Free Trade Agreements in Southeast Asia 9789812306975

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Free Trade Agreements in Southeast Asia

© 2004 Institute of Southeast Asian Studies, Singapore

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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 Stu dies, Singapore

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Southeast Asia Background Series No. 1

Free Trade Agreements in Southeast Asia Rahul Sen

© 2004 Institute of Southeast Asian Studies, Singapore

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 Sen, Rahul, 1965Free trade agreements in Southeast Asia. 1. Free trade—Asia, Southeastern. 2. Free trade—Singapore. I. Title. HF2330.8 S47 2004 ISBN 981-230-250-6 (hard cover) Typeset by Linographic Services Pte Ltd. Printed in Singapore by Seng Lee Press Pte Ltd.

© 2004 Institute of Southeast Asian Studies, Singapore

Contents About the Author

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1

Features of FTAs

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2

Singapore’s FTAs with New Zealand and Australia

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3

Singapore’s FTAs with Japan and EFTA

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4

Singapore’s FTAs with the United States

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5

Ongoing Individual Country FTA Initiatives

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Ongoing ASEAN-wide FTA Initiatives: China, Australia/New Zealand, Japan, and India

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Possible Benefits of FTAs for Southeast Asia

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Postscript

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Selected References

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© 2004 Institute of Southeast Asian Studies, Singapore

About the Author Rahul Sen is Fellow at the Institute of Southeast Asian Studies, Singapore. His research interests are in the areas of international trade and investment linkages in the Asian economies; ASEANIndia economic relations; and regionalism in Asia-Pacific economies.

© 2004 Institute of Southeast Asian Studies, Singapore

1. Features of FTAs

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Chapter 1

Features of FTAs Although the process of globalization of the world economy started in a small way in the nineteenth century before World War I, it has subsequently gained momentum since the early nineties. This is reflected in the rapid pace and widening scope of economic activities that have been taking place across national boundaries, increasing in both pace and scope. Globalization has led to an increased integration of financial and capital markets among different countries, irrespective of their levels of development. This in turn has had far-reaching implications for the economic, social, and political systems, both within and between these countries. It is this process which has thus increased the need for consultation and co-operation among different countries in small geographical regions in order to have greater sub-regional co-operation within a multilateral framework. “Regionalism”, defined by the World Trade Organization (WTO) as “actions by governments to liberalize or facilitate trade on a regional basis through detailed negotiations” thus emerged as an alternative to the rule-based multilateral trading system for all its members. It was first advocated by the General Agreement on Tariffs and Trade (GATT) and now by the WTO, consisting of 146 countries as of 4 April 2003, including the ASEAN countries except Lao PDR and Vietnam. Regional trading agreements (RTAs) (also known as preferential trade agreements or PTAs) became an instrument to foster 1 © 2004 Institute of Southeast Asian Studies, Singapore

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regionalism. The simplest variant became known as the free trade agreements (FTAs), given the freedom that such agreements provided to its member countries in terms of pursuing their trade policy vis-à-vis non-members. FTAs were thus the first building blocks for regional economic integration. They specified a set of rules or standards that governed trade among the members that were a signatory to those FTAs. In the initial years, FTAs focussed almost solely on providing preferential treatment for trade in goods among the members, by specifying a set of across-the-board and product specific rules of origin (ROOs) that identified the originating point of a product, in order to ascertain whether it qualified for preferential tariff treatment under a specific FTA. A vast majority of WTO members, who hitherto strictly adhrered to a multilateral system of world trade, are now parties to one or more FTAs. This surge in FTAs, which started in the early 1990s, accelerated after 1995. Of the 250 FTAs notified to the GATT/WTO as of December 2002, about 130 were established after January 1995. Among these FTAs, over 170 are currently in force, with the remaining expected to be operational soon. WTO estimates that by the end of 2005, about 300 FTAs will be in force all over the world if FTAs reportedly planned or already under negotiation are concluded by then. Each of these FTAs are likely to be unique in their own right. This is so because FTAs, by their nature, are quite complex, as their coverage and depth of preferential treatment vary across different arrangements. Further, the present-day FTAs are no longer confined to the developed countries, and have tended to go far beyond tariff reductions. The “new-age” FTAs thus include negotiations on regulations governing trade facilitation and customs co-operation as well as labour standards, safeguard provisions, etc., as well as market access for trade in services.

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However, it is important to understand that it is not required to have all or most of these elements in order to qualify for an FTA that would be acceptable to the WTO. According to the WTO, any form of FTA is agreeable provided that trade barriers are reduced and/or removed on substantially all sectors of trade among the members, and that non-members do not face discrimination while trading with the member countries. This has widened the scope and diversity of FTAs being concluded or currently being negotiated throughout the world. According to the WTO, the earliest FTA that came into force was in 1960 with the establishment of EFTA or the European Free Trade Association through the Stockholm Convention. Thereafter, most of the FTAs that proliferated during the next three decades involved European countries and North America, with the US– Israel FTA being signed in 1985. One of the most important FTAs that came into force thereafter in 1994 was the North American Free Trade Agreement (NAFTA), which involved the United States, Canada, and Mexico. In the context of Southeast Asia, the only FTA that was established during this period was the ASEAN Free Trade Area (AFTA) which has since come into force for all but the four new members (i.e., Cambodia, Laos, Myanmar, and Vietnam) from 2003. Apart from AFTA, there was no major move to regionalism in Southeast Asia until the financial crisis of 1997–98, which was triggered off by the devaluation of the Thai baht in July 1997. This crisis affected the growth prospects of most ASEAN economies. It had an impact on the ongoing trade and liberalization efforts within ASEAN and APEC, and thus indirectly on the multilateral efforts within the WTO. Thus, bilateralism, defined as an FTA involving two economies/regions, emerged as an alternative option to advance freer trade in East Asia. This option of bilateralism was initiated by Singapore, which started pursuing it

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as a major instrument of its commercial trade strategy through its FTAs with its trading partners. This strategy was meant to help the Singapore economy reduce its erstwhile dependence on other regional ASEAN economies for its growth in trade as it did prior to the crisis. This is particularly so in the light of the changing post-crisis investor perceptions that the dynamism in trade and investment liberalization in Southeast Asia has been lost because of the slow pace of economic recovery of some of the major economies, as well as due to the increasing competition faced by the region from rapidly growing large emerging markets, viz. China. These factors have also motivated the trend towards bilateralism within other individual ASEAN members, as well as within the grouping, with the ASEAN–China FTA (ACFTA) being one of the major initiatives announced in recent years. The debate still remains as to whether this proliferation of FTAs, which is by definition discriminatory in nature, is indeed beneficial for advancing the goal of free trade in the global economy, as is often claimed by most members that enter into such agreements. It is also important to understand the exact nature of the gains from trade when entering into such agreements, given their wide scope and diverse nature. In the context of Southeast Asia, it is particularly important for the general public to understand how a bilateral FTA might affect them, given that this is a trend that was hitherto unknown to most of the region. Before going into the details of individual FTAs, and their expected benefits for consumers and businesses in Southeast Asia, it is important to have a general understanding of the impact of an FTA on economic welfare among the member countries involved in it and the non-members who are not party to those FTAs. Analysis of aggregate effects of an FTA requires summing up all the effects across markets and across all the countries that may be affected.

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ARE FTAs A BUILDING OR A STUMBLING BLOCK TO FREE TRADE? The common belief is that FTAs broadly have two main welfare effects that impact upon the affected countries/markets in an exactly opposite manner. One is that of trade creation, wherein an FTA shifts away its reliance on imports from high-cost domestic industry to that from a lower cost member country, thus facilitating trade among members. The other effect is that of trade diversion that occurs when an FTA shifts import sources from a more efficient supplier (low-cost) to a less efficient supplier (higher cost) in a member country that causes reduction in national welfare. In general, the only way to assure that trade liberalization will lead to efficiency improvements is if a country removes its trade barriers against all countries. The simple way to do that is to imagine that a country entering an FTA may have some import markets in which trade creation would occur and other markets in which trade diversion would occur. The markets with trade creation would definitely generate national welfare gains while the markets with trade diversion may generate national welfare losses. It is common for economists to make the following statement, “If the positive effects from trade creation are larger than the negative effects from trade diversion, then the FTA will improve national welfare.” A more succinct statement, though somewhat less accurate, is “If an FTA causes more trade creation than trade diversion, then the FTA is welfare improving.” By definition, FTAs allow member countries to pursue discriminatory policies vis-à-vis non-members, and have often been viewed as being a stumbling block for multilateral liberalization which involves many countries that are not a signatory to an FTA. It is argued that FTAs could enhance the scarcity of negotiating resources for multilateral negotiations and may thus undermine

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the efforts undertaken by the WTO for global free trade. It is also further argued that an FTA is supposed to cover “substantially all trade” by the WTO, which is not clearly defined. Hence, certain FTAs exclude some sectors from negotiations, which can set a bad precedent for others since this is inconsistent with the WTO rules. In spite of these arguments against FTAs, they have been proliferating and have also been viewed as a building block for multilateral trade and investment liberalization. This is especially since FTAs could be used as an instrument to provide a positive momentum towards trade and investment liberalization, failing which there might be a lapse into protectionism. Those FTAs, wherein members agree to move beyond their WTO commitments, could provide a demonstration effect that motivates future rounds of broader multilateral negotiations under the auspices of the WTO. Such FTAs could act as a “testing ground or pilot project for exploring complex trade issues” and establish some sort of precedent or benchmark for trade negotiations involving a larger number of countries, including one at the multilateral level. Singapore’s FTAs, being comprehensive and covering a wide range of issues, have been thus designed to be “WTO-Plus”, and aim to be a building block in the manner described above. It is generally agreed that although empirical evaluations of a positive impact on FTAs are subject to certain assumptions, an FTA may be more of a building block to freer trade than a stumbling block provided that it has the following characteristics: 1. It undertakes complete liberalization in almost all goods and services that could be traded. 2. Rules of origin are homogeneous and proper dispute settlement procedures are in place. 3. Such FTAs are open for membership to new members on similar terms and conditions.

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The above shows that whether an FTA could be a building or a stumbling block to free trade, is very much open to debate. It depends very much on the way a particular FTA is negotiated since there are no fixed guidelines as to what constitutes a WTOconsistent, welfare-enhancing FTA. Hence, we need to individually examine each of these agreements to determine whether a particular FTA is comprehensive and features the three most important characteristics. Singapore is the first country in Southeast Asia to conclude and implement such bilateral FTAs. In the context of the FTAs being negotiated in Southeast Asia, it is thus pertinent to begin by analysing Singapore’s existing FTAs, and ascertain whether they are designed to be more of a building block than a stumbling block to free trade in Southeast Asia.

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2. Singapore’s FTAs with New Zealand and Australia

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Chapter 2

Singapore’s FTAs with New Zealand and Australia Outward orientation and an openness to trade and investment flows have been a key component of Singapore’s growth strategy over the years. Its total trade volume currently accounts for about thrice of its GDP, and the country is often placed in the league of “super-trading” nations. Singapore has always been a leading advocate of global trade liberalization through the WTO. However, limited progress on many important issues in the WTO, related to trade and investment liberalization, has raised perceptions that the multilateral route to trade liberalization has been disappointingly slow and negotiations have been rather protracted and cumbersome. It is this perception that led highly open and trade-dependent economies like Singapore to simultaneously pursue a second track to trade liberalization through the regional route, which has involved Southeast Asia through the ASEAN grouping and the larger Asia and Pacific economies through the Asia-Pacific Economic Co-operation (APEC) grouping. Nevertheless, in the aftermath of the East Asian crisis of 1997– 98 and its adverse impact on trade and liberalization efforts within ASEAN and APEC, the pace of and willingness to undertake trade and investment liberalization of Singapore’s neighbours in ASEAN 9 © 2004 Institute of Southeast Asian Studies, Singapore

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have slowed down. This has led Singapore to explore a third option of bilateralism to advance freer trade in Southeast Asia and the region in order to to complement its strong advocacy for multilateral liberalization. It is in this context that Singapore has been engaged in negotiating bilateral FTAs with its major trading partners who are “like-minded” in terms of willingness to undertake comprehensive measures to liberalize trade and investment among themselves. This strategy has also been interpreted as a way for Singapore to solve the “convoy problem” whereby least willing members within ASEAN could slow down the pace of trade liberalization. In general, Singapore’s FTA strategy has been pursued with twin goals. The first is to strengthen its economic linkages and gain a “first-mover” advantage vis-à-vis its major trading partners. The second goal has been to concomitantly enhance its market access in new, emerging market economies that have been equally committed to trade and investment liberalization across both goods and service sectors. Overall, Singapore’s moves towards bilateral FTAs are aimed at helping the Singapore economy to reduce its erstwhile dependence on other regional ASEAN economies for its growth in trade, as were the case prior to the crisis. The slow pace of economic recovery of some of the major economies and increasing competition faced by the region from rapidly growing large emerging markets, viz. China, have further prompted Singapore to look for market access opportunities beyond the region in order to remain globally competitive. Singapore has maintained a policy of outward orientation and reduced barriers to international trade and investment. It is fully committed to the WTO, with a belief that it is the only mechanism that can ensure a fair, inclusive, and predictable environment for all economies to engage in and benefit from trade. Singapore’s

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policy-makers believe that suitably designed RTAs and bilateral FTAs can complement the WTO and help stimulate further global trade liberalization. Hence, RTAs and bilateral FTAs can play a catalytic role in moving the WTO forward. It is in this context that Singapore entered into bilateral FTAs with its major trading partners, viz. the United States and Japan, as well as other strategically important trading partners, viz. Australia, New Zealand, and EFTA. It is also currently in the process of or contemplating negotiations with Mexico, Canada, Republic of Korea (ROK), India, the Hashemite Kingdom of Jordan, and most recently, Sri Lanka. This chapter analyses the salient features and expected benefits from Singapore’s FTAs with New Zealand and Australia. The next chapter focuses on Singapore’s FTAs with Japan and the EFTA grouping, while Chapter 4 focuses on Singapore’s FTA with the United States.

SINGAPORE–NEW ZEALAND FTA Singapore initiated its FTA efforts with the launch of the negotiations on Agreement between New Zealand and Singapore on a Closer Economic Partnership (ANZSCEP), jointly announced by the Prime Ministers of New Zealand and Singapore during the APEC Leaders’ Summit in Auckland on 11 September 1999. After six rounds of negotiations, ANZSCEP was signed on 18 August 2000, and came into effect on 1 January 2001. It is a comprehensive agreement covering trade in goods and services, investment, and government procurement, among others. ANZSCEP marked an important milestone in the already excellent relations between New Zealand and Singapore. It is expected to further strengthen bilateral economic linkages and promote greater trade and investment flows between the two countries.

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Highlights of the ANZSCEP Trade in Goods and Rules of Origin Under ANZSCEP, all tariffs have been eliminated since the date of coming into force of the agreement. The tariff reductions have been substantial in manufacturing industries within the electric machinery, non-electric machinery, and manufactured articles sectors. Appropriate rules of origin (ROOs) have been designed to determine the type of products eligible for preferential tariff treatment under ANZSCEP. A product qualifies for preferential treatment under ANZSCEP if at least 40 per cent of the cost originated from New Zealand or Singapore, and if the last place of manufacture is in New Zealand or Singapore. Manufacturers that source inputs from overseas can include the New Zealand or Singapore component of these inputs towards the 40 per cent rule. Further, both New Zealand and Singapore recognize quality control as an integral part of the manufacturing process. A manufacturer doing only quality control in New Zealand or in Singapore would benefit where its cost is at least 8 per cent of the total cost of the qualifying product. Under ANZSCEP, exporters have been permitted to transit, unload, and reload their goods in Australia and still qualify for preferential treatment. New Zealand and Singapore have agreed to abolish the use of emergency safeguard measures and export subsidies on goods, including export subsidies on agricultural products under ANZSCEP. Both countries have agreed to bring greater discipline to anti-dumping investigations and to minimize the opportunities to use anti-dumping in an arbitrary or protectionist manner.

Trade Facilitation Three main initiatives have been undertaken with respect to ANZSCEP. First, paperless trading is to be introduced. Second, risk © 2004 Institute of Southeast Asian Studies, Singapore

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management has been emphasized on high-risk goods and travellers, but legitimate low-risk goods and travellers are allowed to be cleared expeditiously at the customs checkpoints. Third, there would be certification for ROOs with both New Zealand and Singapore assisting in the verification of claims for tariff preferences made by importers. New Zealand and Singapore have concluded a Mutual Recognition Agreement (MRA) on electrical and electronic equipment within ANZSCEP. Under this agreement, electrical and electronic equipment tested in New Zealand or Singapore will no longer require a second round of testing when exported to the other country. They have also agreed to start on a work programme on the mutual or unilateral recognition of standards, regulations and test results, and the harmonization of standards. This work programme covers six sectors, including telecommunications equipment, pharmaceuticals, and chemicals.

Trade in Services Under ANZSCEP, New Zealand has committed to liberalize engineering services, dental services, computer services, equipment repair services, information and communication technology (ICT) services, market research services, management consulting services, financial services, manufacturing services, land surveying services, printing services, courier services, environmental services, and maritime, air and auxiliary transport services for Singapore service providers. It has agreed to further liberalize its regime for intra-corporate transferees, doing away with the residency requirement for some professions and occupations, and binding the threshold for investments subject to the New Zealand Overseas Investment Commission (OIC). For investments above the threshold, New Zealand has assured that the approval by the OIC will be conducted in an open, transparent, and predictable manner. Singapore has in turn committed to liberalize its architecture, © 2004 Institute of Southeast Asian Studies, Singapore

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financial, and engineering services, and has committed to continue to maintain open regime in sectors such as nursing services, research and development services, rental services, management consulting services, courier services, telecommunications services, certain health services, distribution services, and university and technical education services. Both countries have agreed to regularly review their service sector commitments and to progressively expand them. Both countries will also work on the mutual recognition of professional qualifications and registration, including the recognition of degrees from each other’s universities. If trade in certain services sectors are not fully liberalized by 2010, the parties to the agreement would meet by 1 January 2008 to identify a list of such services sectors and to consult on a mutually acceptable solution.

Investment New Zealand and Singapore have committed to a framework of investment rules to promote and protect bilateral investment under ANZSCEP. New Zealand guarantees that Singapore investors are allowed to transfer and repatriate funds freely in any usable currency at the prevailing market exchange rates. In the event of a dispute between a Singapore investor and the New Zealand Government, the Singapore investor can raise the issue at the International Centre for Settlement of Investment Dispute, with New Zealand’s consent.

Government Procurement New Zealand and Singapore have also committed to establish a single government procurement market to maximize competitive opportunities and to reduce costs of doing business for both the government and industry sectors. Suppliers from the two countries

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will be given equal and non-discriminatory access to government tenders valued at above the Special Drawing Rights worth about S$110,000. Procurement will be conducted based on the principles of transparency, value for money, fair dealing, accountability, due process, non-discrimination. and open and effective competition.

Intellectual Property Protection (IPP) In the area of intellectual property protection, both countries have agreed to abide by the WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPS), which is expected to govern all intellectual property issues arising under ANZSCEP.

Competition Policy The provisions on competition policy facilitate the maintenance of an environment supportive of competition. They encourage both parties to implement ANZSCEP in a pro-competitive manner. Both parties are also encouraged to consult one another when developing new competition measures.

Dispute Settlement ANZSCEP has agreed to set up a robust process for consultation or settlement of disputes between the two countries.

General Provisions To promote transparency, both countries have agreed to make public all laws, rules, and regulations that affect trade in goods, services, and investment between the two countries. They have also agreed to provide the opportunity to comment on these laws, with appropriate exemptions allowed for either party to adopt measures to protect public order or morality, or to support creative

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arts of national value, amongst others, provided such measures are not used arbitrarily or discriminatorily or as a disguised restriction on trade. ANZSCEP has been left open to accession or association by any member of the WTO or by any other country, provided both countries agree to it. The trade ministers of both countries have agreed to meet every two years to review and expand on the commitments under ANZSCEP. A general review of the ANZSCEP agreement is expected to be conducted in 2005.

Benefits to the Singapore Economy ANZSCEP provides a range of benefits to Singapore businesses. First, with both countries eliminating all tariffs, most of Singapore’s top exports to New Zealand will be duty-free and would benefit Singapore businesses whose products are exported to New Zealand, especially in the manufacturing industries within the electric machinery, non-electric machinery, and manufactured articles sectors. Second, the substantial commitment to liberalize a range of services trade, including professional services, financial services, and environmental services, would open up significant opportunities for Singapore service providers who wish to export these services to New Zealand. The commitment to a framework of investment rules to promote and protect bilateral investment would further boost bilateral investment and encourage more Singapore investments in New Zealand. Third, under ANZSCEP, both countries have concluded a Mutual Recognition Agreement so that electrical and electronic equipment tested in Singapore will no longer require a second testing when exported to New Zealand. This will reduce compliance costs for businesses in these products and facilitate trade in them.

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Fourth, the commitments for establishing a single government procurement market will benefit Singapore suppliers who would now enjoy equal and non-discriminatory access to all government tenders above S$110,000 in New Zealand. Overall, being the first bilateral FTA of Singapore, ANZSCEP has been a comprehensive agreement and is largely WTO-Plus in nature. ANZSCEP, which lowers barriers to trade and investment, is expected to open up considerable opportunities for the business community. The favourable impact of ANZSCEP on the bilateral trade between Singapore and New Zealand is already evident. New Zealand was Singapore’s thirty-eighth largest trading partner for 2000. After ANZSCEP was successfully implemented on 1 January 2001, bilateral trade between the two countries recorded a growth of 35 per cent during the first two months of 2001. Singapore’s domestic exports to New Zealand increased by 54 per cent during January–February 2001, with the main increase due to greater exports of petrochemical products on account of tariff reductions. Singapore’s imports from New Zealand also increased by 46 per cent during this period, with a significant increase in imports of New Zealand dairy products, viz. milk, cream, and butter.

SINGAPORE–AUSTRALIA FTA Negotiations for the Singapore–Australia Free Trade Agreement (SAFTA) were launched on 15 November 2000 by the Prime Ministers of both sides at the fringe of the APEC Leaders’ Summit. In November 2002, after ten formal rounds of negotiations, Singapore and Australia successfully finalized an FTA that was signed in Singapore on 17 February 2003, and it came into force on 28 July 2003. Like Singapore’s other bilateral FTAs, SAFTA is also a comprehensive agreement covering key areas such as trade

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in goods, trade in services, investment, telecommunication and financial services, movement of business persons, government procurement, intellectual property rights, competition policy, e-commerce and education co-operation.

Highlights of the Singapore–Australia FTA Trade in Goods and Rules of Origin The SAFTA provisions allow for both Singapore and Australia to reduce tariff barriers. Tariffs have been reduced or eliminated by both parties in a range of manufacturing industries, viz. chemicals and petroleum products, electrical and electronic products, plastic products, pharmaceuticals, instrumentation equipment, transport equipment, and fabricated metal products. Appropriate rules of origin have been designed to determine whether such products would qualify for preferential tariff treatment under SAFTA. In terms of current trade value, SAFTA will allow Singapore products valued up to S$3.3 billion to enter Australia duty-free, as compared with the current value of about S$2.6 billion. Further, in terms of product coverage, all Australian tariff lines will be dutyfree for Singapore products, up from the current 50 per cent of duty-free Australian tariff lines. As in other FTAs, appropriate rules of origin have been designed to identify those manufactured products that qualify for preferential tariff treatment under SAFTA. All products need only fulfil a general rule of a specified threshold of local value content of either 30 per cent or 50 per cent, depending on the importance of the product for Singapore. The rules of origin take into account current and future production trends in Singapore and acknowledge the unique production pattern of Singapore currently, whereby certain stages of production are outsourced to other parts of the region that offer lower costs. There is also a

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provision to have a review mechanism in place to take into account further technological developments that could affect the production pattern, and hence require any modifications in the rules of origin.

Trade Facilitation SAFTA also commits both countries to improve the speed and efficiency of customs clearance of goods on a mutual basis by streamlining and simplifying existing procedures and via the use of informational technologies. It has been decided to introduce “paperless trading” for faster customs clearance, thereby facilitating the flow of bilateral merchandise trade between Singapore and Australia. Singapore and Australia have also built up on the Mutual Recognition Agreement (MRA) on conformity assessment between the two countries that was signed in 2001. The coverage is now extended to sanitary and phytosanitary measures. Thus, under SAFTA, products tested in Australia or Singapore will no longer require a second round of testing when exported to the other country. All of these contribute to reduce delays in cross-border transactions, hence facilitating bilateral trade.

Trade in Services Singapore and Australia have guaranteed market access for service providers in a wide range of services sectors in SAFTA that goes beyond what has been committed at the WTO. Services sectors covered by this agreement include professional services, transportation services, distribution services, tourism services, environmental services, and recreational, cultural and sporting services. All the committed sectors are subject to market access, national treatment, and domestic regulation disciplines. Thus,

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service providers have been assured of fair and non-discriminatory treatment with respect to market access in all service sectors, unless specifically exempted in writing. This implies that SAFTA has adopted a “negative list” approach to services trade liberalization. With more Australian companies entering the Singapore market, and other foreign companies investing in Singapore to take advantage of enhanced business opportunities in Australia, Singapore would benefit from a more competitive services market, a higher employment rate, and greater economic growth. Some of the sector-specific provisions in SAFTA with respect to market access in service sector are as follows:

Professional Services Under SAFTA, in the area of legal services, Singapore has agreed to further ease conditions on Australian firms creating joint law ventures to practise Singapore law. Currently, degrees from four Australian law schools are recognized in Singapore. SAFTA has agreed to recognize degrees earned from four more Australian law schools for admission to the Singapore bar of lawyers. The four law schools that were recognized prior to SAFTA were: Monash University, University of Melbourne, the University of New South Wales, and the University of Sydney. The four additional law schools that are now recognized with SAFTA being in force would be the Australian National University, Flinders University, the University of Queensland, and the University of Western Australia.

Financial Services Australia and Singapore have made substantial WTO-Plus commitments in the financial services sector. In general, apart from providing market access to Singapore’s financial companies

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in Australia, the market commitments provide assurance that Australia would not impose additional barriers to entry of Singapore companies in financial services, or unjustifiably discriminate against Singapore financial services suppliers. This has provided greater certainty and reduced business risk for Singapore financial services suppliers contemplating to enter in Australian financial markets.

ICT Services In the area of ICT services, SAFTA has provided improved market access in Australia for Singapore-based businesses supplying ICT products and services. The new commitments provide additional benefits such as increased protection for ICT investments, and the opportunity to offer more ICT services. The agreement also allows for improving familiarity with business environment and a more level playing field for businesses dealing in telecommunication services. Under SAFTA, the two countries will require major telecommunication suppliers in their markets to provide a Reference Interconnection Offer (RIO). An RIO generally refers to a standard interconnection offer containing a comprehensive statement of the prices, terms, and conditions on which a telecommunication supplier is prepared to provide interconnection-related services to other telecommunication suppliers seeking to interconnect their equipment and networks with the former. This RIO would provide greater business operating certainty to Singapore telecommunication suppliers who seek to interconnect with major telecommunication suppliers in Australia. The FTA requires both parties to ensure that major suppliers of telecommunication services do not discriminate against other suppliers nor engage in anti-competitive activities.

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Singapore and Australia will now recognize each other’s telecommunications conformity assessment systems so that businesses benefit from faster time-to-market and reduced costs. Thus, Singapore-based companies exporting telecommunication equipment to Australia need not submit their equipment for additional testing in Australia as long as they are tested in Singapore by test labs accredited and recognized by Australia. A greater trade efficiency is expected as both sides have agreed to accept and make available electronic versions of all trade administration documents by 2005.

Movement of natural persons Both countries have also agreed to ease restrictions on movement of natural persons to facilitate services trade liberalization. Thus, business visitors will be permitted to enter and engage in business activities within Australia for a period of three months, while intracorporate transferees (that is, managers, executives, and specialists within organizations) will be permitted to stay and work in Australia for a committed period of up to fourteen years. Further, both countries have agreed to confer the same benefits on citizens and permanent residents in their countries. It has also been committed that neither country would require labour market testing or certification tests as a condition for temporary entry of business persons.

Government Procurement SAFTA has also aimed at expanding the scope for promoting trade between Australia and Singapore through government procurement. Under the agreement on government procurement in SAFTA, suppliers from both countries will be treated equally as any locally established supplier. Both countries have agreed to

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co-operate to ensure that policies and procedures adopted for this purpose will facilitate access to e-procurement, i.e. government procurement opportunities by suppliers via electronic means.

Investment SAFTA contains comprehensive provisions on investment promotion and protection. The agreement aims to foster an open international environment for cross-border investment. The two countries have agreed to allow investors to freely repatriate and transfer funds related to their investments (such as capital, profits, dividends, and royalties) into and out of the country. National treatment and provisions for an investor to state dispute settlement mechanism are also included in this part of the agreement. These measures would encourage mutual investment flows between Australia and Singapore and help Singapore investors to leverage on Australia’s technological progress and natural resources.

Intellectual Property Protection (IPP) SAFTA also seeks to provide enhanced IPP standards beyond the requirements under the TRIPS Agreement in areas that are of mutual benefit. The objective is to increase dialogue and cooperation between Australia and Singapore on IPP and review current and future co-operation in this area. Both parties have committed to accede to the World Intellectual Property Organization (WIPO) Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT) by 1 January 2005. Also, both parties have committed to adopt a common standard for the protection of industrial designs by ensuring compliance with the provisions of the Geneva Act (1999) of the Hague Agreement. Further, they have also agreed to affirm elements of protection to account for the changing nature of media and

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communication such as digitization of content and Internet communication. They have committed to ensuring effective enforcement of IPP standards by agreeing to take efforts to improve communication between enforcement agencies as well as cooperating on information exchange on education and awareness programmes.

Education Co-operation SAFTA aims to enhance the bilateral trade and investment relationship between Singapore and Australia by promoting mutual co-operation in education. Thus, both countries have committed to encourage and facilitate exchanges in a number of areas, including on-line education and higher education. It has been agreed to encourage greater interaction between relevant government agencies and educational establishments on education opportunities in the two countries, and provide scholarships for overseas study in the respective countries.

Other Provisions Besides the above, SAFTA has also focused on competition policy issues by committing to curtail anti-competitive business practices in both countries and promote a fair and competitive business environment. It has put in place appropriate dispute settlement provisions for resolving any probable disputes arising between investors from both countries.

Expected Benefits of SAFTA to the Singapore Economy As in the case of other FTAs signed by Singapore, SAFTA also confers a range of benefits to Singapore businesses and to its economy.

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First, prior to SAFTA, Singapore’s exports used to face tariffs of up to 25 per cent when entering Australia. However, as a result of tariff elimination under SAFTA, all of Singapore’s products will be able to enjoy zero-tariff treatment upon entry into Australia. It is estimated that potential cost savings from these tariff concessions, based on current trade figures, would be about S$31.6 million. This would lower the cost of exporting to the Australian market and create new market access opportunities for Singapore businessmen seeking to expand production for export purposes in Australia. Second, with an estimated GDP of S$695 billion in 2002, the Australian services market is worth about S$500 billion. However, Singapore exported only about S$2 billion worth of services to the Australian market in 2001. This implies that the potential for expansion is significant. Thus, SAFTA would encourage Singapore service suppliers to leverage on preferential business opportunities accorded in the Australian services market. It is important to note that there are various sectors that Australia has fully liberalized at the Federal level, viz. real estate services, distribution services, tourism services, energy services, and professional services such as legal services, engineering services, and architectural services. Singapore service providers, accorded national treatment under SAFTA, would now have the opportunity to have access to all these areas for investment opportunities in Australia. In these committed sectors Singapore service suppliers will be able to compete on a level playing field. The benefits of these provisions will be extended to Singapore companies (including start-ups), the multinational corporations (MNCs) based in Singapore, as well as Singapore permanent residents. Third, provisions to facilitate movement of business persons between Singapore and Australia would grant Singaporeans a guaranteed entry and stay in Australia as business visitors as well

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as intra-corporate transferees. Singapore companies will have certainty when they choose to deploy Singapore staff to help manage their Australian operations. This would encourage greater flow of skilled manpower across the borders of both countries, boosting trade and investment flows as well. Fourth, when a Singapore-based company (either locallyowned or foreign-owned with substantial business activities) invests in an Australian state, they will enjoy national treatment benefits. Similar national treatment provisions apply to companies from Australian states investing in Singapore. This would help in expanding foreign direct investment (FDI) inflows in Singapore, thus strengthening its position as an investment hub in the region. Fifth, the enhanced investor protection measures under SAFTA will enhance investor confidence in investing in Singapore. The enhanced intellectual property and copyright protection brought about by acceding to the WCT and WPPT establishes a transparent and secure legal framework for e-commerce to flourish between the Australian states and Singapore. It would encourage knowledge-based R&D investments to be based in Singapore. SAFTA has also been a comprehensive FTA, being WTO-Plus in many aspects. This agreement, in force since July 2003, ought to strengthen Singapore’s trade and investment linkages with Australia.

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Chapter 3

Singapore’s FTAs with Japan and EFTA SINGAPORE–JAPAN FTA Singapore and Japan have entered into an FTA as part of the Japan– Singapore Economic Partnership Agreement (JSEPA). The idea of a JSEPA was first mooted in December 1999 by the Singapore Prime Minister, Goh Chok Tong, to his Japanese counterpart. A Joint Study Group was established to study the viability of the proposal. The group completed its work in September 2000 and the governments of Japan and Singapore entered into formal negotiations on a trade pact in October of that year. Following a series of negotiating rounds, the agreement was signed on 13 January 2002 in Singapore and came in force on 30 November 2002. The economic linkages between Japan and Singapore are deep and well established. The recently concluded “New Age Economic Partnership” is aimed at fortifying and revitalizing these already strong linkages bilaterally as well as promoting joint Japan– Singapore trade and investments in third countries.

Highlights of the JSEPA Agreement Trade in Goods and Rules of Origin The JSEPA eliminates tariffs on goods covering 98.5 per cent of 27 © 2004 Institute of Southeast Asian Studies, Singapore

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current trade between the two countries, much higher than the WTO zero-tariff commitments, which currently covers about 65 per cent of current Japan–Singapore trade. Singapore has committed to grant zero-tariff treatment on all imports from Japan. In turn, Japan has more than doubled its zero-tariff commitments to Singapore from the current 34 per cent to 77 per cent of total tariff lines. While preferential tariff-free market access has been granted to an extensive range of products, agriculture is the one area where tariff concessions have lagged because of the extreme political sensitivity of this sector in Japan, on the one hand, and its relative unimportance to Singapore, on the other. Both countries are prohibited from maintaining any export duties that may distort bilateral trade. Appropriate rules of origin have been designed in this respect.

Trade Facilitation As tariff barriers have progressively come down worldwide, focus of trade agreements has shifted to other potential barriers to the flow of goods that may restrict market access opportunities. Complex and non-uniform customs procedures are seen as a significant hindrance to the movement of goods across borders. The JSEPA commits both countries to improve the speed and efficiency of customs clearance of goods on a mutual basis by streamlining and simplifying existing procedures and via the use of informational technologies. In relation to this, the countries have agreed to replace the current paper-based supporting trade documents, which are typically required for goods to be cleared with more cost-effective electronic versions. Steps will be taken to ensure that the necessary infrastructure is put in place to support “paperless trading”. Differences in testing and certification standards is another important barrier to trade in goods across borders. In recognition

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of this, both countries have agreed to take steps to ensure the mutual recognition of test results and certification by accredited conformity assessment bodies in either countries. Once this is in place, exporters can have their products tested and certified by assessment bodies locally and not have to duplicate the procedures in the importing country. All of these are bound to reduce delays in cross-border transactions, hence facilitating bilateral trade. Specific focus of the agreement is on electrical, electronic and telecommunication products, which is a major area of bilateral trade between the two countries, as well as pharmaceuticals. The latter is not only an area of growing importance in terms of bilateral trade but is also of strategic relevance in view of the rapidly ageing populations in both countries.

Trade in Services The services sector is of particular significance to both economies. The JSEPA therefore discusses a number of provisions for the liberalization and facilitation of transactions in this sector. To begin with, the agreement vastly increases the commitments by both countries well beyond those agreed under the WTO (over 130 sectors in both cases). Much more than in the case of trade in goods, non-tariff and non-quantitative barriers hinder cross-border services trade. Steps have been taken to ensure that “behind the border” impediments to trade and investment flows (that is, trade facilitation measures) have also been addressed. The committed sectors are subject to market access, national treatment and domestic regulation disciplines. Given the degree of internationalization of the Singapore economy, the JSEPA has been extended to include permanent residents and multinational firms, which have “substantive business operations in Singapore”. While a number of services sectors are expected to benefit from the agreement, it is noteworthy that four sectors have being given special attention.

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In an effort to promote the tourism sectors in both countries, the JSEPA has proposed the establishment of a Joint Committee on Tourism. More concretely, the countries have agreed to a Memorandum of Understanding on the twinning of Ginza and Orchard Road, which are the premier shopping districts of Japan and Singapore respectively. The aim of this is not only to promote the two areas to one another’s citizens and those in third countries but also to undertake joint promotions and special events to showcase the arts and cultures of both Asian countries. Both countries are among the leaders in ICT trade and its dayto-day utilization. Undoubtedly one of the reasons for the depiction of the JSEPA as being “New Age” is its emphasis on cooperation and facilitation of this sector. The JSEPA has put in place steps to: (1) fortify the market access in Japan for Singaporebased businesses delivering ICT products and services and vice versa; (2) augment the knowledge of business environments in both countries and provide a more level playing field for businesses dealing in telecommunication services; (3) reduce technical and technological obstructions to ICT trade; (4) offer additional and alternative route to orderly dispute settlement; and (5) catalyse and facilitate the ongoing expansion of ecommerce transactions. Co-operation in the area of media and broadcasting has also been identified as a key area of co-operation in which Japan and Singapore can help one another in the development and provision of innovative media and broadcasting technologies. Singapore, Tokyo, and Hong Kong are the three important financial centres in Asia. In an effort to give one another’s financial sectors a boost in terms of turnover and cost efficiency, the JSEPA has put in place a number of initiatives to enhance bilateral cooperation to promote financial sector and capital market development.

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Movement of Natural Persons Trade in services and investments invariably require complimentary movement of natural persons. The JSEPA will grant Singaporeans and permanent residents of Singapore guaranteed entry and stay in Japan to work and to administer their investments under fairly liberal conditions. Similarly, Japanese professionals will be able to practise in Singapore. Measures are also being taken towards the mutual recognition of professional qualifications.

Investment As noted previously, Singapore is highly dependent on FDI, and Japan is the second largest investor in the city-state. Indeed, various studies have emphasized the complementarities between FDI and trade growth. Thus, issues relating to the facilitation of investments must be part of any broad-ranging economic co-operative agreement. The JSEPA contains a set of detailed provisions on investment promotion and protection aimed at fostering an open international environment for cross-border investment and providing access to each other’s markets. Issues covered include national treatment, prohibition of performance requirements, expropriation and compensation, transfers of profits and other funds, and investor-to-state dispute settlement mechanism and procedures. As with trade in services, the agreement spans both citizens and permanent residents of Singapore and encompasses firms formed in either Japan or Singapore that are owned or controlled by non-Singaporeans/Japanese and “engaged in substantive business operations”. Steps have also been put in place to encourage co-operation and business alliances between small and medium-sized enterprises (SMEs) between the two countries in order to gain greater market shares in one another’s economies as well as penetrate third countries.

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Other Areas of Co-operation Beyond those areas already stated and other specific ones that promote trade and investments (for example, by enhancing facilities for export credit insurance and overseas investment reinsurance), the JSEPA has taken steps to: (1) promote mutual recognition of and co-operation with regard to competition policies; (2) put in place a set of procedures and regulations pertaining to government procurement; (3) undertake collaborative measures and co-operative activities on intellectual property; (4) step up co-operation in science and technology and human resource development; and (5) establish provisions for orderly dispute settlement.

Expected benefits of JSEPA to the Singapore Economy The JSEPA provides a range of benefits to Singapore businesses. First, with about 84 per cent of Singapore’s exports currently entering Japan tariff-free, tariff elimination in JSEPA would further reduce tariff barriers so that nearly 94 per cent of Singapore’s exports are able to enjoy zero-tariff treatment. Exporters to Japan will enjoy tariff-free treatment for a wide range of products, in particular, Singapore businesses will benefit from zero-tariff concessions in key manufacturing sectors, viz. chemicals, pharmaceuticals, electronics, transport equipment, and plastic products. It is estimated that the total tariff savings from nearly 264 products of interest to Singapore in the above sectors would amount to more than S$20 million annually. Based on Singapore’s domestic exports to Japan in 2000, these products accounted for about three-quarters of Singapore’s total domestic exports to Japan. Second, the Japanese services market is huge, worth almost S$5.7 trillion. However, it has generally been regarded as one of

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the more difficult markets for foreign companies to penetrate, evident from its relatively low level of external trade in services and inward FDI. Notably, Japan’s imports of commercial services was only about 3.5 per cent of total Japanese services market, while its exports of commercial services was about S$117 billion (2 per cent of total services market) in the year 2000. Inward FDI in the non-manufacturing sector during the same period constituted only 0.6 per cent of the total services sector. The JSEPA provisions for trade in services guarantees Singaporeans easier access into the Japanese services market compared with that from any other country. With the JSEPA, Singapore service suppliers will now be able to supply a broad range of services to the Japanese market. These include professional services, construction services, computer services, distribution services, telecommunication services, financial services, and transport services. There will be transparency in the regulations governing committed sectors and certainty in the trading environment. Thus, there would be a level playing field for Singapore suppliers interested in competing in the Japanese market. Restrictions for movement of natural persons have been eased, which is likely to enhance the flow of skilled manpower for these services between the two countries. More specifically, some of the benefits to Singapore companies in certain sectors are as follows: 1. In the area of maritime transport services, Japan has committed to international transport of freight and passengers, thus Singapore-based shipping companies are free to call at Japanese ports. Japan has also made commitments for maritime freight forwarding and non-discriminatory access to inland transport services (internal waterways transport, rail and road transport). Singapore shipping companies are now assured of unrestricted access to the world’s second most important maritime nation.

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2. In the area of testing and analysis services, Japan has committed its technical testing and analysis services for manufactured goods, which is a WTO-Plus commitment. 3. In the area of R&D services, Japan has expanded its scope of commitments in the JSEPA beyond the WTO and has included R&D services on natural sciences as well as interdisciplinary R&D services. This implies that Singapore companies wanting to participate in the R&D market in Japan can do so. The Japanese Government has agreed not to limit the activities of Singapore R&D companies, or impose regulations that would discriminate against them. 4. In the area of medical and dental services, Japan is ranked sixth in the world in terms of medical care expenditure per head, and with its rapidly ageing population, health-care expenditure in Japan has been increasing in recent years. This is, therefore, an area wherein Singapore service providers can benefit from the huge potential service market in Japan. 5. In the area of education services, the JSEPA would allow Singapore companies to venture into the Japanese market providing education services in areas such as early childhood education, information technology, corporate training, and industry-related training like packaging design centres. 6. The JSEPA guarantees a level playing field for Singapore financial institutions interested in expanding in the Japanese market. Japan has committed to providing greater market access to Singapore than it had previously committed at the WTO. Japan has also committed to allow Singapore’s investment trust managers to set up branches in Japan, rather than subsidiaries. This would reduce the set-up costs for Singapore trust managers who are keen on establishing a market presence in Japan. The JSEPA has also promised more transparency in government regulations in this area.

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Third, one of the greatest benefits to Singapore businesses from the JSEPA are to those involved in the trading of ICT products and services. Under the JSEPA, an additional twenty-one ICT products will be able to enter Japan tariff-free. ICT businesses in Singapore are expected to save S$850,000 annually as a result of these tariff concessions. Further, the agreement would help to increase familiarity with the business environment and provide a more level playing field for businesses from both countries involved in telecommunication services. Thus, suppliers of telecommunication services in Singapore and Japan should now find it easier to obtain interconnection services in either country. The provisions ensure that major suppliers of telecommunication services do not discriminate against other suppliers nor engage in anti-competitive activities such as predatory pricing or price squeezes. For the first time, Japan has committed to opening its market to courier operators. Courier operators in Singapore can now offer pick-up, transport, delivery, sorting, conveyance, and distribution services in Japan for packages and parcels. The JSEPA has lowered technical/technology barriers to ICT trade. Both countries would now recognize each other’s telecommunications conformity assessment systems so that businesses would benefit from faster time-to-market and reduced costs. Singapore companies exporting telecommunication equipment to Japan need not submit their equipment for additional testing in Japan if they have been tested in Singapore by test labs accredited and recognized by Japan. This could entail a cost savings of between S$1,800 to S$12,000 per equipment. In order to catalyse e-commerce growth and foster ICT co-operation, Japan and Singapore have agreed to recognize IT qualifications of each other, so as to enhance the flow of skilled IT manpower between the two countries. Singapore IT project managers who

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are certified under Singapore’s National IT Skills Certification Programme will be recognized as having qualifications equivalent to Japanese IT engineers, and will no longer be required to sit for any examinations in order to work in Japan. Apart from these, the JSEPA has agreed for both sides to share information and explore further co-operation in other areas in ICT, such as interactive broadband multimedia services, the development of advanced telecommunication networks, eGovernment and postal services. A joint committee to oversee the implementation of the specific areas of co-operation and to discuss any other additional co-operative issues would be formed in this regard. Fourth, in the area of investments, Japanese investors will have more confidence in investing in Singapore since the agreement has secured enhanced protection and ease of entry and operation for investors from Japan. In a similar manner, investments from Singapore into Japan will also be accorded similar protection. This is likely to enhance bilateral FDI flows between Singapore and Japan. However, the JSEPA’s scope is not limited to investments from Japan since a foreign company having substantive business operations in Singapore is also considered a beneficiary under the JSEPA when it invests in Japan from Singapore. This would help Singapore to attract investments from other countries and enhance its role as a hub from where MNCs could invest in Japan. Besides these benefits, the JSEPA encourages human capital development between the two countries and promotes tourism, which would also benefit Singapore businesses. Thus, co-operation between Singapore Trade Development Board (TDB) and the Japan External Trade Organization (JETRO) is expected to create more opportunities for Japanese and Singapore companies to interact with one another, as well as jointly seek business opportunities in third countries like China, India and countries in the ASEAN

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region. The memorandum of understanding (MOU) between JETRO and the TDB would allow both organizations to leverage on their strong networks in the region to assist these companies to jointly seek out new opportunities and new markets. The JSEPA, being a New Age FTA, also encourages joint co-operation in human resource development, which would also encourage interaction, promote understanding, and inspire new ideas, thereby encouraging technological innovation and entrepreneurship among the business community.

SINGAPORE–EUROPEAN FREE TRADE ASSOCIATION FTA The European Free Trade Association (EFTA) is an RTA in Europe consisting of four countries, viz. Switzerland, Iceland, Liechtenstein, and Norway. The idea of an EFTA–Singapore FTA was first floated at the EFTA Ministerial Meeting on 12 December 2000, and after a round of exploratory talks in Geneva from 5–6 March 2001 both sides announced the launch of negotiations on 4 May 2001. After three rounds of negotiations, the FTA was signed in Egilsstadir, Iceland on 26 June 2002 and came into force on 1 January 2003. The EFTA–Singapore FTA (EFSTA) became the first bilateral FTA between the EFTA countries and a country in Asia.

Highlights of the EFTA–Singapore FTA Trade in Goods and Rules of Origin The ESFTA provisions allow for both Singapore and EFTA states to reduce tariff barriers. Tariffs have been reduced or eliminated by both parties in a range of manufacturing industries, viz. chemicals and petroleum products, electrical and electronic products, plastic products, pharmaceuticals, instrumentation equipment, transport

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equipment, and fabricated metal products. Appropriate rules of origin have been designed to determine whether such products would qualify for preferential tariff treatment under the ESFTA.

Trade Facilitation The ESFTA also commits both countries to improve the speed and efficiency of customs clearance of goods on a mutual basis by streamlining and simplifying existing procedures and via the use of informational technologies. It has been decided to introduce “paperless trading” for faster customs clearance, thereby facilitating the flow of bilateral merchandise trade. Singapore and EFTA states have also agreed on entering into Mutual Recognition Agreement (MRA) on conformity assessment. These measures are expected to reduce delays in cross-border transactions, hence facilitating bilateral trade.

Trade in Services Singapore and the EFTA states have guaranteed market access for service providers in a wide range of services sectors. Singapore’s service suppliers are thus able to enjoy enhanced market opportunities into the services markets of the EFTA states. Some of the sector-specific provisions in the ESFTA with respect to market access in service sector are as follows.

Financial Services The EFTA states and Singapore have made substantial WTO-Plus commitments in the financial services sector. In general, the market commitments provide assurance that the EFTA states would not impose additional barriers to entry of Singapore companies in financial services, or unjustifiably discriminate against Singapore

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financial services suppliers. This has provided greater certainty and reduced business risk for Singapore financial services suppliers contemplating to enter in the EFTA states’ markets. Singapore’s financial services commitments in the ESFTA are in line with the phased financial services liberalization measures that the Monetary Authority of Singapore (MAS) has undertaken over the last few years.

ICT Services In the area of ICT services, the ESFTA has provided improved market access in the EFTA states for Singapore-based businesses supplying ICT products and services. New commitments under the ESFTA provide additional benefits such as increased protection for ICT investments and the opportunity to offer more ICT services, such as courier services. The agreement allows for improving familiarity with business environment and a more level playing field for businesses dealing in telecommunication services. Under this FTA, Singapore and the EFTA states will require major telecommunication suppliers in their markets to provide a Reference Interconnection Offer (RIO). An RIO generally refers to a standard interconnection offer containing a comprehensive statement of the prices, terms, and conditions on which a telecommunication supplier is prepared to provide interconnection-related services to other telecommunication suppliers seeking to interconnect their equipment and networks with the former. This will provide greater business operating certainty to Singapore telecommunication suppliers who seek to interconnect with major telecommunication suppliers in the EFTA states. The FTA requires both parties to ensure that major suppliers of telecommunication services do not discriminate against other suppliers nor engage in anti-competitive activities.

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Investment The ESFTA contains comprehensive provisions on investment promotion and protection. This agreement aims to foster an open international environment for cross-border investment, strengthen protection of investments, and provide access to each other’s markets. These measures are expected to increase the attractiveness of Singapore as an investment destination to investors from the EFTA member states. Concurrently, this would also encourage Singapore investments into EFTA member states to access their markets and leverage on their technological progress.

Intellectual Property Protection (IPP) The ESFTA also seeks to provide enhanced IPP standards beyond the requirements under the TRIPS Agreement in areas that are of mutual benefit. The objective is to increase dialogue and cooperation between the EFTA states and Singapore on IPP and review current and future co-operation in this area. Under the ESFTA provisions, both parties have committed to accede to the WCT and WPPT by 1 January 2005. The WCT and WPPT (commonly called “WIPO Internet treaties”) clarify existing ambiguities in the provisions relating to copyright under the TRIPs Agreement and also address copyright protection issues by enacting clear and appropriate legal provisions, which are not found in any existing international agreements and conventions on copyright. Both parties have committed to adopt the standards of IPP as set out under the European Patent Convention (EPC). They have also agreed to abide by the WIPO Joint Declaration on Well-Known Marks, which ensures that trade mark laws with regard to well-known marks in both the EFTA states and Singapore are uniform and conform to that in other countries, viz. the United States and EU, that have also adopted this joint declaration.

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Expected Benefits of EFTA–Singapore FTA to the Singapore Economy Like other FTAs signed by Singapore, the ESFTA also confers a range of benefits to Singapore businesses and to its economy. First, only about 23.6 per cent of Singapore’s exports used to enter EFTA tariff-free. The ESFTA, now in force, entails the removal of tariffs on 99.8 per cent of Singapore’s domestic exports to EFTA. This reduces cost for Singapore businesses that are exporting to the EFTA market. Exporters to EFTA will enjoy such preferential tariff treatment for a wide range of products in key sectors, viz. chemicals and petroleum products, electrical and electronic products, plastic products, pharmaceuticals, instrumentation equipment, transport equipment, and fabricated metal products. Second, the ESFTA guarantees Singapore service suppliers access to a wide range of services sectors in the EFTA states. This includes professional services, distribution services, telecommunication services, financial services, and transport services. Specific services sectors committed by the EFTA states that would be of particular interest to Singapore companies include research and development services, courier services, maritime transport services, freight transport services, and construction and related services. In these committed sectors Singapore service suppliers will be able to compete on a level playing field. The benefits of these provisions will be extended to Singapore companies (including start-ups), MNCs based in Singapore, as well as Singapore permanent residents. Third, when a Singapore-based company (either locally-owned or foreign-owned with substantial business activities) invests in an EFTA member state, they will enjoy national treatment benefits. The government will not take over the assets of the company unreasonably, and in cases where there are legitimate reasons,

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compensation will be paid. If the company is for any reason aggrieved, it can seek recourse at an international arbitration tribunal with the agreement of that government. Similar national treatment provisions apply to a company from an EFTA member state investing in Singapore. This would help in expanding FDI inflows in Singapore, thus strengthening its position as an investment hub in the region. Fourth, the enhanced investor protection measures under the ESFTA will enhance investor confidence in investing in Singapore. These benefits are unlikely to be limited to investments from the EFTA member states. Indeed, under the ESFTA, investments made out of Singapore into EFTA member states will also be covered (except for the case where these are not Singaporean/PR owned and without substantive business activities here). Thus, if a foreign company has substantial business activities in Singapore, it will also be considered a beneficiary under the ESFTA when it invests in EFTA member states from Singapore. This would also enhance Singapore’s role as an investment hub from which MNCs can invest in EFTA member states. Fifth, the enhanced IPP copyright protection brought about by acceding to the WCT and WPPT establishes a transparent and secure legal framework for e-commerce to flourish between the EFTA states and Singapore. It would encourage knowledge-based R&D investments to be based in Singapore. It is expected that by adopting a uniform standard of patent protection and trade marks, Singapore may attract Swiss pharmaceutical giants to set up operations in Singapore, which would enhance its aspirations towards becoming a hub for science-based activities. Thus, all in all, the ESFTA has also been a comprehensive FTA, being WTO-Plus in many aspects. This agreement, in force since beginning of 2003, ought to strengthen Singapore’s trade and investment linkages with the EFTA member states.

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Chapter 4

Singapore’s FTA with the United States Although the idea of establishing an FTA between Singapore and the United States was thought of earlier, it was only on 16 November 2000, during the APEC meeting in Brunei, that the then U.S. President Bill Clinton and Singapore’s Prime Minister Goh Chok Tong officially announced the launch of the U.S.– Singapore FTA (USSFTA). After more than six rounds of negotiations spanning two years, U.S. Trade Representative Robert Zoellick and Singapore’s Minister for Trade and Industry BG George Yeo, jointly announced the substantive conclusion of the USSFTA in Singapore on 19 November 2002. The agreement was signed by the current U.S. President George W. Bush and Singapore’s Prime Minister Goh Chok Tong in Washington, D.C. on 6 May 2003. With the passing of the USSFTA by the House of Representatives on 25 July 2003 and by the Senate on 1 August 2003, the agreement came into force from 1 January 2004. The economic rationale behind the USSFTA is reflected in the de facto close trade and investment linkages between the United States and Singapore. The USSFTA strengthens the already strong economic ties between the two countries. The United States, being the world’s largest economic and military superpower, is Singapore’s second largest trading partner and is also the largest foreign investor. Nearly 1,300 U.S. companies and 15,000 U.S. 43 © 2004 Institute of Southeast Asian Studies, Singapore

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citizens are based in Singapore, with many U.S. MNCs using Singapore as an export base to the rest of the world. Singapore has also been an important economic and strategic partner for the United States in Southeast Asia. It is the twelfth largest trading partner of the United States and the second largest Asian investor in the country, after Japan. The United States, which has a market of nearly 288 million people with a GDP per capita of US$36,273, offers great opportunities for Singapore and other ASEAN countries to expand their market access through FTAs. The USSFTA is not only seen as a means of gaining greater market access, but also as a way of avoiding the imposition of possible protectionist measures by the United States in future, as well as managing future trade tensions. Being the first mover further ensures that Singapore is not discriminated ex-post in the event that its major competitors form FTAs with the United States. The USSFTA is by far the most comprehensive FTA ever concluded with any ASEAN economy and has a wide scope of coverage, ranging from trade in goods, cross-border trade in services, financial services, temporary entry, telecommunications, e-commerce, and rules of origin to customs administration, and technical barriers to trade, as well as investment, competition, government procurement, intellectual property protection, transparency, general provisions, labour, environment, and dispute settlement. In many ways, both countries have gone way above their WTO commitments to initiate a model FTA that could be labelled as being WTO-Plus in most respects. This section analyses some of the major highlights of this important agreement.

Highlights of the USSFTA Trade in Goods and Rules of Origin The USSFTA has allowed both countries to undertake substantive tariff reductions in their respective manufacturing sectors. Under © 2004 Institute of Southeast Asian Studies, Singapore

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the USSFTA, Singapore, which already has close to zero to average zero tariff, has committed to zero tariffs for all imports (except some alcoholic products) from the United States upon entry into force of the USSFTA. The United States has committed to eliminate nearly 92 per cent of its current tariffs on exports from Singapore immediately upon entry into force of the USSFTA. It has agreed to eliminate all remaining tariffs within eight years. Some of the sectors that ought to benefit from these measures would be chemicals and petrochemicals, electronics, instrumentation equipment, processed foods, and mineral products. In the textile and yarns industry, it has been proposed under the USSFTA that tariffs be eliminated for most products that are produced from yarn originating in the United States and/or Singapore. Some apparel exports have been exempted from this rule for eight years, with existing tariffs on them to be phased out within five years. Singapore has agreed to establish a system to monitor the import, production, and export of textiles and apparel products in order to ensure that only eligible goods enjoy the tariff reduction benefits under the FTA. In addition, the United States has agreed to immediately waive the Merchandise Processing Fee for all Singapore exports, as well as to abolish its Vessel Repair Duty for Singapore, leading to further savings in trading costs between the two countries. As in other FTAs, appropriate rules of origin (ROOs) have been designed in the USSFTA to ensure that only those exports that undergo substantial transformation and value-added in Singapore can be labelled as being of “Singapore origin” and qualify for preferential tariff in the United States. Imported inputs that are used in the manufacture of final products within Singapore are classified under a separate tariff classification from the final product. In general, each product has a specific ROO under the USSFTA. Thus, for some electronic products, the ROO require that a rule of a specified threshold of local value content of about 30 © 2004 Institute of Southeast Asian Studies, Singapore

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to 60 per cent must be satisfied in order to qualify for preferential tariffs in the United States. Further, in case of certain chemicals or petrochemical products, a specified process, such as a specific chemical reaction, must occur in Singapore. The ROOs take into account the unique production pattern of Singapore, whereby certain stages of the production are outsourced to lower cost centres in the region. Thus, in the case of some electronic products, overhead activities done in Singapore, such as R&D, design, engineering, purchasing, are defined as having contributed towards value-added in Singapore, and would hence qualify for tariff concessions. The ROOs in the USSFTA have another salient feature in this context, viz. the Integrated Sourcing Initiative (ISI). This initiative has been announced under the ROOs in the USSFTA to encourage Singapore manufacturers to source imports from its neighbouring regions. The ISI aims to treat inputs sourced from the region and used in the manufacture of two main non-sensitive, globalized sectors, such as IT and medical equipment, as being of Singapore origin. Thus, intermediate inputs of these sectors sourced from Singapore’s regional neighbours also qualify for preferential tariffs.

Trade Facilitation In addition to the reduction in tariffs, the USSFTA focuses on trade facilitation measures and attempts to enhance bilateral customs co-operation. In this context, Singapore is to implement systems and procedures to ensure preferential treatment is only granted to legitimate goods under the ROO specified in the USSFTA. It has also been agreed to exchange information and use risk management techniques to enforce against trade in illegitimate goods.

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Trade in Services Under the USSFTA, service providers in both countries have committed to a significant degree of trade liberalization. They have been assured of fair and non-discriminatory treatment with respect to market access in all service sectors, unless specifically exempted in writing. This implies that the USSFTA has adopted a “negative list” approach to services trade liberalization. It has been agreed that individual states in the United States can provide national treatment to Singapore service providers, that is, to provide a similar treatment as that given to its supplier from the same state or other American states. Appropriate regulatory mechanisms to ensure high standards of openness and transparency would be in place to facilitate bilateral trade liberalization in the service sector. Other measures for liberalization of specific service sectors, as announced in the USSFTA, are as follows: 1. Professional services. In the area of legal services, Singapore has agreed to ease conditions on U.S. firms creating joint ventures to practise Singapore law, and have also agreed to recognize degrees earned from four U.S. law schools for admission to the Singapore bar of lawyers, subject to certain criteria being fulfilled. One such criterion for recognition is that the person must be a Singapore citizen or a permanent resident at the time of receiving the degree from one of the four law schools, as mentioned in the Side Letter on Legal Services under the USSFTA. In the area of architectural and engineering services, requirements for the board of director of firms have been relaxed. Capital ownership requirements have been phased out for land surveying services. It has been further agreed to engage in bilateral consultations to develop a set of mutually acceptable standards and criteria for licensing and certification

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of professional service providers, especially among architects and engineers. 2. Financial services. In the area of financial services, Singapore has agreed to provide U.S. banks with an increased access to Singapore’s retail banking sector. It has also agreed to remove the quota on Qualifying Full Banks (QFBs) and Wholesale Banks for U.S. banks after eighteen and thirty-six months respectively of entry into force of the USSFTA. The USSFTA has also agreed to remove restrictions on customer service locations for U.S. QFBs after two years of entry into force of the USSFTA. Singapore-incorporated U.S. QFBs are allowed to negotiate with local banks for access to their Automatic Teller Machine (ATM) networks on commercial terms about two and a half years after the entry into force of this agreement. This has introduced phased competition in the financial services sector vis-à-vis local and U.S. Banks. 3. Telecommunications and e-commerce. In these sectors, the USSFTA has allowed service providers in both countries to have access to respective public telecommunications networks, including submarine cable landing stations, while ensuring transparent and effective enforcement through a proper regulatory mechanism. Provisions are also included to safeguard against discriminatory and anti-competitive behaviour by incumbent providers in areas such as interconnection, co-location, and access to rights of way and resale. The implementation of a comprehensive arrangement for the mutual recognition of conformity assessment for telecommunication equipment is also to be worked out. Under the USSFTA, both countries have also committed to the non-discriminatory treatment of digital products and allowing a permanent duty-free status of products delivered electronically.

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4. Movement of natural persons. Both countries have also agreed to ease restrictions on movement of natural persons to facilitate services trade liberalization. Separate categories of entry for citizens of both countries on a temporary basis to conduct a variety of business and investment activities have been created under the USSFTA. Further, Singapore citizens who are business visitors are allowed to enter the United States for conducting business activities for up to a period of ninety days without the need for labour market test. However, they would have to abide by the usual immigration and security measures.

Government Procurement Under the USSFTA, government procurement has also been accorded priority, with both countries having agreed to allow market access by service providers from the other country through a negative list approach. These commitments apply to all procurement contracts for goods and services (with the exception of construction services) worth more than US$56,190 and for construction procurement contracts that are worth more than US$6.5 million.

Investment The USSFTA has taken significant steps to boost bilateral investment relations. Thus, certain restrictions on performance requirements for investors such as requiring them to export a certain level of goods and services, as a condition for the investment, have been removed. Provision has also been granted to establish an investor-to-state dispute settlement mechanism. Existing investors in both countries thus have the right to take the dispute directly to an international arbitration tribunal for

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resolution, in cases of breach of obligations. New Singapore investors who enter into investment agreements with the federal government after the entry into force of the USSFTA are also allowed to do so. Both countries also grant national treatment provisions to investors.

Intellectual Property Protection (IPP) The USSFTA has incorporated very strong commitments to enhance intellectual property protection (IPP) standards on a nondiscriminatory basis. These measures are way above the WTO commitments provided by both countries with regard to IPP standards. One of the reasons why the USSFTA has focused on strengthening IPP is because both countries are increasingly becoming knowledge-driven. They have put greater emphasis on innovation and development of R&D capabilities in the fields of ICT and biomedical sciences, which require them to respect copyright rules and patent protection in order to maintain a competitive advantage. As part of the USSFTA, both countries have agreed to align their terms of protection for copyrighted works, performances, and phonograms. They have also agreed to adopt additional protection standards relevant and applicable in the digital environment. In this context, both countries are to provide strong anti-circumvention provisions to prohibit tampering with technology and prevent piracy of copyrighted works over the Internet. They have also agreed to criminalize unauthorized reception and redistribution of satellite signals. Internet service providers (ISPs) will be provided with immunity for complying with notification and take-down procedures when material suspected to be infringing are hosted on their servers. In the area of patents, both sides have agreed to strengthen their existing regimes to protect bio-inventions. In this context,

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Singapore will accede to the International Convention for the Protection of New Varieties of Plants (UPOV) to better protect new plant varieties. Both countries have agreed to commit to the current regime on allowing all inventions, including bioinventions to be patentable, as long as they do not contradict public order or morality. It will also limit the use of compulsory licences to safeguard against anti-competitive practices, public non-commercial use, national emergencies, and other circumstances of extreme urgency. It is important to note that to date Singapore has not issued any compulsory licences. Both countries have agreed to introduce safeguards to strengthen patent protection, especially for pharmaceuticals. Both countries will grant originators a data exclusivity period of up to five years from the date of marketing approval, instead of the date of application, and extend the patent protection period if there is an administrative delay during the marketing approval process. In the area of trade marks, all trade marks, including sound trade marks, can now be registered in Singapore, with both countries according stronger protection for well-known marks. Trade mark licensees would no longer need to register their licences in order to assert their rights in a trade mark. These strong commitments on IPP standards are to be complemented by robust enforcement obligations. Both countries are willing to undertake stringent enforcement against piracy in close consultation and collaboration with the industry. In this context, both the United States and Singapore have agreed to provide an additional avenue for rights owners to opt for compensation based on a predetermined range of statutory damages for civil proceedings against copyright and trade mark infringements. They have agreed to prevent and enforce against the illegal manufacture, import, and export of pirated goods.

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Singapore has agreed to formalize its regime of regulating optical disc manufacturing activities through the imprint of Source Identification Code on optical discs unless specifically exempted by the rights owner, and criminalize companies that make pirated copies from legitimately purchased products.

Competition Policy In the area of competition policy, Singapore has committed to its earlier announced intention to establish a general competition regime by 2005. Under the USSFTA, it has committed to maintain its existing policy of not interfering with the commercial decisions of government linked companies (GLCs), thereby ensuring that GLCs are commercially run, and that they do not discriminate against U.S. companies.

Labour and Environment Standards Both countries have agreed to enforce their own domestic laws relating to labour and environment, but consult and co-operate closely on environmental and labour issues of mutual concern and interest.

Dispute Settlement and General Provisions Under the USSFTA, it has been agreed that a dispute settlement system that focuses more on co-operation rather than on traditional trade sanctions be set up, by allowing a party to pay a monetary assessment into a common fund. This common fund will be used to facilitate trade between the two parties.

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Benefits of the USSFTA to Singapore and Other ASEAN Countries The wide scope of coverage in the USSFTA as detailed above offers a range of potential benefits that companies and businesses in Singapore and its ASEAN neighbours could gain from. The benefits that accrue from USSFTA are identified as follows.

Cost Savings to the Manufacturing Sector from Tariff Reduction This is one of the most common benefits from any FTA, and the USSFTA is no exception. Estimates from the Singapore Ministry of Trade and Industry (MTI) indicate that tariff reduction under the USSFTA is expected to bring about US$200–$300 million in cost savings for Singapore-based manufacturing companies that export to the United States. Of this amount, the MTI has calculated that the tariff savings for the various industries would be: chemical industry, S$178 million; minerals industry, S$54 million; electrical and electronic industries, S$48 million; instrumentation equipment industry, S$4 million; and several other sectors, S$16 million. With 60 per cent of trade between the United States and Singapore accounted for by intra-MNC trade, these tariff reductions will benefit the U.S. MNCs in Singapore. Following the elimination of tariffs, the textile and apparel industry is expected to benefit through a competitive price advantage of 5 to 15 per cent for such goods originating from Singapore, provided they use Singapore-made or U.S.-made yarn or fabric. Further, the waiving of merchandise processing fee of 0.21 per cent (ad valorem) imposed on all imports entering the United States is also expected to save S$51 million annually for

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Singapore businesses. Waiver of the vessel repair duty, assessed on the basis of 50 per cent of the value of repair work done on U.S. ships outside the United States, is estimated to bring a cost savings of another S$7.7 million per annum, according to MTI estimates.

Encouraging Greater Sourcing of Inputs from the Region Due to the Integrated Sourcing Initiative provision under the USSFTA, Singapore-based companies are expected to increasingly source components for the ICT and the medical equipment industries from the region. These components will be treated as being of Singapore origin, thus qualifying for preferential treatment. This would encourage manufacturers to invest in the region, which has not been geographically defined, but presumably will centre on the nearby Indonesian islands of Batam and Bintan, in order to capture the comparative advantages of different locations in the region. Under the USSFTA, the list of goods that qualify for preferential access to the United States under the ISI is quite extensive. These include electronic components, semiconductors, computers, telecom equipment, cell phones, optical fibre cables, photocopying equipment, medical instruments and appliances, and a range of other high-tech products. There is an option to expand the list in future. The broader implications of the initiative would be farreaching. It would encourage more Singapore manufacturers to invest in the region. This would imply a shift of certain low-cost manufacturing activities in the ICT and medical equipment sectors, away from Singapore to the nearby region. This would certainly be beneficial to those industrial clusters in ASEAN located in the neighbouring region of Singapore that can serve as a base

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for sourcing of such components under the ISI. It is expected that this could create more demand for spin-off services such as logistics, transportation, financial services, and tourism in these regions. Over the years, these benefits are expected to be dynamic and will lead to increased investments not only in Singapore, but also among its regional neighbours.

Wider Market Access and Increased Liberalization of the Services Sector The provisions in the USSFTA for liberalizing services trade and providing wider market access to each other on a bilateral basis also confer significant benefits to service providers from both countries. Singapore’s service suppliers are guaranteed access to the U.S. market in sectors such as the ICT and financial services, and are also accorded national treatment, which would encourage more service providers to enter the U.S. market. This would also lead to greater accessibility to U.S. government contracts for Singapore exporters and service providers. Concomitantly, this would also increase competition for domestic service providers in Singapore with those of the U.S., especially in legal, professional, and financial services, once the USSFTA comes into force. This indicates that domestic businesses in the services sector would need to become more innovative, raise their standards of service, and expand overseas, in order to sustain competitive pressure. Specifically, the USSFTA would benefit professional bodies from the United States and Singapore, especially those in architecture and engineering, who would engage in greater consultations to develop mutually acceptable standards and criteria for licensing and certification of professional service providers. One of the most significant impacts of the USSFTA provisions in the services sector is likely to be felt in the financial services sector. Observers argue that the USSFTA could adversely impact

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the local banks in Singapore since they continue to enjoy a certain degree of protection, especially in the retail market. The liberalization schedule for financial services in the USSFTA indicates that by 2007, local banks would be competing on an almost level playing field with U.S. banks that are likely to be financially stronger, have a wide global outreach, and are marketing savvy in nature. What would be the likely impact of this liberalization on the working of local banks in Singapore? To answer this question, we need to analyse the size of the local banks and their retail presence. The DBS Bank has about 800 ATMs, while Stanchart, HSBC, and Maybank have about sixty in a shared network, which is the largest among foreign banks. American banks would therefore need to do a lot of catching up in terms of retail presence. Furthermore, in the business of mortgage lending, which accounts for a major portion of retail business, local banks have the benefit of a lower cost of funds due to their larger depositor base. Given that the depositor base is typically slow to shift, it is likely that local banks will continue to enjoy their advantage in mortgage lending for some time to come. Local banks are also well positioned to lend to local SMEs, visà-vis U.S. banks, which have been hitherto serving mainly topend corporate and foreign clients. These suggest that local banks do have an advantage over U.S. banks, even in the face of impending competition due to the FTA.

Increased Movement of Natural Persons The USSFTA provisions in the services sector have also provided important benefits to Singapore by easing restrictions on skilled manpower flows. Thus, under the USSFTA, Singaporean business visitors would be allowed to conduct business activities in the United States, for a period of up to ninety days, without being

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subject to the labour market test. The waiving of the H1B visa requirement under the USSFTA would also be beneficial in promoting a freer flow of talent between the two economies. This is particularly so in a broader context of both Singapore and the United States moving towards a knowledge-based economy, wherein innovation and talent are major inputs for success.

Increased Investment Opportunities and Greater Investment Protection The increased market access for both U.S. and Singapore businesses would provide an impetus for an increase in foreign direct investment (FDI) into Singapore from both U.S. as well as non-U.S. companies to take advantage of the FTA provisions. This would therefore strengthen Singapore’s position as a regional investment hub. Under the investment provisions in the USSFTA, investment protection through the establishment of an investorto-state dispute settlement mechanism has been accorded utmost importance. Thus, an aggrieved Singaporean investor can take an individual American state to an international arbitration tribunal if it feels that the U.S. counterpart has acted in breach of its obligations under the FTA, and vice versa. From Singapore’s perspective, these measures to enhance investor confidence should encourage more U.S. investors to base themselves in Singapore.

Greater Intellectual Property Protection The strong intellectual proprty protection measures included in the USSFTA are expected to encourage more R&D and knowledgeintensive activities to be located in Singapore. Under the USSFTA Singapore will accede to WIPO treaties on copyright that will provide enhanced protection for copyrighted works and stronger

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anti-circumvention measures, thus raising its protection levels to U.S. standards. Singapore has already been enjoying increased investment in certain knowledge-intensive industries such as the pharmaceutical industry. In this context, it has been indicated by the MTI that one of Hollywood’s studios has decided to make Singapore its Asian hub for customizing its games for the various Asian markets.

Improved Competition Policy and Favourable Impact on GLCs The stronger enforcement of the Competition Law by 2005, as agreed under the USSFTA, would level the playing field between all companies operating in Singapore. This is likely to have an impact on Singapore’s government-linked companies (GLC), fostering their commercialization and ensuring greater transparency in their operations. Specifically, the USSFTA commits Singapore to “at least annually make public a consolidated report that covers, for each entity, the percentage of shares and percentage of voting rights that Singapore and its government enterprises cumulatively own and the name and government title of any government official serving as an officer or a member of the board of directors”. The FTA commits Singapore to divest stakes in the GLCs. Accelerated sales of government stakes in the GLCs are thus now likely, although the FTA provides for some flexibility on the pace and timing of sales. There will also be a stronger enforcement of transparency of GLCs. Thus far, the total number of GLCs, including their multi-tiered subsidiaries, the size of the government’s stake in them, and who runs these GLCs are not widely known. However, after the USSFTA comes into force, it is expected that this information will have to be made public, and would be updated regularly.

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It is observed that the USSFTA is WTO-Plus in many aspects and confers a range of benefits on its members that go far beyond the usual cost savings from tariff reduction measures in the manufacturing sector. These benefits ought to have important spillover effects on most of the domestic economic agents in Singapore and the manufacturing companies in its geographical proximity. However, some adjustment costs for the Singapore economy may need to be entailed in order to reap these benefits. Such costs need to be weighed against the benefits outlined earlier, in order to understand the implications of the USSFTA on the Singapore economy. The costs are likely to be in terms of adjusting to greater competitive forces, and enforcing policy discipline through “locking in” of policy changes announced in the FTA. Further, Singapore companies operating in the United States would need to make adjustments in their ways and means of doing business, if they are to gain from the increased outward investment opportunities in the United States. Singapore companies have not been active players in the U.S. market, even in the past decades, and have relied on the government for their overseas operations. Thus, operating in a highly competitive and mostly private sector dominated U.S. market would be a challenge to most Singapore companies. Viewed in a nutshell, these range of benefits from the USSFTA have a potential to significantly change Singapore’s domestic economic landscape as well as the nature of its linkages in the region. The analysis of the above bilateral FTAs indicate that that all of them have been comprehensive, WTO-Plus in nature, and have provided a range of benefits for the Singapore economy. Besides the economic benefits, the USSFTA is also expected to be of great strategic significance.

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Other than the above FTAs that have been negotiated involving Singapore, there have been ongoing efforts within Southeast Asia to seal such agreements with other trading markets with a view to expanding market access. The next chapter analyses these ongoing FTA initiatives in Southeast Asia.

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Chapter 5

Ongoing Individual Country FTA Initiatives As observed, Singapore has been the first mover towards bilateral FTAs in Southeast Asia. Other regional efforts in ASEAN include the formation of the ASEAN Free Trade Area (AFTA), which is now implemented for the association’s six founding members. Although other ASEAN members were initially sceptical of Singapore’s moves towards bilateral FTAs, the interest in taking the bilateral route to free trade has gradually found favour within the grouping as a whole as well as within the individual members. The individual FTA initiatives from other ASEAN members include a Thai–U.S. FTA, with Thailand having already signed an FTA framework agreement with Bahrain and India. Thailand is also well on the way to conclude similar bilateral deals with Japan and Australia. Malaysia, the Philippines, and Vietnam have been contemplating bilateral FTAs with Japan. Although there are a number of possible economic and strategic motivations for these ongoing FTA initiatives involving ASEAN countries, the primary motive appears to be to strengthen ASEAN’s competitiveness as a regional grouping and to make it more attractive to investments from its major trading partners and the emerging markets of China and India. As in the case of Singapore, slow progress in multilateral trade talks within the WTO 61 © 2004 Institute of Southeast Asian Studies, Singapore

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and the setback to regional economic integration due to the economic crisis of 1997–98 have been the reasons behind other ASEAN members and the grouping to go for the third best option for advancing free trade through bilateral FTAs. Singapore has been the most active country with respect to negotiations of bilateral FTAs in ASEAN on an individual country basis. This chapter analyses Singapore’s ongoing bilateral FTA initiatives on an individual country basis, and then focuses on the ongoing bilateral FTA initiatives by other ASEAN members, specifically Thailand, Malaysia, and the Philippines. These three countries have already announced or are contemplating negotiating bilateral FTAs with their major trading partners outside ASEAN. Since detailed information on most of these initiatives are not yet available, the expected benefits from these FTAs cannot be clearly spelt out as was done in the case of Singapore’s concluded FTAs.

SINGAPORE’S ONGOING FTA INITIATIVES To date, Singapore’s ongoing bilateral FTA initiatives on an individual country basis involves Mexico, Canada, Republic of Korea (ROK), India, the Hashemite Kingdom of Jordan, and, most recently, Sri Lanka. On an individual basis, none of these countries constituted more than 1–2 per cent of Singapore’s total merchandise trade in 2002. Each of these initiatives and its significance are now discussed.

Mexico Negotiations for the Mexico–Singapore FTA (MSFTA) started in July 2000. According to the MTI, six rounds of trade talks have taken place between the two countries. There have been a series of road shows in Mexico to drum up support among the Mexican business community.

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The proposed FTA with Mexico aims to accelerate the pace of trade liberalization in APEC, besides enhancing bilateral trade and investment. When in force, this FTA is expected to strengthen bilateral linkages between the two economies and the regions of Latin America and Southeast Asia. Status of ongoing negotiations indicate that this FTA is expected to be comprehensive in coverage, and it will be WTO-Plus in its contents, as with the case of Singapore’s other FTAs that are now in force.

Canada The decision to launch the Canada–Singapore FTA negotiations was taken during the APEC summit in Shanghai in October 2001. This was another cross-regional bilateral FTA initiative, intended to strengthen economic linkages between Singapore and Canada. To date, Singapore and Canada have completed five rounds of negotiations. The next round of negotiations are scheduled in Ottawa, Canada in the week of 29 September 2003. The two countries have already negotiated on a comprehensive range of issues such as trade in goods, trade in services, financial services, investment, government procurement, institutional provisions, and dispute settlement. According to the MTI, Singapore, have made encouraging progress. It is expected that the FTA negotiations with Canada would possibly be concluded within 2003.

Republic of Korea (ROK) Korean Trade Minister Hwang Doo-yun and Singapore’s Trade and Industry Minister BG George Yeo agreed to formally launch a JointStudy Group (JSG) for exploring a Korea–Singapore FTA (KSFTA) on 14 November 2002. The JSG was expected to focus on the feasibility and desirability of including specific sectors in the proposed FTA.

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To date, the JSG has already had three meetings on the KSFTA with the third meeting held from 4–5 September 2003 in Seoul. The discussions in the Joint Study Group included extensive discussions on further liberalization of trade and strengthening of economic relations between Korea and Singapore. They reflected the mutual understanding by both sides that the KSFTA would bring about greater benefits to both Korea and Singapore and forge a closer relationship between the two countries. According to the MTI, the JSG report for the KSFTA is thus expected to contain a recommendation on the launching of the FTA negotiations between Korea and Singapore at an early date, with the aim to conclude the negotiations as soon as possible. The KSFTA, once negotiated and in force, would be the first such initiative of an ASEAN member country involving the ROK and could be a template for ROK’s future negotiations with ASEAN as an overall grouping. This initiative would also advance regionalism efforts in East Asia.

India With increasing economic linkages and institutional links between Singapore and India, it has been recognized that there needs to be a sustained effort to cement this relationship. It is important to note that the past decade had witnessed a significant expansion in bilateral economic relations between Singapore and India. While the total bilateral merchandise trade between the two countries trebled during 1991–2002, reaching US$4.20 billion, the bilateral services trade increased by 40 per cent from 1998, to US$0.74 billion in 2000. These trade flows have been accompanied by an increasing volume of foreign investments, with Singapore emerging as the eighth largest foreign investor in India in 2002. These investments have covered a wide range of sectors from telecommunications, electrical equipments, electronics, health

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care, and real estate, to port development, trade logistics, tourism, and transportation. These economic linkages have been further strengthened by the development of institutional links particularly between trade, investment, and tourism promotion agencies of the two countries. During the visit of the Indian Prime Minister Shri Atal Bihari Vajpayee to Singapore in April 2002, it was proposed that a Joint Study Group (JSG) be set up to explore the areas of mutual economic co-operation. The JSG has since completed its report, and during the recent visit of Prime Minister Goh Chok Tong to India in April 2003, a declaration of intent to conclude a Comprehensive Economic Co-operation Agreement (CECA) between India and Singapore within a time span of 12–18 months was signed. It has been agreed that the recommendations of the JSG Report on the India–Singapore CECA, released during Mr Goh’s visit to India, could serve as a basis for detailed negotiations. This declaration thus represents another step forward in operationalizing India’s Look East policy. Upon signing, the CECA with India would represent the first such bilateral arrangement that Singapore has entered into with a developing country and India’s first such agreement with a highincome country. It is important to note that India already has a functional FTA with Sri Lanka, and is in the process of negotiating free trade arrangements with Thailand, Brazil, and Chile. India’s experience with such agreements with two ASEAN members, namely, Singapore and Thailand, can be expected to ease negotiations for a prospective India–ASEAN Free Trade Agreement. The JSG Report on India–Singapore CECA has recommended that the CECA be an FTA-plus arrangement. This implies that negotiations would go beyond tariff reduction on merchandise trade into other areas of trade negotiations, viz. services, investments, standards, and movement of natural persons.

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Specifically, the JSG has recommended that the CECA should be an integrated package of agreements comprising of the following major components: 1. An FTA which would include, inter alia, trade in goods and services, and investment. 2. A bilateral agreement on investment promotion, protection, and co-operation. 3. An improved Double Taxation Avoidance Agreement. 4. A more liberal Air Services Agreement, and Open Skies for Charter Flights. 5. A work programme for economic co-operation covering areas outlined in the JSG report, including, inter alia, the creation of the India–Singapore Fund, and the setting up of a second India Centre in Singapore, and tourism co-operation. Three rounds of negotiations on the CECA has been completed. According to the MTI, discussions have been held on a wide range of issues relating to investment and trade in goods and services. Both sides have explored opportunities for investments in Indian airports and ports. It has also been decided to launch joint missions to third countries in areas of mutual interest. The negotiations so far have also covered financial services, free trade agreement in goods including anti-dumping, safeguards, and rules of origin. A dispute settlement mechanism is also being negotiated, and areas of customs co-operation are being identified. The services sector discussions have been related to areas of co-operation in IT, telecom, science and technology, biotechnology, financial services, air services, tourism, and education. Overall, the negotiations indicate that a comprehensive CECA pact between Singapore and India could well be in force by next year. However, given the importance of this agreement, developing mutual trust and confidence would be vital for the CECA to be

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successful and potentially beneficial for both countries. It is essential that the media and élites on both sides make every effort to address the current information and perception gaps and demonstrate recognition of mutual benefits by providing balanced and analytically sound discussion of the relevant issues involved, not only in CECA but also in other areas. The India–Singapore CECA, with its comprehensive agenda, certainly provides a new dimension to the existing efforts at regionalism in Asia, which was hitherto being restricted to East Asia. If the CECA is indeed established within 12–18 months as is envisaged, it could provide a powerful impetus for India’s relations with ASEAN as a regional grouping, and may indeed expedite the negotiations for an ASEAN–India FTA, encompassing most of the major components as discussed in the JSG report. This would further deepen India’s economic engagement with Southeast and East Asia.

Hashemite Kingdom of Jordan The idea of a Singapore–Jordan FTA was conveyed during the visit of BG George Yeo to Jordan on 23 June 2003. His Majesty King Abdullah II Bin Hussein of the Hashemite Kingdom of Jordan welcomed the proposal to have an FTA between the two countries. The FTA, comprehensive in scope and coverage, would seek to promote trade in services, goods, investment, and e-commerce. It is expected to include an Investment Framework Agreement. The FTA is expected to provide the foundation for increased co-operation in areas such as e-government, IT, port management, and tourism, with both countries aiming to work together on capacity-building activities in third countries. Singapore has agreed to organize a business delegation to explore opportunities in Jordan, prior to the launch of negotiations, which is expected to take place in the near future.

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This is a significant step as this FTA, once negotiated and in force, would be the first FTA between Jordan and an Asian country, as well as between Singapore and a Middle East country. This FTA has the potential for expanding and enhancing business opportunities for Singapore in the Middle East.

Sri Lanka During the visit of the Sri Lankan Minister for Commerce and Consumer Affairs, Ravi Karunanayake, on 29 August 2003 in Singapore, the idea of beginning exploratory talks in October 2003 for a Comprehensive Economic Partnership Agreement (CEPA) between Singapore and Sri Lanka was announced. The announcement was with a view to launch formal FTA negotiations in the middle of 2004, or earlier if possible. The CEPA is expected to include an FTA for the liberalization of bilateral trade in goods, services, and investment, and other co-operation elements. The CEPA, once negotiated and in force, would be the first such initiative of an ASEAN member country involving Sri Lanka. This initiative would also strengthen Singapore’s economic linkages with South Asia, given that its CECA agreement with India is already well on course and is to be completed in 2004. Besides these FTA initiatives on an individual basis, Singapore is actively involved in ASEAN’s overall efforts to seal bilateral FTA deals with other important trading partners.

THAILAND’S ONGOING FTA INITIATIVES Ever since the trends towards bilateral FTAs started in Southeast Asia, with Singapore taking the lead, Thailand has been one of the most active ASEAN member countries that has been seeking bilateral FTAs in recent years. According to a recent study on

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Thailand’s FTA policy, three major factors could help explain the sudden interest of Thailand in pursuing bilateral FTAs. These are: (1) the slow pace of multilateral liberalization under the WTO, as well as in regional trade liberalization through the AFTA; (2) the possible demonstration effect from Singapore’s bilateral FTAs; and (3) a dual-track approach of bilateralism and regionalism in trade policy being actively pursued by the present government in Thailand who believes that bilateral FTAs could be a building block for free trade at the multilateral level. Available studies indicate that Thailand was interested in bilateral FTAs ever since the economic crisis in 1997. At that time, there were attempts to initiate bilateral FTAs with Australia, Chile, the Czech Republic, Croatia, and the Republic of Korea, which were largely unsuccessful. The strategy seems to be much more focused under the present government, wherein large and potentially emerging markets in Asia and America have been targeted as FTA partners under the dual-track approach. Thailand has signed its first FTA with Bahrain. This agreement came into effect under the Thai–Bahrain Framework Agreement on Closer Economic Partnership in July 2003. The FTA indicates that both countries are expected to bring about zero per cent tariff reduction by the year 2010, with tariffs being reduced for 626 products in the first stage. This FTA is strategically significant for Thailand, as Bahrain can be used as the gateway for further enhancing its economic co-operation with the other Gulf Cooperation Council or GCC countries. It is, however, important to note that Bahrain’s share in Thailand’s total trade is currently quite negligible. Apart from this, Thailand is also involved in negotiating bilateral FTA deals with China, India, Australia, the United States, and Japan. Its list of potential FTA partners under the present government also includes the EFTA, New Zealand, Mexico, Russia,

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South Africa, and South Korea. The following subsections focus on the significance and current status of some of these bilateral FTAs that Thailand is currently negotiating or is expected to negotiate soon.

Thailand-China FTA In spite of being actively involved in negotiating the ASEAN–China Free Trade Agreement (ACFTA), Thailand has also been pursuing a separate bilateral FTA deal with China. The proposed FTA with China (which is more of a preferential trading agreement, or PTA, at this stage) is set to eliminate tariffs on about 200 fruit and vegetable products. This “early-harvest” scheme would allow bilateral Chinese–Thai trade to enjoy reduced tariffs before the scheduled establishment of the ACFTA in 2010. This PTA is scheduled to be implemented before 1 January 2004, with tariff reductions for the first group of products targeted to be completed by 2006. This agreement is important for both Thailand and China since agriculture products compose a significant proportion of their bilateral trade, and would be given a boost by such tariff reductions. More sectors are expected to be added at a later stage in this tariff-reduction schedule.

Thailand–India FTA Thailand has signed a bilateral FTA with India on 9 October 2003 in Bangkok. This FTA is of a major significance as it could change the dynamics of bilateral relations between the two countries. This FTA is expected to lead to an increase in Thai–India bilateral trade from US$1.2 billion to US$2.1 billion over a span of a year. The agreement has allowed for an FTA in goods between India and Thailand to be established by 2010, with that in services and investments expected to commence from 2006.

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According to available reports, the first phase of this FTA is expected to reduce tariffs to zero for about fifty products in a time span of four years. These products are likely to be automobiles, and its components, and electronics products and components, which Thailand enjoys a comparative advantage in exports. A proposal for co-operation in rice trade is also likely to be included in the agreement. Apart from trade in goods, co-operation on other areas, viz. tourism and air transport services are also expected to be included in the agenda. It is indicated that Thai Airways had been “mandated” to hold talks with Air India for expansion of direct services in two stages, from October 2003 and the summer of 2004, which would boost co-operation in the area of tourism. This FTA, besides enhancing market access for both countries, would help Thailand and India to reap gains from freer trade, ahead of the formation of an overall ASEAN–India FTA. This move could also motivate other ASEAN countries to consider providing a stronger impetus to the ASEAN–India FTA initiative. It would offer both countries an opportunity to boost their ICT industry and exploit the application of biotechnology in agriculture. For example, Thailand could offer its experience in cleaning up the effluent in prawn farms and in improving the yield and quality of sugar cane to India.

Thailand–Australia FTA The joint feasibility study for Thailand’s bilateral FTA with Australia was completed in July 2002, which highlighted the benefits from a possible FTA. On that basis, negotiation for a Closer Economic Relations and Free Trade Agreement (CERFTA) of Thailand with Australia has been launched. Reports indicate that during the last round of negotiations in April 2003, both countries are yet to agree on the number of items under a zero per cent tariff reduction schedule, as well as on formulation of rules of origin, sanitary

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standards for fruits and meats, and co-operation for further liberalization in investment and services. Reports indicate that Thailand is keen to conclude and sign a trade deal with Australia before the end of 2003.

Thailand–Japan FTA The idea of an FTA with Japan was proposed by the Thai Prime Minister during his visit to Japan in November 2001. Working groups were then set up to study the feasibility of an FTA. Following that, negotiations with Japan were started and are under way for a proposed Closer Economic Partnership (CEP), which is expected to complement the efforts towards the creation of an ASEAN-wide CEP with Japan. Reports indicate that Thailand is expected to finish trade negotiations with Japan by this year. However, negotiations seem to be protracted and difficult over the agricultural sector, particularly on agricultural items, for example rice and chicken, which are important products of merchandise trade for both countries.

Thailand–U.S. FTA The idea of an FTA with the United States was also proposed by the Thai Prime Minister during his visit to the United States in November 2001. Both countries then set up working groups to discuss the feasibility of such a possibility. In October 2002, Thailand signed a Trade and Investment Framework Agreement (TIFA) in order to be eligible for a bilateral FTA with the United States under the Enterprise for ASEAN Initiative (EAI). This initiative, launched by U.S. President George W. Bush at the APEC Summit that year, aimed to enhance opportunities for ASEAN to strengthen its bilateral economic relationship with the United States, an important trading partner of most of the ASEAN countries.

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It is now widely expected that Thailand–U.S. FTA would be a reality, with a possible announcement during the forthcoming APEC meeting in Bangkok in October 2003. However, negotiating this FTA may generate difficulties as it is expected that the United States is likely to insist that Thailand follow the USSFTA as a template for the agreement. This implies that Thailand would need to remove important non-tariff barriers, especially in services trade, undertake reforms in their IPP regime, improve customs procedures, and agree to allow for greater foreign participation in telecommunication companies and in other areas of its services trade. Furthermore, agriculture is a sensitive sector for both countries and could also affect the process of negotiations. Besides the potential FTA partners already mentioned, Thailand is also contemplating to enter into bilateral FTAs with other trading partners outside Asia, including the EFTA, new Zealand, Peru, Russia, Mexico, and South Africa. Many of these agreements are undergoing feasibility studies at this stage.

MALAYSIA’S ONGOING FTA INITIATIVES Malaysia has hitherto been the strongest critic of bilateral FTAs being pursued in the region, although it has supported regionalism initiatives, viz. AFTA and a prospective East Asian Economic Grouping (EAEG) involving China, Japan, and South Korea. However, recently it has also started to view bilateral FTAs in a more positive light. Reports indicate that Malaysia is now negotiating a bilateral FTA with Japan, which is likely to complement the ASEAN-wide initiative for an ASEAN-Japan CEP. It is likely to develop into a comprehensive CEP, focusing on liberalization of trade in goods, services, and investment. Apart from this, Malaysia is also looking into the possibility of entering into a bilateral FTA with South Korea.

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According to a recent study, Malaysia’s approach towards its FTA policy needs to be understood in the light of the linkages between its FTA policy and ASEAN diplomacy. In general, Malaysia has favoured for ASEAN as a grouping to play a central role in negotiating FTAs. It prefers to have an ASEAN-wide consensus while negotiating with non-ASEAN members. This is because this framework provides a certain degree of flexibility with regards to the commitments in the FTAs that has helped to a certain extent shield the impact of such FTA on its domestic industries. The need to balance domestic economic priorities on one hand and promote its external economic interests on the other has led Malaysia to tread carefully on the path to bilateralism. With Japan being a very important trading partner and among the largest investor in Malaysia, the proposed Malaysia–Japan FTA is likely to be of major significance for the two countries.

PHILIPPINES’S ONGOING FTA INITIATIVES The initiative for a Japan–Philippines Economic Partnership Agreement (JPEPA) was initiated during the visit of the President of Philippines to Japan in December 2002. The JPEPA is also expected to complement the formation of the ASEAN–Japan CEP. This agreement is expected to lead towards an FTA, and is expected to be comprehensive in terms of coverage, encompassing trade in services, investment, human resource development, co-operation in ICT, tourism, and development of SMEs. A study group has been initiated to analyse the feasibility of establishing the JPEPA and its possible economic benefits to both countries. Besides these initiatives, there are also ongoing talks for consideration of a U.S.– Philippines bilateral FTA. The Philippines has already entered into a TIFA with the United States to make it eligible as an FTA partner for the U.S. under the EAI.

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Chapter 6

Ongoing ASEAN-wide FTA Initiatives China, Australia/New Zealand, Japan, and India Besides individual ASEAN countries continuing to negotiate on FTA deals with their emerging trading partners, there is also a surging interest among the ASEAN members to negotiate bilateral FTAs with their major trading partners as a single grouping during the past two years. To date, ASEAN as a grouping is negotiating bilateral FTAs with China and India; a Closer Economic Relations (CER) grouping consisting of Australia and New Zealand; and a comprehensive Economic Partnership with Japan. Each of these initiatives and their significance are discussed in this chapter.

ASEAN-CHINA FTA (ACFTA) The ASEAN–China Free Trade Agreement (ACFTA) is the first such agreement that China has entered into after becoming a WTO member. It is very significant for regionalism in Asia as it is to be one of the largest FTAs ever negotiated, involving about 1.7 billion people, with a combined GDP of US$2 trillion, spanning across eleven diverse and heterogeneous economies, both in terms of their size and levels of development. 75 © 2004 Institute of Southeast Asian Studies, Singapore

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The idea of an ACFTA was first mooted by Chinese Premier Zhu Rongji during the ASEAN–China Summit in November 2001. The Framework Agreement for this FTA was given concrete shape during the ASEAN Summit in Cambodia in November 2002. One of the key features of the ACFTA agreement is the “early harvest” clause. This clause commits ASEAN and China to reduce their tariffs for certain products (mainly agricultural products) within a span of three years, in order to demonstrate a reflection of their commitment to tariff reduction. The early harvest products belong to the following categories, viz. live animals, meat and edible meat offal, fish, dairy produce, other animal products, live trees, edible vegetables, and edible fruits and nuts. Tariff reduction or elimination for goods that are not included under this clause are to be negotiated through the ACFTA, scheduled to be completed by 30 June 2004. The timetable indicates the formation of the ACFTA in goods for the older ASEAN members (Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand, or ASEAN-6) by 2010, and that for the newer members (Cambodia, Laos, Myanmar, and Vietnam, or CLMV) is scheduled to be by 2015, thus providing newer members more time to adjust to the requirements of the ACFTA. The ACFTA also aims to be comprehensive, and the Framework Agreement indicates that both parties have agreed to commence negotiations for the liberalization of services and investment by 2003. Five priority areas for economic co-operation have been identified in the agreement, viz. agriculture, human resource development (HRD), ICT, investment, and the Mekong River Basin development. Implementation of capacity-building programmes and provision of technical assistance for newer ASEAN members to help catch up with the older ones have also been agreed upon in the Framework Agreement for the ACFTA.

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The ACFTA would enhance economic interactions between ASEAN and China and strengthen the growing mutual interdependence between them. However, it is argued that the specific impact of the ACFTA on individual ASEAN member economies is likely to be felt differently. This would depend upon the extent to which the economic structure and composition of trade of each ASEAN member complements or competes with that of China. In such situations, those countries whose trade composition complements that of China would clearly stand to gain more from the ACFTA than those that directly compete with China for exports in the global market. A major perceived benefit of this FTA would be the reduction of transaction costs and the efficient procurement of parts and components in the region, thus benefiting all the ASEAN countries involved in the regional production network along with China. The FTA would also contribute to greater regional stability by raising the costs of engaging in conflict among the countries involved, besides offering more systematic avenues to negotiate possible disputes.

ASEAN–CER CLOSER ECONOMIC PARTNERSHIP Trade ministers from ASEAN and the Closer Economic Relations (CER) grouping consisting of Australia and New Zealand met in Brunei on 14 September 2002 and signed the Ministerial Declaration, officially launching the ASEAN-CER Closer Economic Partnership (CEP). The CEP aims to expand trade and investment and encourage regional economic integration between ASEAN and the CER members. It is thus the first cross-regional FTA involving ASEAN as a regional grouping.

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The CEP aims to double the volume of ASEAN-CER trade and investment by 2010. To achieve these targets, an AFTA-CER Business Council (ACBC) has been established. The ACBC has outlined some proposals to enhance business linkages between the two regions in the areas of ICT and e-commerce, human resource development, and small and medium-sized enterprises. Non-tariff barriers have been identified as a major impediment to enhancing ASEAN-CER trade flows. It has been decided that the ACBC and ASEAN-CER officials will work together to implement the CEP work programme. The initial projects will cover ways and means for reduction of technical barriers to trade or non-tariff measures, improve customs cooperation, and co-operation in electronic commerce, standards and conformity assessment, and among SMEs from both regions. Issues concerning trade liberalization as well as co-operative activities in areas such as science and technology, and financial co-operation would be considered for the future. The ASEAN-CER CEP has a comprehensive agenda and is thus expected to benefit both the regions from an enhanced market access and liberalized business environment. It is in line with APEC’s Bogor goals of establishing an APEC-wide free trade area by the year 2020.

ASEAN–JAPAN COMPREHENSIVE ECONOMIC PARTNERSHIP The Joint Declaration on the Comprehensive Economic Partnership (CEP) between ASEAN and Japan was signed on 5 November 2002 during the ASEAN-Japan Summit in Cambodia. It was decided that measures for realization of the economic cooperation, including elements of a possible free trade area, are to be implemented soon and should be established within ten years,

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while taking into account the economic levels and sensitive sectors of each of the member countries involved in this agreement. To take into account the adjustment problems of newer ASEAN members, special and differential treatment is to be provided by Japan to those countries. The CEP aims to be comprehensive in nature and would include co-operation in trade and investment liberalization, customs procedures, standards and conformance, non-tariff measures, and co-operation in financial services, ICT, human resource development, SMEs, tourism, transport, energy, and food security, within its ambit. The framework agreement for the CEP was signed during the ASEAN–Japan Summit meeting in Bali in October 2003. It indicates that ASEAN and Japan will start consultations on the CEP on the liberalization of trade in goods, trade in services, and investment, from the beginning of 2004. These meetings will also discuss the basic principles of ASEAN–Japan cumulative rules of origin, customs classification, and the collecting and analysing of trade and custom data. The framework agreement also indicates that those ASEAN members that have not concluded bilateral Economic Partnership Agreement (EPA) with Japan will negotiate concessions on a bilateral basis, and that the schedules for bilateral liberalization concessions between Japan and each individual ASEAN member countries would not be renegotiated during the negotiation of the ASEAN–Japan CEP. These will instead be annexed to the CEP agreement. With Japan being one of the largest investors and trading partners of ASEAN, this CEP agreement aims to open up new opportunities by creating enhanced business opportunities for both ASEAN and Japan to each other’s markets. Strategically, this agreement is also expected to bring about greater stability and prosperity to the region. It should be noted that Japan has already

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signed the JSEPA agreement with Singapore and has been negotiating with Thailand, the Philippines, and Vietnam for bilateral FTA deals. It has already taken steps to enhance economic integration with ASEAN members, and the CEP could become the overarching framework for economic co-operation between Japan and ASEAN as a regional grouping.

ASEAN–INDIA FTA The initiative to launch an ASEAN–India FTA was proposed by the Indian Prime Minister Shri Atal Bihari Vajpayee during the first ASEAN–India Summit held in Phnom Penh, Cambodia in November 2002. The idea was to negotiate a closer economic partnership agreement, with an FTA to be established within a decade. There are several factors that contributed to this initiative, thus enhancing the scope for positive dynamics of increasing economic and political relations between India and the ASEAN member countries during the previous decade. These factors include: 1. the end of the Cold War and a change in the political and security environment in Asia during the beginning of the nineties; 2. rapid pace of globalization and associated technological changes that was accompanied by economic reforms in India in 1991, which increased India’s willingness and capacity to engage with ASEAN; 3. the financial and economic crisis in ASEAN countries in 1997– 98 that reduced the medium-term growth prospects of member economies and required them to diversify their economic partners beyond the region and East Asia;

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4. stronger institutional foundations that have increased the level and interest of participation of both India and ASEAN in various multilateral and subregional fora, viz. ASEAN Regional Forum (ARF) , G-15, Mekong-Ganga Co-operation (MGC), and the BIMSTEC (Bangladesh, India, Myanmar, Sri Lanka, Thailand Economic Co-operation) regional grouping; and 5. interaction of individual ASEAN member countries with India that have been strengthened through mutual visits by heads of state. The first ASEAN–India Summit, wherein this FTA was proposed, also declared India’s willingness to extend special and differential treatment to the newer ASEAN members, while supporting early accession to the WTO for some of those members. The proposal indicated that ASEAN and India could significantly co-operate in the area of trade, investment, and human resource development. India’s strong capabilities in advanced technology and research in agriculture, biotechnology, remote sensing, ICT, pharmaceuticals, and healthcare would benefit ASEAN, particularly the newer members, in improving their levels of economic development. It was also agreed at this summit to broaden and intensify joint efforts at economic co-operation between ASEAN and India in the Mekong Basin by promoting the MGC programme and enhancing the build up of transport links that span India, Myanmar, Thailand, Cambodia, and Vietnam. ASEAN and India also pledged to undertake common efforts to help fight international terrorism and transnational crime, particularly the trafficking of drugs, weapons, and humans. The efforts and commitment by India to intensify its economic relations is now evident with a Framework Agreement for a Comprehensive Economic Partnership between ASEAN and India

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being signed by the Indian Prime Minister during the second ASEAN–India Summit in Bali in October 2003. This follows up on the recommendations of the AFTA–India linkages task force, which had recommended the setting up of a regional trade and investment area between ASEAN and India, with much scope for comprehensive economic co-operation, beyond tariff reduction. Co-operation between ASEAN and India is expected to encompass a strategic and political partnership, thus going well beyond a traditional FTA agreement. The framework agreement on comprehensive economic cooperation between India and ASEAN provides for an early harvest programme that specifies the areas for collaboration and a common list of items for preferential tariff concessions at the initial stage. According to this framework agreement, the deadline for negotiations for the FTA in goods would be between January 2004 and 30 June 2005, and for services and investments between 2005 and 2007. Both countries have agreed to start tariff reductions under the FTA by 1 January 2006. India has agreed to eliminate tariffs for Brunei, Cambodia, Laos, Indonesia, Malaysia, Myanmar, Singapore, Thailand, and Vietnam by 2011, with the CLMV members eliminating tariffs for India with effect from 2016. India and the Philippines have agreed to eliminate tariffs for each other on a reciprocal basis by 2016. The early harvest programme under the ASEAN–India FTA for preferential tariff concessions on listed goods will start from 1 November 2004. Exchange of tariff concessions and elimination of tariffs on an agreed common list of 105 items based on common reciprocity between India and the ASEAN-6 is expected to take place within three years. While India will remove tariffs on these items within three years for the CLMV countries, they will do so for India in six years. Further, India has also agreed to extend

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unilateral tariff concessions to the CLMV countries on 111 items to extend special and differential treatment to the newer ASEAN members, based on their levels of development. The framework agreement also indicates that a trade negotiating committee (TNC) has been set up. This committee will begin framing rules of origin, modalities for tariff reduction, and the FTA in January 2004. To boost business ties, the setting up of an ASEAN–India business council is also proposed. It is expected to comprise twenty-four members, with two from each ASEAN member and four from India, to be nominated for a period of two years. This agreement marks a new phase of emerging and strengthening of economic relations between ASEAN and India. This agreement, once established, is expected to link India more closely with the East Asian economies, and open a new chapter in the regionalism efforts in Asia. The aim is to increase bilateral trade between ASEAN and India to US$15 billion by 2005, and to US$30 billion by 2007. The range of ongoing efforts on inking bilateral FTAs in Southeast Asia indicates that bilateralism is indeed gaining momentum as an integral part of the commercial trade strategy of ASEAN countries. One of the prime reasons for this emerging rise of bilateralism across East Asia has been the slow progress at the multilateral level in the WTO. In this context, the failure of multilateral trade negotiations in the recent WTO Ministerial Meeting at Cancun is likely to accelerate this trend in a stronger manner across East Asian economies and in ASEAN. It is highly likely that ASEAN would continue to see the proliferation of such bilateral initiatives over the coming years. It is important to study the extent to which these initiatives affect the regional economic integration efforts in ASEAN, and their consistency with

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multilateral framework. These concerns are addressed briefly in the concluding chapter, by way of analysing the possible benefits from FTAs and the challenges before Southeast Asia can reap the benefits.

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Chapter 7

Possible Benefits of FTAs for Southeast Asia The preceding chapters have indicated a clear and emerging trend towards bilateralism in Southeast Asia. It is also observed that on a bilateral basis, these FTA initiatives are likely to be beneficial for its members in terms of greater market access in goods and services due to reduction in trade barriers, increased investment opportunities in overseas markets, and reduction of business costs arising from the dismantling of tariffs and non-tariff barriers. However, given that the economies of ASEAN are highly interdependent among themselves, it is important to analyse whether the proliferation of such bilateral FTAs would benefit the grouping and the Southeast Asian region as a whole and the possible adjustments it may require in order to reap those benefits. The spate of bilateral FTAs in ASEAN raises the concern as to the extent to which such FTAs could complement the ongoing economic integration process in ASEAN that was initiated through AFTA in 1992. This concern is particularly pertinent given that prevailing economic diversity among ASEAN members calls for a concerted approach towards economic integration. The economic integration process is supposed to culminate towards an ASEAN Economic Community by the year 2020. A Concept Paper on the ASEAN Economic Community prepared by the Institute of 85 © 2004 Institute of Southeast Asian Studies, Singapore

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Southeast Asian Studies in Singapore envisages free movement of goods, services, capital, and labour among ASEAN members. The economic crisis of 1997–98 has made this task of economic integration difficult, with resultant slow progress in liberalization of their economies in both goods and services through AFTA and the ASEAN Framework Agreement on Services (AFAS) respectively. Although AFTA has been implemented for the ASEAN-6, tariff barriers on all goods are still not dismantled, while AFAS has not been able to significantly increase the pace of service sector liberalization. Therefore, one of the principal challenges for economic integration among ASEAN members is to increase the pace of liberalization and undertake necessary structural and institutional reforms in member countries, wherever required. This would help them to enhance and sustain competitiveness in the global market. It is in this context that comprehensive bilateral FTAs in ASEAN, involving goods, services, and investment liberalization, could possibly facilitate individual ASEAN countries to improve upon their global competitiveness, and hence complement economic integration at a regional level. This would require the founding members of ASEAN to encourage the CLMV member countries to integrate their economies at a faster pace so that overall economic progress of the grouping is not constrained by slower progress of the newer members. These members have a larger time-frame under AFTA to open up their markets, which should help them to catch up with the older members. Furthermore, ASEAN countries need to further improve upon their IPP regime in order to enhance investor confidence in ASEAN. Although the ASEAN–5 countries have proceeded to improve their respective IPP regimes since 1995, there is still a wide divergence between Singapore and its other ASEAN neighbours with respect

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to IPP. According to the IMD World Competitiveness Yearbook 2002, with regards to patent and copyright protection, Singapore scored the highest with a score of 13, followed by Malaysia (27), Thailand (39), Philippines (46), and Indonesia (49) in a scale from 1 to 49 among the ASEAN–5 countries. In this regard, besides simplifying the substantive and procedural laws concerning IPPs, it will be extremely important to conceptualize and operationalize an effective and credible enforcement mechanism. This will have a direct impact on improving the attractiveness of ASEAN as an investor destination. These efforts at ASEAN Economic Integration will go a long way in strengthening the position of ASEAN as a hub for bilateral FTAs in East Asia, and thus enhancing its bargaining power in the global economy. Another important issue of concern in the context of bilateral FTAs in ASEAN is that of its consistency with the regional and multilateral efforts that are ongoing in ASEAN. The concern is that the discriminatory preferences, complexities in the implementation of rules of origin, and cost and time spent on the implementation of these FTAs could be a burden on the scarce negotiating resources, and may divert ASEAN’s attention from the WTO. As noted earlier, this shift towards FTAs is likely to be pronounced after the failure of multilateral trade negotiations in the recent WTO Ministerial Meeting at Cancun. Since ASEAN is a diverse group of economies, and individual countries are also involved in bilateral FTA negotiations apart from the grouping itself, it is therefore important to ensure a certain degree of consistency with respect to their terms of coverage of sectors, rules of origins, and the depth of tariff reductions. Unless such a consistency is achieved, it can lead to problems for ASEAN in managing its external trade relationship and will increase business costs instead, since it would have to deal with a wide

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range of rules and regulations and tariff measures. A spate of bilateral FTAs in ASEAN, with different rules of origin for a number of commodities and involving exclusions for certain sectors and commodities with respect to preferential tariff treatment, can indeed create a “spaghetti-bowl” like situation wherein administrative and compliance costs of trade policy would be much higher. To avoid this situation, the best strategy would be to adopt some kind of a Common Framework Agreement among ASEAN countries that could form the basis for future FTA negotiations. This common framework should focus on the sequencing and timing of the agreements, their nature and coverage of sectors, and the implementation mechanisms to be involved. In general, most of the FTAs that have been signed or are ongoing in ASEAN appear to be comprehensive in coverage, thereby leading to a Common Economic Partnership (CEP). This helps accommodate the interests of a large and diverse group of participating members in ASEAN, and is likely to be the most preferred nature of agreement in the event a common framework of FTAs is to be considered by the grouping. This would also be more acceptable at the multilateral level since an FTA with a comprehensive coverage that includes “substantially all trade” is generally regarded as being WTO-consistent. An important aspect in this context concerns the negotiations in the agricultural sector in a bilateral FTA involving ASEAN. Certain agreements involving Singapore, viz. the JSEPA agreement, has not involved the agricultural sector in the negotiations, since the sector, though of vital importance to Japan, is not important for Singapore as agriculture constitutes a negligible proportion of its economy. Thus, the JSEPA would still be regarded as being WTOconsistent. However, such an exclusion would not be deemed as WTO-consistent for other ASEAN members when negotiating their

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bilateral FTAs. This is because the merchandise trade of other ASEAN member countries still constitutes a significant proportion of agricultural products. As such, negotiation of agricultural sector is likely to be a sensitive issue for them when engaging in bilateral FTAs, since it would require reconciliation between domestic policies and external imperatives. In conclusion, it is worth emphasizing that free trade in a multilateral forum through the WTO is still widely accepted as the best route towards trade liberalization. Regionalism and bilateralism are at best the second and third best options towards achieving this goal. It is therefore important for ASEAN, while supporting bilateral FTA initiatives in the event of a nonsubstantive movement in multilateralism, to continue their strong commitment towards a larger goal of liberalization under the WTO. It is noted that in spite of its FTA strategy, Singapore has continued to show its strong commitment to the WTO forum. It is an active participant in the WTO and remains hopeful for a successful Doha Round. The failures at Cancun notwithstanding, there is still hope that the pace of multilateralism will be revived. Current trends do indicate that till such a revival takes place, bilateral and regional efforts for free trade are likely to expand at a rapid pace in Southeast Asia. Singapore, which started this trend towards bilateralism, has ensured that its FTAs are a building block towards the larger goals of multilateral free trade. All its FTAs have been comprehensive, and some of them, viz. the USSFTA, has indeed set a precedent by negotiating through complex and contentious issues, which have seen little progress at the multilateral level under the WTO. Available indications from the other ongoing FTA efforts indicate that ASEAN would also prefer WTO-Plus agreements, and most of its initiatives appear to be comprehensive and moving in this direction. However, the broader implications of these

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initiatives for regional economic integration and multilateral liberalization must be kept in mind when designing such FTAs. A common framework for negotiating comprehensive bilateral FTAs in ASEAN would complement regional and multilateral liberalization efforts within ASEAN. It is in this manner that the FTA efforts in Southeast Asia can indeed be WTO-Plus and can become a building, rather than a stumbling, block towards global free trade.

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Postscript Since the completion of this manuscript, the following developments have taken place with respect to the proliferation of FTAs in Southeast Asia: 1. The USSFTA has now come into force with effect from 1 January 2004. Further, two more Middle Eastern countries, viz. Egypt and Bahrain, have agreed to forge FTAs with Singapore. It may be reminded that Jordan has been the first Middle East country to express an interest in forging an FTA with Singapore. 2. Singapore is also involved in a trilateral FTA called Pacific 3 or P-3 FTA involving Chile and New Zealand. This agreement was launched at the sidelines of the APEC Leaders’ Economic Meeting in Los Cabos, Mexico in October 2002, and the first round of negotiations was held in Singapore from 24–26 September 2003. The aim is to conclude the P-3 FTA by November 2004, when the APEC Leaders meet in Chile. Significantly, the P-3 FTA is the first trilateral FTA involving Southeast Asia that spans across three different continents. This FTA will be comprehensive and forward-looking, with the aim of having 98–99 per cent of all commitments being three-way and with flexibility to allow for new members on similar terms and conditions.

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3. The Joint Study Group (JSG) on the Korea–Singapore Free Trade Agreement (KSFTA) has submitted its recommendations to the Heads of State of the Republic of Korea and the Republic of Singapore on 7 October 2003. The report indicates that there is significant scope for expansion of economic linkages between Singapore and Korea through the KSFTA. The scope of the agreement should encompass comprehensive liberalization and facilitation of economic relations between Korea and Singapore, which would include trade in goods and services, investment, government procurement, and intellectual property rights. The KSFTA should also include a comprehensive range of economic co-operation elements covering an array of areas including financial services, ICT, human resources development, trade and investment promotion, and broadcasting, and have an in-built consultation and dispute settlement mechanisms to deal with issues arising from the interpretation and application of the agreement. The JSG report is to be used as the framework for negotiating the KSFTA and is targeted to be completed as soon as possible. 4. The negotiations for a free trade agreement between Australia and Thailand were successfully concluded on 19 October 2003. This agreement is Australia’s third FTA, and the first comprehensive FTA for Thailand that involves a developed country. Besides removing tariff barriers for Australian imports into Thailand, this agreement also focuses on facilitation of trade in services and bilateral investment flows. The FTA also includes rules to promote co-operation and best practice in a wide range of areas such as competition policy, e-commerce, industrial standards, and quarantine procedures, and includes provisions for dispute settlement mechanisms to be established.

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This FTA is likely to enhance the engagement of Australia in Southeast Asia, given that it already has an FTA with Singapore. As discussed in the book, this could create a demonstration effect for other countries in Southeast Asia to contemplate on entering into a bilateral FTA with Australia.

© 2004 Institute of Southeast Asian Studies, Singapore

Selected References

Selected References ASEAN Secretariat. “Framework Agreement on Comprehensive Economic Cooperation between the Republic of India and the Association of South East Asian Nations”. Available at , 2003. . “Framework for Comprehensive Economic Partnership between the Association of South East Asian Nations and Japan”. Available at , 2003. Asher, Mukul G, Rahul Sen, and Sadhana Srivastava. “ASEAN–India: Emerging Economic Opportunities”. In Beyond the Rhetoric: The Economics of India’s Look-East Policy, edited by Amitabh Mattoo and Frederic Grare. New Delhi: CSH-Manohar, 2003. Balasubramanium, Jaishree. “India, Thailand sign Free Trade Deal”, Indian Express, on-line edition, 9 October 2003. Available at . China Daily. “China, Thailand, Reach Trade Deal”. 5 June 2003. Available at . Financial Express on-line edition. “India, ASEAN Seal FTA Pact”. 9 October 2003. Available at . Hindu (The). “Thailand, India to Sign FTA on Oct 9”. 10 August 2003. Also available at . Gaur, Seema. “ASEAN-India Ties Entering a New Phase”. Business Times, 8 October 2003. JPEPA Research Project. Available at . 2003. 95 © 2004 Institute of Southeast Asian Studies, Singapore

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Khanna, Vikram. “Mega Payoffs and Some Pain”. Business Times, 26 May 2003. Malaysiakini News. “Malaysia, Japan to Conclude FTA Talks in a Year: Minister”. Available at , 2003. Ministry of Trade and Industry (MTI), Singapore website. Available at , 2003. . “Media-Info Kit on the Singapore–Australia Free Trade Agreement”. Singapore: MTI, 2003. Available from . . “Information Paper on the ANZSCEP”. Released by MTI, Singapore at . Montreevat, Sakulrat. “Is Thailand Pushing Too Hard for Trade Pacts?”. Straits Times, 24 June 2003. Nagai, Fumio. “Thailand’s FTA Policy: Continuity and Change between the Thaksin and Chuan Governments”. In Whither Free Trade Agreements? Proliferation, Evaluation and Multilateralization, edited by Jiro Okamoto. IDE Development Perspective Series no. 2. Japan: Institute of Developing Economies, JETRO: 2003. Rajan, Ramkishen and Rahul Sen. “International Trade in Services in Selected ASEAN Countries: Telecommunications and Finance”. ISEAS Working Papers on Economics and Finance no. 3. Singapore: Institute of Southeast Asian Studies, 2002. Rajan, Ramkishen, Rahul Sen, and Reza Siregar. Singapore and Free Trade Agreements: Economic Relations with Japan and the United States. Singapore: Institute of Southeast Asian Studies, 2001. Sen, Rahul. “The India–Singapore Comprehensive Economic Cooperation Agreement (CECA): A Good Beginning Towards an Enduring Economic Relationship”. ASEAN Economic Bulletin 20, no. 2 (August 2003): 179–83. Suzuki, Sanae. “Linkage between Malaysia’s FTA Policy and ASEAN Diplomacy”. In Whither Free Trade Agreements? Proliferation, Evaluation and Multilateralization, edited by Jiro Okamoto. IDE Development Perspective Series no. 2. Japan: Institute of Developing Economies, JETRO, 2003.

© 2004 Institute of Southeast Asian Studies, Singapore