia Malmstrom launched the initial process to begin EBA withdrawal on October 4 last year. AFP

Dear Editor,

Both in my capacities as entrepreneur and as representative of the European business community in Cambodia I reiterate my attachment to European values and engagement to support Cambodia improve its human rights records.

In this regard, jointly with human rights advocates and European Chamber of Commerce (EuroCham)​ members, I want to voice once more my deepest concerns in respect to the process to withdraw preferences offered to Cambodia under the Everything But Arms (EBA) scheme.

Trade preference is granted to the country as a whole not to individual operators, and suspension should be employed the same way.

The use of trade as leverage to restore human rights raises an ethical question as to whether a negative impact on businesses, workers and their families who are not responsible for the situation leading to the adoption of sanctions is a legitimate means to pursue foreign policy objectives.

Many entrepreneurs like myself, locals and foreigners, have contributed to the progress of human rights by further enhancing economic growth and socio-economic development for people here in Cambodia.

Together we share growing concerns over hard-won gains that could be imperilled, and the condition of the Cambodian people worsened by depriving poor people of jobs and endangering their livelihoods.

A withdrawal of EBA could produce results that run counter to other rights, like the protection of vulnerable groups of people and the promotion of basic human rights embedded in the UN Charter and human rights treaties.

In terms of identities and perceptions, a withdrawal of EBA unnecessarily increases the confusion as to the notion of “human rights” in Asia where there is a need for universal values to be entrenched.

Deepening human suffering comes from the manner in which actors pursue their objectives.

A disregard for impoverished communities is understandably perceived as a worrying feature.

Economic sanctions challenge the basic sense of right and wrong and create ambiguity about human rights.

As seen in the local newspapers, a Cambodian analyst stated: “Those who are happy to see sanctions should be ashamed. They can be protagonists of human rights, they are in fact the enemy of humanity.”

Seen as harmful and unjust by affecting ordinary citizens, and driving innocents into poverty, I join openly the ones that demand a refrain from using such measures for human rights, unless the EU can provide sufficient, consistent and coherent guarantees for the protection of the political, economic, social and cultural rights of affected communities.

Shouldn’t economic sanctions be proportional and only used in the most extreme cases?

Researchers have estimated the probability of success of such measures by analysing data from past cases.

In general terms, all international sanctions combined, scholars demonstrate a low probability of success in reaching their goals: five, 22 or 30 per cent.

A high probability of failure: between 65-95 per cent of the time.

Looking at the nature of sanctions, as of today, withdrawals of the US GSP scheme and EBA have not recorded a single case of compliance.

When reinstatements have occurred, they have not been driven by the target’s compliance.The probability of success is reduced to zero.

Looking at the goal of sanctions, in this case the restoration of a democratic environment, sanctions designed for this purpose are significantly associated with higher levels of democracy.

They rarely manage to instantly create liberal democracies, but more commonly some form of electoral authoritarianism, increasing prospects for future democratisation.

However, authors warn “these findings should not be taken as evidence to justify all types of sanctions in all contexts […] There are several examples of highly unsuccessful democratic sanctions in the past”.

In general terms, international sanctions have a counterproductive effect on democracy.

There may be an increase of repression in an effort to stabilise the regime and they can create incentives for the leadership to restrict political liberties and consolidate power.

In addition, target elites might respond by changing their priorities to military spending in order to enhance their coercive capacity.

I urge the EU to carry out an impact assessment of any trade measures to be taken in response to human rights violations and balance any negative impact on the local population and affected workers against its possible effectiveness in Cambodia.

As human rights are the stated primary objective of the process of withdrawal of EBA, coherence and synergy within the EU institutions to negotiate with stakeholders in Cambodia should take place effectively.

There is a need to shift away from a focus on trade to a focus on benefits and achievements in human rights.

I regret that the decision and process are led by the Directorate General for Trade – an increased role of the directorate generals specialising in human rights and development would be more appropriate.

They should play the lead role to address the human rights situation and their expertise can ensure these issues remain the main concern.

I believe the EU’s expertise in human rights, and whose approach is to deliver results on the ground by integrating lessons learned, can contribute to attaining the objective of democratisation.

In the present situation, the process to review Cambodia’s duty-free access needs to be transparent and based on European values.

In line with the Trade Commissioner’s vision of trade as a force for good in the world, I recall any action to promote human rights cannot be justified if it has a negative impact on human rights.

The EU needs to consider as a priority the rights and well-being of ordinary citizens, with particular attention paid to the most vulnerable populations.

They should not be sacrificed.

As the final decision will depend upon the judgement of the EU and in the absence of an impartial and independent body to monitor the progress of dialogue between the EU and the Cambodian government, I urge the EU to define realistic expected results, monitor progress toward the achievement of expected results, integrate lessons learned and report on performance in all transparency. In addition, the EU should not leave itself open to accusations of double standards.

When the EU threatened Cambodia on its failure to meet human rights provisions, the bloc was in a process to conclude the “most ambitious agreement ever made with a developing country” – Vietnam.

According to the 2018 Democracy Index, Cambodia ranks 125th and Vietnam 139th. According to the 2018 press freedom index, Cambodia ranks 142nd and Vietnam 175th.

The use of double standards when it comes to democracy and human rights is counterproductive for the EU, for the credibility of its external action and, most importantly, for the very principles it promotes.

If suspension is not consistently applied, as a result the activation of the withdrawal procedure in Cambodia will be seen as subject to political and economic considerations.

The EU’s EBA offers unilateral trade preferences to Cambodia but the EU’s FTA with Vietnam removes or reduces customs tariffs in bilateral trade.

It is obvious that EU economic interests are part of the decision to refrain from imposing economic sanctions.

In the past, the EU has also been criticised for being at the forefront of the practice of linking commercial objectives with political interests through the use of conditionality clauses.

A misunderstanding of the motives of decision-making on conditionality clauses with regards to human rights would undermine the government’s awareness that Cambodia’s steps to improve rights will lead to a positive outcome.

Transparency is mandatory and I contest the use of selective conditionality and the application of double standards.

Questions of human rights need to be dealt with objectively, regardless of any economic or political gain.

In terms of democracy and political rights, in some cases, incentives can be more effective and preferable to sanctions.

As a long-timer actor of the private sector, I acknowledge the negative influence of trade on labour conditions and environmental preservation.

In this regard, a withdrawal of EBA is likely to translate into a deterioration of labour conditions and may unfairly penalise workers, including those employed in European businesses in Cambodia.

Instead, to prevent and remedy against negative impacts of trade on human and labour rights, the EU should conduct a human rights impact assessment before granting trade preferences to a candidate country and during its implementation.

These assessments should be undertaken by independent experts, in consultation with civil society, including with representatives of communities affected by trade preferences.

Arnaud Darc,CEO of Thalias Hospitality Group, Phnom Penh

Send letters to: newsroom@phnompenhpost.com or PO Box 146, Phnom Penh, Cambodia. The Post reserves the right to edit letters to a shorter length.The views expressed above are solely the author’s and do not reflect any positions taken by The Phnom Penh Post.

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Liberalisation and empowerment the path to Malaysian prosperity

March 25, 2010

25 March 2019

Author: Editorial Board, ANU

https://www.eastasiaforum.org/2019/03/25/liberalisation-and-empowerment-the-path-to-malaysian-prosperity/

It’s nearly a year since the Malaysian people overwhelmingly cast aside the domineering, divisive and corruption-riddled government of Najib Razak for an alternative led by Mohamad Mahathir that promised renewed focus on the people’s interests. The new Pakatan Harapan government undertook to restore good governance, raise the bar for ministers and civil servants, recover embezzled funds and deliver them back to Malaysians as cost of living relief.

Translating rhetoric into action has thus far proven an uphill battle for an inexperienced government accustomed to life in opposition. It’s struggling to turn the vision into concrete reforms, as it tries to navigate a hostile upper house and entrenched vested interests. Progress has been confined to a handful of easy wins and the multiplication of committees to continue decades-old debates about well-understood policy failings. Malaysians are becoming restless for the government to deliver on the promise of a ‘New Malaysia’ that secures livings standards regardless of ethnicity.

Efforts to deconcentrate centralised power structures and break up state monopolies are central to reinvigorating the economy. This will enable more effective governance and help tackle endemic corruption. Malaysia’s Federal Government commands over 88 per cent of total government revenue and expenditure (the share is closer to 50 per cent in federations like Australia and the United States), leaving almost 170 states and local authorities with limited resources to address local needs. Imperious policymaking from the administrative capital of Putrajaya coupled with non-elected local governments bedevil the effective delivery of local services including law enforcement, education and healthcare.

This week’s lead article by Wing Thye Woo argues that ‘[g]rowth requires state governments that are empowered to plan and implement their own development strategies’. This would require a significant shift from the highly political allocation of development finance that penalised opposition-led states under the former government.

Government-linked corporations (GLCs) dominate the Malaysian economy and that needs to change. GLCs command a majority share of market capitalisation and key sectors of the economy including natural resources, utilities, construction and finance. Policies that reinforce GLC dominance stifle innovative and dynamic small and medium enterprises and competitiveness.

As Woo says, ‘GLCs may perform well in theory, but they don’t in practice — officials inevitably use them for political patronage and personal corruption. GLCs are political creatures, not economic instruments … Downsizing the state-related sector through privatisation is necessary for economic efficiency, political accountability and income equality’.

The government has acknowledged the problem but has been tentative in its approach to this critical reform. Its first substantive policy announcements and budget provided a major setback, reinforcing the role of GLCs in ethnic Malay development strategies and increasing government dependence on GLC dividends. It’s unclear whether the government now has the clout and political fortitude to pursue a privatisation and competition agenda.

Decentralisation is more than just government ownership and power-sharing; it encompasses a shift in the mentality of government from one underpinned by heavy-handed direction to one of empowerment. This requires the creation of institutional and regulatory environments that empower people to shape the policies that affect them, private business and entrepreneurship to fuel the engine room of economic growth, and all levels of government to deliver an enabling environment in which private actors flourish.

Empowerment means replacing ethnic discrimination with inclusive approaches to policy making, lifting up all low-income households. It means constructing a tax and transfer system that reduces rather than perpetuates inequality and cost of living pressures, positively reshaping the social contract between taxpayers and government. And it requires liberating the education system from the mechanistic, dictatorial, one-size-fits-all approach that has prioritised a one-eyed conception of nation-building over the development of inquisitive and adaptable minds.

Effective governance starts with a recognition that meaningful reforms may not please everyone but if done well can benefit all. It requires the strength of conviction to stay the course in the face of interest group pressures, avoiding discouraging U-turns like abandoning intentions to sign the United Nations International Convention on the Elimination of All Forms of Racial Discrimination. It entails more than a solitary sugar tax to raise funds for development and social welfare when the tax revenue share of GDP is a third of the OECD average. And it requires delivering substantive reforms to education in the light (or in spite) of next month’s special task force report.

The government’s recent by-election defeat in Semenyih provides a wake-up call that its support among middle-class Malaysians depends on improving its performance not on disparaging its predecessor. That means harnessing the electorate’s heightened expectations towards charting a more prosperous course for the economy, governance and for the Malaysian people.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.

 

Decentralisation the best bet for Malaysia’s growth

24 March 2019

Author: by Dr. Wing Thye Woo, Sunway University

Malaysia’s burgeoning middle class has high expectations for future economic development. But the nation won’t escape the ‘middle-income trap’ and won’t have socially-inclusive growth under current government policies. A range of reforms that deliver decentralised decision-making is needed to build the knowledge-led economy to propel Malaysia to the next level of development.

Malaysia’s current policy framework has its roots in the 1970 New Economic Policy (NEP) and its socio-political counterpart ‘Ketuanan Melayu’ (Supremacy of Malays). NEP has succeeded in building a large Malay middle class that is informed, skilled and confident about its identity. But it’s also well aware that these two policies rooted in the past are not capable of transforming Malaysia into a developed nation.

To meet these aspirations, reform is urgently needed in three key economic areas. Each area requires a common reform component: the careful entrenchment of decentralised decision-making.

First, the state’s administrative structure inhibits innovative policymaking and prevents effective oversight. The federal government is much larger and more cumbersome than state governments and has disproportionate power.

Contrasting budgets and spending power reveal the imbalance between federal and state governments. The federal government has legal authority to impose income and sales taxes. But state governments must rely on land-related transactions and fees on small-ticket items like hawker licenses for independent revenue. The provision of most public services is done through branches of federal ministries operating at the state level.

State expenditure is determined by fiscal allocations from the federal government to state governments, and the amounts allocated depend on political considerations. Under the former Barisan Nasional (BN) government, opposition-controlled states received budgetary allocations that were proportionately much smaller than BN-controlled states. State governments are banned from borrowing to finance development projects, and that means they are unable to raise revenue to build the infrastructure needed to clear production bottlenecks in local industries.

Growth requires state governments that are empowered to plan and implement their own development strategies. Effective decentralisation requires each state government to have its own civil service. States will also need much larger shares of tax revenue, based on factors like developmental stage and tax revenue contribution. They should also be allowed to borrow to finance local infrastructure projects — with the commitment that there will be no federal bailouts — and be invested with significant responsibilities that are currently held by federal ministries.

The second key task is reforming government-linked corporations (GLCs). GLCs are crowding out the private sector, reducing economic dynamism. They also enable corruption that increases income inequality.

GLCs may perform well in theory, but they don’t in practice — officials inevitably use them for political patronage and personal corruption. GLCs are political creatures, not economic instruments.

Competition between GLCs and private firms is intrinsically unfair and harmful for overall growth. No matter how inefficient GLCs are, they can always count on government bailouts. They undermine economic dynamism by buying up their more efficient private competitors. Worse still, they prevent the development of a dynamic Malay business community by pulling capable Malays entrepreneurs away from starting private businesses and into cosy, life-long GLC jobs.

Downsizing the state-related sector through privatisation is necessary for economic efficiency, political accountability and income equality. The only two considerations in choosing buyers should be the size of the bid and the promotion of industry competition. A well-prepared and transparent privatisation process is more important than a speedy one.

The third key economic reform task is diversifying and expanding the banking system. The financial sector’s monopoly structure damages economic performance and worsens income inequality by suppressing the operations of small and medium-sized enterprises (SMEs).

The 1997 Asian financial crisis convinced the Malaysian government that the banking system would be less prone to crisis if regulators could more easily monitor them. The result was the forced consolidation of smaller banks into 10 big banks in 2000.

This action made state investment companies the controlling shareholders in most commercial banks, effectively creating a state-owned banking monopoly. These banks are slow in adopting better payment practices and providing new financial products, shoddy in their treatment of small retail customers, and biased in lending towards GLCs. The small number of banks and the extent of state control in the largest banks are to blame.

One serious defect of the bank consolidation was that Malaysian SMEs began experiencing difficulties in getting capital from the large banks, replicating the international experience that SME financing comes mostly from small and medium-sized banks. In response, the Malaysian government established the state-owned SME Bank in 2005. But the SME Bank is not meeting the sector’s capital needs. It also has the highest non-performing loan ratio in the banking industry. The slow growth of the SME sector means new Malay bus­­­inesses are not emerging and the distribution of income is worsening.

Reforming the banking sector will mean allowing private small and medium-sized banks to exist again, reducing the government’s bank share holdings, and removing restrictions on foreign banks and their activities.

The NEP is essentially ‘Ketuanan Centralisation’ (Supremacy of Centralisation) in the economic sphere, manifesting as ‘Ketuanan Federal Government’ in governance, ‘Ketuanan GLC’ in production, and ‘Ketuanan Monopoly Bank’ in finance.

NEP cannot mobilise the entire brain-power of Malaysia for knowledge-creation because it prevents entrenchment of excellence in socio-economic institutions, and induces brain drain and capital flight. For Malaysia to escape the middle-income trap, ‘Ketuanan Centralisation’ must be purged from the public policy framework to make way for knowledge-led growth.

Wing Thye Woo is President of the Jeffrey Cheah Institute on Southeast Asia and Director of the Jeffrey Sachs Center on Sustainable Development at Sunway University and Professor of Economics at the University of California at Davis; he holds adjunct academic positions at Fudan University and Chinese Academy of Social Sciences.

 

 

Dr. Krugman on Trump, Trade and The Advantage of Autocrats

A Trade Deal with China will require a more comprehensive approach, based on a fundamental shift in mindset say, Andrew Sheng and Xiao

February 23, 2019

 

https://www.project-syndicate.org/commentary/trump-zero-sum-approach-china-trade-talks-by-andrew-sheng-and-xiao-geng-2019-02

In the ongoing US-China trade talks, considerable progress has been made on several key trade issues, such as intellectual-property rights protection. But to defuse tensions in any sustainable way will require a more comprehensive approach, based on a fundamental shift in mindset.

HONG KONG – Trade negotiations between the United States and China are closing in on the March 1 deadline, after which the bilateral tariff war will resume – beginning with an increase from 10% to 25% on $200 billion worth of Chinese products. While global financial markets are fluctuating wildly, investors seem to assume that too much is at stake for the US and China to fail to reach a deal. Their optimism could prove short-lived.

To be sure, there has been considerable progress on several key issues, such as technology transfer, protection of intellectual-property rights, non-tariff barriers, and implementation mechanisms. But to defuse tensions between the US and China in any sustainable way will require a more comprehensive approach, based on a fundamental shift in mindset.

Over the last 40 years, Sino-US engagement has been largely cooperative, reflecting a holistic approach that takes into account the interests of the entire global system. US President Donald Trump’s administration, however, does not seem to believe that engagement with China (or anyone else for that matter) can benefit both sides. As Trump’s “America First” agenda shows, the US is now playing a zero-sum game – and it is playing to win.

For example, the US has threatened to punish or desert its closest allies unless they increase their defense spending. Under pressure from the Trump administration, South Korea just agreed to increase its contributions to US forces in Korea by 8.2%, to $923 million, in 2019.

Similarly, Trump has repeatedly disparaged fellow NATO members for insufficient defense spending. Most recently, Trump has criticized Germany for spending only 1% of GDP for defense, compared to America’s 4.3%. German Chancellor Angela Merkel responded by condemning US isolationism at the Munich Security Conference, and calling for the revival of multilateral cooperation.

The Trump administration’s myopic approach is also apparent in its preoccupation with bilateral trade imbalances. Any US deficit with another economy is, from Trump’s perspective, a loss. Given this, if China agrees to cut its bilateral trade deficit with the US, other economies with bilateral surpluses vis-à-vis the US – including close allies, such as the European Union and Japan – may find themselves facing intensifying pressure to do the The weakening of trade that could result in this scenario would compound existing negative pressure on global growth, hurting everyone. A global economic downturn is the last thing the world needs at a time when it is already beset with risks, including a possible no-deal Brexit and populist gains in the European Parliament election in May.

Of course, while Trump does not spare his allies, his primary target remains China. After all, the competition between the US and China extends far beyond trade. Although the US maintains military, technological, financial, and soft-power superiority, China has been steadily catching up, leading to bipartisan support in the US for a more confrontational approach.

Last October, US Vice President Mike Pence bluntly accused China of technology theft, predatory economic expansion, and military aggression. Pence’s stance echoed the fears of the US national security community. As former US Defense Secretary Ashton Carter put it, “Because it is a Communist dictatorship, China is able to bring to bear on US companies and our trading partners a combination of political, military, and economic tools that a government such as ours cannot match. This puts us at an inherent disadvantage.”

And yet America’s tools are hardly useless. The US authorities have mobilized a broad range of domestic and international resources – from law and diplomacy to national security measures – to stop the overseas expansion of the Chinese telecommunications giant Huawei. If Western countries allow Huawei to build their 5G infrastructure, America’s hawks and their allies argue, they will be vulnerable to cyberattacks from China in some future war.

All of this has shaken business and market confidence to the core, wiping out trillions of dollars in market capitalization. And the Trump administration’s apparent insistence that countries choose sides in its dispute with China is further heightening fears. As the rest of the world’s trading countries understand, Trump’s approach will fragment business and reverse the globalization-enabled economies of scale that have fueled growth for decades.

“Ending the Sino-US trade war will require considerable statesmanship on the part of Trump and Chinese President Xi Jinping. But, beyond that, both sides need to recognize that supporting global peace and prosperity requires less ideology and more respect for diversity of political, social, and cultural systems. Failing that, the fault lines will continue to deepen – much as they did in the 1930s – potentially setting the stage for full-blown war”- .

More broadly, the Trump administration’s rejection of multilateralism undermines the global cooperation needed to confront a range of issues, including migration, poverty and inequality, climate change, and the challenges raised by new technologies. Trump’s focus on geopolitical rivalry – and the associated rise in security and defense spending – will dramatically reduce resources available for global public goods, such as infrastructure investment and poverty-reduction programs.

 

EU and ASEAN: Advancing partnership for sustainability

February 16, 2016

By Francisco Fontan

https://www.khmertimeskh.com/50578204/eu-and-asean-advancing-partnership-for-sustainability/

 

The EU–ASEAN Foreign Ministers Meeting in Brussels on 21 January. Cooperation, solidarity and prosperity have long been the hallmark of the EU–ASEAN relationship.

As global stakeholders, the EU and ASEAN have the responsibility to advance the international rules-based order and preserve their ‘global commons’, writes Francisco Fontan.

In January I joined Federica Mogherini ( pic above), the EU’s High Representative for Foreign Affairs and Security Policy, in Brussels as she co-chaired the 22nd EU-ASEAN Ministerial Meeting. It was an impressive occasion, and the best attended such gathering anyone could remember, with almost all the ten ASEANan and twenty-eight EU member states represented by their Foreign Ministers. Brussels was preparing for its first big snowfall of the winter, but the reception we gave our ASEAN partners was a truly warm one.

The debate inside the room reflected the depth and breadth of our relations, from conflict in the Middle East, to the importance of the South China Sea and the Rohingya crisis, to promoting trade, investment, or higher education. Much was said but there was also a unity of purpose – a common desire to strengthen EU–ASEAN cooperation including in new areas such as combating unregulated fishing, or launching a new high level dialogue on environment and climate change, and an agreement in principle to upgrade our relations to a strategic partnership.

..

As Ms Mogherini said after the meeting, this was “a recognition of the strategic nature of the partnership we already have in many fields. It was an important signal showing that the two most advanced and most successful integration processes in the world stand firmly behind multilateralism and a rules-based global order.”

Or as her fellow co-chair Vivian Balakrishnan, Minister of Foreign Affairs of Singapore and ASEAN coordinator for EU relations put it “we take our partnership to a greater height, we will continue to explore new areas in which we can cooperate and learn from each other, such as cybersecurity, maritime security, connectivity and climate change.” A close and deep partnership between the EU and ASEAN is thus of strategic importance for both regional blocs.

We are certainly pivotal economic partners already. Our private sector is, by far, the first investor in ASEAN, holding a quarter of total stock in the region, and we are ASEAN’s second largest trading partner. The EU has concluded or is negotiating free trade and investment agreements with a number of Asean members, building blocks for an ambitious region-to-region trade and investment framework.

We are working hard to increase transport links and our overall connectivity. If – as I hope – we soon agree the first ever region-to-region Comprehensive Air Transport Agreement, millions of our citizens will benefit and the travel and tourism industry in particular stands to make great gains. We can build on this and establish a comprehensive EU–Asean Connectivity Partnership. While some question globalisation and are retreating into economic nationalism, it is important that ASEAN and the EU together seek to bolster global links, make them work for all and show their true value to our shared prosperity.

And as ASEAN says, we can leave no one behind.

..

The EU remains the largest donor to ASEAN, helping the organisation and your governments to reduce poverty and spread opportunity, with over 200 million euros ($225 million) in support of ASEAN regional integration and connectivity, on top of over 2 billion euros of bilateral assistance to ASEAN member states, and the direct efforts of our 28 EU member states. We will also continue to stand by you after each major natural disaster, from tsunamis to cyclones, putting victims’ needs above any other consideration.

Cooperation, solidarity and prosperity have long been the hallmarks of our relations. And while they remain so, the rapidly evolving international scene is leading us to focus more on key strategic issues. Our shared ambitions can only realise their full potential in a rules-based, peaceful and stable environment. This is what makes ASEAN so important for the EU in Asia – not just as a community of ten, but being also the core of the East Asia Summit, the ASEAN Regional Forum, or the ADMM+ process. And this is where ASEAN and the EU are already rightly expanding their security cooperation – from trafficking in persons to cyber-crime, from maritime security to transnational crime and counter-terrorism.

No one can achieve these goals alone. And thankfully that is something else we agree on – the Foreign Ministers spent more time talking about the environment, climate change and sustainable development than anything else. We agreed to deliver together on our United Nations Sustainable Development Goals, including on the Paris Agreement on Climate Change.

As global stakeholders, the EU and ASEAN have the responsibility to advance the international rules-based order and preserve our “global commons.” I have been immensely privileged, as the EU’s First Ambassador to ASEAN, to have seen our strategic relationship go from strength to strength. I am confident that it has even further to run and that, together, we will play a leading role in developing the global responses needed for the challenges of tomorrow.

Francisco Fontan is European Union Ambassador to ASEAN.

Navigating ASEAN’s economic priorities

February 14, 2019

11 February 2019

By  Kaewkamol Pitakdumrongkit, RSIS

Southeast Asian economies may face major economic headwinds this year amid US–China trade tensions and US Federal Reserve interest rate increases. To help weather the impact, ASEAN member states should prioritise progress on regional economic initiatives.

 

Some observers think that the 90-day truce between Washington and Beijing could beget better relations between the two powers. But they may be overestimating China’s ability to make concessions that fulfil what the Trump administration wants. Buying more American products is easy, but implementing measures to address ‘unfair’ trade practices to a degree that satisfies the United States is more difficult to achieve within 90 days. More rounds of tariff escalations or other trade-restricting measures could be in the offing.

On the financial front, in December 2018 the US Federal Reserve raised interest rates from 2.25 to 2.50 per cent and forecast the possibility of further increases in 2019. The Fed did so to ensure there will be room for it to use monetary policy and decrease interest rates to fight the next US recession.

Additional hikes could trigger capital pull-outs from Southeast Asian countries as investors move funds to seek higher yields in the United States. If not well-managed, such capital outflows may instigate financial instability in the ASEAN region.

Regional economies must brace themselves for future economic and financial turbulence. While they are unlikely to be able to avoid such headwinds, ASEAN member states can nevertheless cushion the impact through regional initiatives: the ASEAN Economic Community (AEC) 2025, ASEAN–Hong Kong Free Trade and Investment Agreements (AHKFTA and AHKIA), Regional Comprehensive Economic Partnership (RCEP) and Chiang Mai Initiative Multilateralization (CMIM).

Policymakers should prioritise the complete implementation of the AEC 2025. This is a regional economic integration project by the 10 ASEAN member states designed to achieve five objectives: a highly integrated and cohesive economy; a competitive, innovative and dynamic ASEAN; enhanced connectivity and sectoral cooperation; a resilient, inclusive, people-oriented and people-centred ASEAN; and a global ASEAN.

Advancing the AEC 2025 will enable businesses to better tap into the integrated market of over 600 million people, rendering regional economies more resilient to the incoming headwinds.

Southeast Asian governments should also ratify the AHKFTA and AHKIA signed in November 2017 so that these treaties can enter into force in early 2019 as expected. The agreements will enhance cross-border flows of goods, services and investment between ASEAN and Hong Kong.

The agreements will not only allow firms to enjoy greater access to goods and services markets and better investment protection, but also enable ASEAN nations to further tighten trade and investment ties with China. The latter will help Southeast Asian economies to recuperate from any damage that future Washington–Beijing trade spats may inflict on them.

ASEAN authorities should also concentrate on wrapping up RCEP talks. If concluded, this 16-economy free trade bloc will encompass a market of 3.6 billion people that contributes to a third of global GDP. It will cover 29 per cent of global trade and 26 per cent of the world’s foreign direct investment flows.

Concluding the negotiation will create more opportunities for businesses to deepen their supply chains, and provide RCEP economies with another means to diversify their economic relations and cushion against the negative effects of future US–China trade war spats.

Finally, ASEAN nations together with China, Japan and South Korea (ASEAN+3) should advance the CMIM, a regional financial safety net under the ASEAN+3 framework. Launched in 2010, the scheme provides financial support through a network of currency swaps to help ASEAN+3 nations weather their balance-of-payments difficulties.

Because future Fed rate hikes could trigger investor panic leading to financial instability and capital flights in certain regional economies, the CMIM can provide financial assistance to alleviate such problems.

Admittedly, the above initiatives face their own challenges. A major hurdle for implementing the AEC 2025 is a lack of coordination among domestic ministries and agencies. Individual ASEAN countries must sort out how to improve coordination among the involved authorities. Certain domestic hurdles must also be cleared for a successful ratification of the ASEAN–Hong Kong treaties.

Planned elections in Australia, India, Indonesia and Thailand in 2019 may delay the conclusion of RCEP negotiations in the first half of 2019. Politicians in these nations will likely prioritise their electioneering over international matters. And if the momentum of RCEP talks picks up in the second-half of the year, the parties’ different positions and preferences will still need to be reconciled to seal the deal.

Regarding the CMIM, while a laudable agreement was signed in December 2018 to create more favourable conditions that will enable the regional financial safety net to better assist in a crisis, efforts to advance other aspects of the CMIM have been lacklustre in recent years.

For one, its size has remained the same at US$240 billion since 2012. With this amount, the scheme can at best provide simultaneous lending support to a few small- and medium-sized economies should they come under a crisis. The participants must push for an expansion of the CMIM’s size.

US–China trade tensions and Fed rate hikes will likely generate undesired effects for Southeast Asian economies this year. Despite the challenges of the above initiatives, ASEAN countries must collectively pursue them to navigate through the coming economic headwinds. Time is running out and policymakers must act fast.

http://www.eastasiaforum.org/2019/02/11/navigating-aseans-economic-priorities

Kaewkamol Pitakdumrongkit is Deputy Head and Assistant Professor at the Centre for Multilateralism Studies, S Rajaratnam School of International Studies (RSIS), Nanyang Technological University, Singapore.