international law ASEAN free trade agreement.

Background on ASEAN and the AEC (ASEAN Economic Community)

ASEAN was first formed in 1967 by Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Since then, ASEAN has added Brunei (1984), Vietnam (1995), Laos (1997), Myanmar (1997) and Cambodia (1999). Although ASEAN’s ten member economies are in various stages of development, it has a combined population larger than the European Union, a combined gross domestic product of $2.5 trillion, and average economy growth rates of between 4 to 7 percent.[footnoteRef:1] [1: Jones Day, The ASEAN Economic Community: Investment Opportunities and Challenges in the World’s Newest Market,(Feb.11,2016), http://www.lexology.com/library/detail.aspx?g=6dfc7188-cef3-4ad8-8bc5-8ee6230f6c4e ]

ASEAN embraces a philosophy known as the "ASEAN Way," by which countries approach problem solving through informal compromise, consensus, and noninterference. These principles —rooted in each state's sovereignty, integrity, and identity—have resulted in slow development and difficult consensus building for ASEAN goals. Comparisons between ASEAN and the European Union ("EU") are frequent but probably, at best, premature. For instance, whereas the EU has focused on fuller integration, with a continent-wide currency and visa-free travel, ASEAN has focused on issues such as regional peace and economic development.[footnoteRef:2] [2: id.]

In 2007, ASEAN developed its Blueprint for the ASEAN Economic Community. The Blueprint identified four "pillars" of the AEC to create a single market and production base, a competitive economic region, a region of equitable economic development, and a globally integrated regional economy. In the subsequent eight years, the implementation of the AEC has been a work-in-progress. Numerous trade and

economic treaties have been proposed or ratified, but the organization has faced delays in ratification of many agreements, and some states have been slow to adopt enacting legislation domestically. Cross-country development and efficiency gaps continually threaten AEC and cross-cultural and political differences have proven irreconcilable with consensus building.[footnoteRef:3] [3: id.]

Despite these obstacles, the ASEAN members agreed to form the AEC—effective January 1, 2016—with the continued goal of realizing the four pillars in the original Blueprint. As the AEC continues to mature, opportunities will arise for companies looking to expand in or into the Southeast Asian market. Indeed, foreign direct investment is one of the publicly-stated priorities for the AEC. [footnoteRef:4] [4: Jones Day, The ASEAN Economic Community: Investment Opportunities and Challenges in the World’s Newest Market (Feb.11,2016), http://www.lexology.com/library/detail.aspx?g=6dfc7188-cef3-4ad8-8bc5-8ee6230f6c4e ]

The economic integration came with the ASEAN Free Trade Agreement (AFTA) in 1992, which reduced tariffs and non-tariff barriers to intra-ASEAN trade. Under the AFTA, intra-ASEAN tariffs were capped at 5% (with exceptions for a few classes of “sensitive” goods) for all of the six nations that comprised ASEAN (ASEAN-6) at the time. When the CMLV countries later joined ASEAN, they also signed on to the AFTA, although they were given a more lenient schedule for reducing tariffs[footnoteRef:5] [5: Will Greene, ASEAN Economic Integration: Opportunities and Challenges to the 2015 Deadline,(Nov.25,2012) http://www.tigermine.com/2012/11/25/asean-economic-integration-opportunities-obstacles-2015-deadline/]

because their relative underdevelopment rendered many of their industries more vulnerable to shocks from rapid trade liberalization.

The ASEAN member states agreed in 2007 to take economic integration to the next level by forming an ASEAN Economic Community (AEC), which they committed to realizing by 2015.  According to the AEC Scorecard, a report produced by the ASEAN that lays out the goals of the AEC, the AEC has four “pillars”:[footnoteRef:6] [6: Id.]

· Creation of a single production and market zone in which all Southeast Asian states retain national sovereignty but eliminate virtually all tariffs and open their borders to a much freer flow of trade, capital, investment and labor.[footnoteRef:7] [7: Id.]

· Enhancing the economic competitiveness of the region through various measures designed to promote ease of doing business, including infrastructure development projects, better consumer rights and IP laws, and policies designed to foster competition.[footnoteRef:8] [8: Id.]

· Promoting equal economic development through policies that are designed to bridge the development gap between the countries richest and poorest members.[footnoteRef:9] [9: Id. ]

· Enhancing integration into the world economy  by concluding free trade agreements with external powers.[footnoteRef:10] [10: Will Greene, ASEAN Economic Integration: Opportunities and Challenges to the 2015 Deadline,(Nov.25,2012) http://www.tigermine.com/2012/11/25/asean-economic-integration-opportunities-obstacles-2015-deadline/ ]

The Cross-Border business opportunity in ASEAN.

As intra-ASEAN collaboration increases, the AEC will start to realize goals of unifying the region’s production base, particularly with policies such as free movement of goods and services and the elimination of cross-border tariffs. China's increasing labor costs and economic slowdown may make the AEC region increasingly attractive to potential investors.[footnoteRef:11]  [11: Jones Days, The ASEAN Economic Community: Investment Opportunities and Challenges in the World’s Newest Market, (Feb.11,2016),http://www.lexology.com/library/detail.aspx?g=6dfc7188-cef3-4ad8-8bc5-8ee6230f6c4e ]

For example, the ASEAN nations individually have a diverse set of structural capabilities, natural resources, and labor skills. Singapore has emerged as a financial and legal powerhouse that offers easy access to investor capital and a well-established legal system known for its rule of law. Countries like Indonesia have extensive natural resources in a variety of sectors, while Vietnam, Myanmar, and Cambodia still maintain attractive labor markets. As cross-border trade continues to increase and tariffs continue to loosen, companies should consider the AEC as an opportunity to integrate production processes and take advantage of each country’s unique resources and abilities.[footnoteRef:12] [12: Id. ]

The AEC may allow for increasingly creative corporate structures. As some examples, companies can establish a series of specialized subsidiaries in the various ASEAN countries, which may include a regional headquarters and/or joint ventures with local businesses. With reduced cross-border tariffs and free movement of goods, such structures can realize the comparative advantages that each country has to offer.[footnoteRef:13]  [13: Id.]

Ultimately, these opportunities will depend on the AEC’s ability to address cross-legal and cross-cultural differences among the member countries. While the individual countries have different strengths within a single marketplace, many of them have local restrictions or prohibitions on foreign ownership of locally incorporated entities. Additionally, variations in the regulation of corporate affairs such as shareholder, capital, and even language requirements will all present challenges in pan-regional corporate structures.[footnoteRef:14]  [14: Jones Days, The ASEAN Economic Community: Investment Opportunities and Challenges in the World’s Newest Market, (Feb.11,2016),http://www.lexology.com/library/detail.aspx?g=6dfc7188-cef3-4ad8-8bc5-8ee6230f6c4e ]

As it matures, the AEC may continue to see cross-border simplification with issues such as incorporation requirements, multilingual applications, and standardized procedures, and companies should continue to monitor developments in the AEC as potential opportunities for streamlining and economizing across entities.[footnoteRef:15]  [15: Id.]

Asean Evolution, 1967-1992

Except for Thailand[footnoteRef:16] all of the nations that are now members of ASEAN [16: David A. Gantz, Regional Trade Agreement 414 n.15 (2009)]

( Brunei, Cambodia, Indonesia, Laos, Phillipines, Malaysia, Myanmar, Singapore, Thailand and Vietnam) were colonies of European powers or the United States untill after World War II, when most became independent. Singapore separated from Malaysia after some friction in 1965.[footnoteRef:17] The Phillipines, Malaysia, Burma and much of what is now Indonesia were occupied by the Japanese during the war. When ASEAN was formed in 1967 by Thailand, Indonesia, Malaysia, Phillipines and Singapore, its major objective was to encourage stability and maintain security in the face of communist threats from China, Vietnam, Laos and Cambodia. Brunei joined ASEAN upon achieving independence from United Kingdom in 1984; Vietnam became a member in 1995, Laos and Myanmar in 1997, and Cambodia in 1999. [17: Id. 414 nn.16-19]

In 1976 Treaty of Amity[footnoteRef:18] carried the 1967 Bangkok Declaration somewhat further, emphasizing several key principle: a. Mutual respect for the independence, sovereignty, equality, territorial integrity and national identity of all nations; b. The right of every State to lead its national existence free from external interference, subversion or coercion; c. Non-interference in the internal affairs of one another; d. Settlement of differences or disputes by peaceful means; e. Renunciation of the threat or use of force; f. Effective cooperation among themselves.[footnoteRef:19] [18: Id. 414-415 n.20] [19: David A. Gantz, Regional Trade Agreement 415 n.20 (2009)]

This approach reflects one of the key features of ASEAN, the so-called “ASEAN Way”, an approach toward international negotiations and international (particularly regional) relations that has deeply permeated ASEAN and AFTA from the outset. According to one scholar, the “ASEAN Way” is a consensus approach embodied in the Malay terms “musaywarah” and “mufakat” that relies on “patient consensus-building to arrive at in formal understanding or loose agreements”. The first term refers to decision-making through discussion and consultation, while the second to the ultimate, always unanimous decision, which apparently is part of the regional culture and social system, derived from ancient practices in village politics. It can be contrasted with the Western approach that generally relies on legal and administrative structure and their functions.[footnoteRef:20] [20: Id. 415 nn.21-23]

The “ASEAN Way” has meant a relative loose institutional structure based on declarations or international agreements that are intentionally vague, ambiguous and unenforceable. For example, despite the creation of ASEAN in 1967, no secretariat was created until 1976, and the Treaty of Amity, reflecting the perilous times in Southeast Asia, logically focused much more on peace and security than it did on economic integration. (Two current member ASEAN Members, Vietnam and Cambodia, were at war with each other by 1978, providing the first real test of the Treaty of Amnity.)[footnoteRef:21] Despite this security focus the 1976 discussion were ultimately responsible for the test, cautions venture toward reducing intra-regional trade barriers. [21: Id 415 nn.24-26]

The ASEAN FTA

The ultimate objective of FTA is to increase ASEAN’s competitive edge as a production base geared for the world market. A critical step in this direction is the liberalization of trade in the region through the elimination of intra-regional tariffs and the elimination of non-tariff barriers. This will have the effect of making ASEAN’s manufacturing of non-tariff barriers. This will have the effect of making ASEAN’s manufacturing sectors more efficient and comparative in the global market. At the same time, consumer will source goods from the more efficient producers in ASEAN, thus creating intra-ASEAN trade.[footnoteRef:22] [22: David A. Gantz, Regional Trade Agreement 416 n.33 (2009)]

The result of these concerns was a series of cautions steps toward reduction of regional trade barriers through the creation of the common effective preferential tariff (“CEPT”) scheme, embodied in a 1992 agreement to create preferential (not duty-free) regional trade through the AFTA over a fifteen year period. AFTA was explained in part as a mean of improving the PTA scheme discussed earlier. The CEPT did not apply to agriculture goods at all until 1995 but only to manufactured goods and to processed agriculture products. Under the scheme general exceptions (patterned after GATT, Article XX) are permitted along with “temporary” exclusions (selected by each member). Initially, AFTA Members were not required to reduce most tariffs to the 0-5% level until 2007, although subsequently the deadlines were accelerated, first to 2003, and then, for the ASEAN Six, to 2002. For Vietnam, one of the latter four members, the 0-5% tariff reductions were implement in 2006; for Laos and Myanmar, implementation was scheduled for 2008.[footnoteRef:23] [23: Id. 417 nn.34-41]

The basic rule of origin states that “ A product shall be deemed originating from the ASEAN Member States, if as least 40% of its content originates from any Member States. Despite the ambiguous language, it appears that the intent is to allow cumulative ASEAN content in determining origin. Little guidance appears to have been provided to national customs authorities and there was no requirement that the Members provide any right of appeal of national customs decisions as in NAFTA and other U.S. FTAs.[footnoteRef:24] [24: Id. 417 nn.42-44]

A ministerial level Council was established by the ASEAN Economic Ministers (“AEM”) with a representative of each member and the secretary-General of the ASEAN Secretarial; the Secretariat is to “provide the support to the ministerial-level Council for supervising, coordinating and reviewing the implementation of this Agreement…” and related matters.[footnoteRef:25] The Council’s role in dispute settlement is discussed below. [25: David A. Gantz, Regional Trade Agreement 417 n.45 (2009)]

The most serious problem with the AFTA structure, in addition to the weakness of dispute resolution and enforcement of obligation, was the general exception list. Since each member was to decide on its own which products should be exclude, the process was obviously subject to abuse. It could be used almost at the whim of a Member government to protect whatever items were considered sensitive by local authorities, or interfering with infant industry objective, sometimes with items being added to the list on short notice.[footnoteRef:26] There also seems to be relatively high tolerance for exceptions and withdrawal of concessions already given, perhaps because all the ASEAN members are using the lack of discipline to their own advantage. The ministerial level AFTA council set up under the scheme appears to have had little affect in encourage compliance.[footnoteRef:27] [26: Id. 417-418 nn.46-47] [27: Id. 418 ]

Bali Concord and ASEAN Integration Economic Community.

The Bali Concord II, a 2003 undertaking that is yet unimplemented in most respects, calls, inter alia, for ASEAN Economic Community (“AEC”) along with political, security and socio-cultural cooperation by 2020. As a document, the Bali Concord is a mix of the old and the new. In the preamble, it reaffirms “ the fundamental importance of adhering to the principle of non-interference and consensus in ASEAN cooperation and overall its scope is left unclear, as with so many earlier ASEAN agreements. The Bali Concord also calls for accelerating regional integration in priority sectors, facilitating movement of business persons

and skilled labor, strengthening ASEAN institutions and providing for “expeditious and legally binding resolution of any economic disputes,” with the development of a “single market and production base”[footnoteRef:28] [28: David A. Gantz, Regional Trade Agreement 418 nn.48-50 (2009)]

Five years later, the Bali Concord II and the AEC concept remain a series of objectives toward which relatively little progress in implementation has been made, perhaps in part because some of them are daunting even by ASEAN standard. The achievement of a European Union style single market (which took nearly forty years in Europe) has never occurred outside of Europe. It is years if not decades off even for relatively successful FTAs such as NAFTA. Within ASEAN, those ostensibly favoring such a community (particularly Singapore and Thailand) are subject to the usual constrains to deeper economic integration discussed herein, plus further complications such as labor mobility, a concept that seems unlikely to be attractive to Singapore or to any more developed Members (such as Thailand or Malaysia) who may fear excessive migration. Achieving the elimination of intra-regional tariffs, now on the horizon, is a positive step, but there is still much work to be done on non-tariff barriers before even AFTA can be considered substantially implemented.[footnoteRef:29] [29: Id. 418 n.51]

Economically, East Asian countries have realized that their economics were much more deeply interconnected than they might have imagined before. The trade volume between East Asian countries was doubled or even tripled in the last decade. In 2003, total intra-regional trade volume hit US$ 918.02 billion, accounting for 54.5 per cent of the region’s total exports. Unfortunately, this interdependence and interconnection has not only been evidenced by the increase of the intra-regional trade, but also by the Asia Financial Crisis in 1997-1998. After about 30 years economic boosting, of which the extra regional trade, rather than intra-regional trade, was believed as the main engine, the Asia Financial Crisis made East Asian countries painfully aware of their mutual dependence. The fact that the financial crisis in Thailand, which appeared to be isolated, soon spread to other East Asian countries, highlighted the negative aspect of interdependence.[footnoteRef:30] In a way, this crisis shed light on the refreshed enthusiasm of regionalism in East Asia. After that, it is impossible to deny that the de facto economic integration has gone much deeper and the institutionalization of cooperation mechanism is more or less a catch-up in responding to economic reality. [30: Regional Trade Agreements and the WTO legal system 421 nn.11-13 (Lorand Bartels and Fedrico Ortino et al. eds 2006)]

On the other side, the development of regionalism in East Asia has been boosted not only because the East Asian countries felt isolated when other regional institutions have successfully created or advanced their regional identities, but also because of their gradual, but fundamental, change of perception towards regionalism: from building a closed trade bloc to open regionalism.[footnoteRef:31] [31: Regional Trade Agreements and the WTO legal system 422 n.14 (Lorand Bartels and Fedrico Ortino et al. eds 2006)]

In sum, regional integration in East Asia, unlike European integration, started without a strong conceptual framework and a strong leadership. Rather it went through a pragmatic and slow process.[footnoteRef:32] In the late 1990s, economic incentives, such as the surge of intra-regional trade and the regional resolution of Asian Financial Crisis, largely promoted the development of regionalism in East Asia. More ideologically, the changing perception of regionalism in East Asian countries, in particular Japan and China, confirm the belief that open regionalism, by following a WTO-consistent path, is in the interest of all East Asian states. The recent high profile of RTAs in the region best evidenced this changing perception.[footnoteRef:33] [32: Id. 422 n.25] [33: Id. 422]

ASEAN Charter

In November 2007, the ASEAN Members tentative agreed on yet another broad initiative as “ASEAN Charter” The plan is to establish an EU-style “borderless economy” by 2015, an undertaking which according to one Member would take “regional integration to a higher level” and “give substance to ASEAN after forty years of our existence.” However, under the accompanying “ASEAN Economic Blueprint” the elimination of intra-regional import duties remains on a slow track. The sensitive and highly sensitive exclusion lists remain; other tariffs are to be eliminated for the ASEAN-6 in 2010 and for the remaining four in 2015, with some products remaining subject to tariffs until 2018. Wisely, the focus between 2007 and 2015 is to be on eliminating non-tariff barriers (2010 for the ASEAN-5, 2012 for Philippines, 2015 to 2018 for the other four), with a stand still on NTBs in the mean times, increasing transparency, expanding the use of regional rules and regulators. Rules of origin are to be simplified and made more responsive to changes in regional production, with a commitment to explore possible cumulation mechanisms where possible. Custom techniques are to be modified with an effort made to integrate customs systems.[footnoteRef:34] [34: David A. Gantz, Regional Trade Agreement 419 nn.52-57 (2009)]

The Charter would also give ASEAN legal personality and establish greater institutional accountability with a compliance system, providing for an ASEAN Summit, Coordinating Council, Community Councils, and various Sectoral Ministerial Bodies. The responsibilities of the ASEAN Secretary-General are spelled out in considerably more detail than in the past, although the Secretary-General are spelled out in considerably more detail than in the past, although the Secretary-General and Secretariat still do not have much in the ways of real powers, lacking, inter alia, any enforcement authority. The Charter also requires each of the Members to appoint a permanent representative based in Jakartar, to serve on a Committee of Permanent Representative,[footnoteRef:35] a step that could improve coordination of ASEAN policies if promptly implemented. [35: Id. 419 nn.58-60]

Under the Charter ASEAN would be permitted to conclude agreements with third countries, but no explicit procedures or scope requirements are specified. These details are left to action of the ASEAN Coordinating Council. At present there is no plan to provide the organization with the authority to negotiate trade or other commercial agreements independently of the Members. This means that even if five or even all ten ASEAN Members negotiate as part of a group with outsiders, each individual Member will become a party to the new agreement separately and there is no assurance that all ten Members will ultimately become parties. The complexities of a “spaghetti bowl” approach with overlapping and possibly conflicting tariff reduction schedule, rules of origin and other regulations of commerce will thus continue to plague traders, investors and customs of officials.[footnoteRef:36] [36: Id. 419 nn.61-62]

Despite bold statements promising an enforceable agreement it was reported that in the course of the drafting process many of the stronger recommendations, including provision for punitive measures for non-compliance encouraged diplomatically by the United States and the EU, did not make it into the final Charter. The Charter reaffirms the “basic principle” of ASEAN decision-making by consultation and consensus, albeit with some vaguely-stated flexibility on making decisions when there is no consensus. As far as dispute settlement is concerned, those which arise under specific ASEAN instruments are to be settled through mechanisms provide in such instruments, presumably including the 2004 Enhanced Dispute Settlement Mechanism discussed elsewhere in this chapter. Otherwise , “appropriate dispute settlement mechanisms, including arbitration, shall be established for disputes which concern the interpretation or application of this Charter and other ASEAN instruments.[footnoteRef:37] [37: David A. Gantz, Regional Trade Agreement 420 nn.63-66 (2009)]

The Charter is intended to go beyond the establishment of an Economic Community with the creation of an ASEAN Security Community and a Socio-Cultural Community, reflecting the earlier Bali Concord II. For example, the preamble calls for adherence “to the principles of democracy, the rule of law and good governance, respect protection of human rights and fundamental freedoms.” The stated principles include “respect for fundamental freedoms, the promotion and protection of human rights and the promotion of social justice.” Despite such language, at the November 2007 conference the ASEAN ministers effectively avoided the issue of human rights in Myanmar. They simply urged that the Myanmar government continue to work with the United Nations, lift restrictions on Aung San Suu Kyi and release political detainees. In general they accepted Myanmar’s assertion that the situation was a domestic affair.[footnoteRef:38] The contrast here between word and deed is apparent, although perhaps not surprising given the existence of human rights concerns in other ASEAN members and long memories regarding various neighbors’ intervention in other affairs.[footnoteRef:39] [38: Id. 420 nn.67-68] [39: Id. 420 ]

Given the recent changes, including removing the blanket exclusion for agriculture and speeding up implementation of tariff shifts, a good argument can be made that the AFTA is generally consistent with the requirements of GATT Article XXIV, although clearly it was not when the objective was tariff reduction rather than tariff elimination. The most significant remaining uncertainty is whether the remaining exclusion lists are sufficiently voluminous so as to undercut the “substantially all trade” requirement. If the implementation process draws on much beyond the timetable set out in 2007, the “reasonable period of time” criterion will obviously be subject to question.[footnoteRef:40] [40: David A. Gantz, Regional Trade Agreement 420 nn.69-70 (2009)]

Expanding service coverage under AFTA.

Services are not addressed in AFTA proper; they are the subject of yet another frame work agreement. This services agreement requires the Members to “liberalise trade in services within a reasonable time-frame” through eliminating “substantially all discriminatory measures and market access limitations amongst Member States” and prohibiting new discriminatory measures and market access limitations. The agreement contemplates a process similar to the GATS, utilizing a “positive list” approach in which the ASEAN Members enter into negotiations to conclude individual schedules of specific commitments. It also permits two or more Members to proceed separately if the other members are not willing to move forward.[footnoteRef:41] [41: Id. 421 nn.71-75]

The 2003 protocol reflects frustration on the part of some ASEAN Members at the slow speed of ASEAN services negotiations. The protocol not only encourages two or more members to negotiate separately on services commitments, but makes it voluntary for those Members to extend the negotiated services commitments to the non-participating Members, until they are ready to make offers “at similar or acceptable levels.” The idea of permitting those members who are ready to make deeper commitments to services market access to do so, without requiring consent or consensus for the rest, is an important development. The precise origins of this so-called “ASEAN-X” (sometimes referred to as “ASEAN Minus X”) formula are unclear[footnoteRef:42] but it appears in the 2003 Protocol and maybe well be embodied directly or directly in other contemporary agreements. The disadvantage of the ASEAN-X approach is that partial embrace of services market opening commitments is likely to lead to confusion, particularly where ASEAN services annexes apply only to some but not all other ASEAN Members. It may also encourage to the more progressive Members to move forward alone in other areas, contributing to the marginalization of ASEAN.[footnoteRef:43] [42: Id. 421 nn.76-77] [43: David A. Gantz, Regional Trade Agreement 421 (2009)]

On its face, the Services Agreement appears to be consistent with GATS, Article V which applies GATT Article XXIV-like disciplines to RTAS with services coverage,[footnoteRef:44] but implementation is incomplete, making it impossible to determine the final nature of the ASEAN services mechanism. In my view, it seems likely that most of the ASEAN Members are likely to focus their services’ negotiations on the GATS schedules, either as part of the Doha Round or otherwise.[footnoteRef:45] [44: Id. 421 n.78] [45: Id. 421]

The 2007 ASEAN Economic Blueprint above calls for liberalization of priority air transport, e-ASEAN (electronic communications system), healthcare and tourism services by 2010 and logistics services by 2012, with the removal of “substantially all restriction on trade in services for all other services sectors by 2015. Financial services are to be liberalized so as to “ensure orderly financial sector development and maintenance of financial sector development and maintenance of financial and social-economic stability. With financial services the “ASEAN-X” formula explicitly allows those Members who are ready to liberalize to proceed, with others to join later.[footnoteRef:46] Detailed guidelines for negotiations are also provided. These are indeed lofty goals, particularly in light of the very limited intra-regional services trade that has been liberalized in ASEAN up to now.[footnoteRef:47] [46: Id. 422 nn.79-81] [47: Id. 422]

Policy Consideration of FTA.

1. Trade in Goods - Most ASEAN countries are major exporters of such products as agriculture and fisheries products, electronic products, textile, leatherwear and computer parts. The major objective for concluding FTA is to expand more market access for their products with export potential.[footnoteRef:48] [48: Krit Kraichitti, Asean Free Trade Agreement policy and legal considerations for development at 6, http://www.aseanlawassociation.org/9GAdocs/w3_Thailand.pdf]

2. Trade in Services - All ASEAN countries except Singapore are not able to compete with advance economies in supplying services in most sectors from financial, transportation, telecommunication, education, public health and other service sectors which require advanced technology and large amounts of capital. In concluding FTAs with developed economies, ASEAN need to make thorough assessment of their capacity to supply these services and make appropriate strategies for the opening of these markets to benefit from the management skills, technology and investment that can come with the liberalization of these services sectors.[footnoteRef:49] [49: Krit Kraichitti, Asean Free Trade Agreement policy and legal considerations for development at 6, http://www.aseanlawassociation.org/9GAdocs/w3_Thailand.pdf ]

3. Investment - Every ASEAN country has adopted her own national strategy and policy to attract foreign direct investment (FDI) which is expected to contribute to national economic and social development. While providing tax and other incentives to promote FDI, they also need infrastructure development projects and targeted promotion of special industries. All countries also have domestic laws to regulate the liberalization of investment in the industries and businesses that are considered important to national interest and security, for example, laws that limit foreign participation in the management and equity interest of companies in the transportation, financial, telecommunication and other domestic businesses or other industries which still need protection from foreign competition. In regulating foreign investment, the host country will normally require foreign investors to set up their establishment with the participation of local management and equity interest. To get value added benefits from FDI, local content and export requirements were normally imposed by the host countries in giving permission to foreign investor to do business and invest in their countries.[footnoteRef:50] [50: Id. ]

Evolution of Investment Protection and Encouragement

Attracting foreign investment is probably the only area in which the Members of ASEAN have been even more cautions then in facilitating intra-regional trade. The earliest effort, the ASEAN Industrial Projects Scheme, began in 1976. It was a mechanism to encourage major capital-intensive venture, financed 60% by the host government and 40% by other ASEAN governments, focusing on responses to regional demands and more efficient use of natural resources. In those days of managed trade and investment, the members agreed that an industrial project would be allocated to each member. However only two of the five AIPS ever became operational, probably as a result of difficulties in choosing projects and raising the necessary capital, competitive rather than complementary manufacturing sectors and a general preference of the members to focus on national industrial development so as to stimulate global exports.[footnoteRef:51] There was likely very little private sector support for such government-dominated industrial activities. [51: David A. Gantz, Regional Trade Agreement 423-424 nn.94-95 (2009)]

The next regional effort was the ASEAN Industrial Complementation Scheme (“AICS”) initiated in 1981 and the related ASEAN Industrial Joint Venture (“AIJV”) scheme in 1983. The AICS projects were to be complementary, allocated by ASEAN to a particular member country. The chosen enterprised were to enjoy exclusive production of the good in the region for two years in the case of existing facilities and three years in the case of new facilities. They also qualified for trade preference under the PTA scheme. The incentives for the AJIV, which also contemplated multi-member projects, were more attractive: all participating ASEAN members (but not the others) were obligated to provide a 50% tariff preference for the initial three years of manufacturing. The AJIV required a minimum 51% ASEAN equity ownership but this limit could be waived when the participating members agreed otherwise and over 50% of the product was to be exported outside the region. Certain other conditions also applied.[footnoteRef:52] [52: Id. 424 nn.96-100]

Despite the incentives, only eighteen projects were authorized between 1983 and 2004, some of which are non-operational. This disappointing result is likely due to the lack of established goals and guidelines for choice of product, investment and market access, along with slow bureaucratic approval processes and a lack of marketing to the private sector.[footnoteRef:53] [53: Id. nn.101-102]

A 1987 protection and promotion of investment agreement carried the process a few steps further. The 1987 agreement continued the move away from government controls over the investment process. It applied only to investment within the ASEAN region, not from outside, although it covered existing as well as new investments. Coverage also extended to some local corporate entities with partial outside ownership, assuming they were approved and registered in the host country conditions. The extent to which the agreement applies to such corporate entities is uncertain.[footnoteRef:54] [54: David A. Gantz, Regional Trade Agreement 424 nn.103-105 (2009) ]

The agreement incorporates some important elements of investor protection that are also found in typical bilateral investment treaties, including a broad definition of investment, most-favored-nation treatment, fair and equitable treatment, limited non-discrimination provisions well short of national treatment, and protection against expropriation and limits on repatriation of capital and earning (the latter subject to national laws and regulations). It also provides for biding international arbitration between investors and host states under the rules of ICSID, UNCITRAL, the Kuala Lumpur Regional Center or any other regional center agreed to by the parties to the dispute.[footnoteRef:55] [55: Id. 425 nn.106-107]

The ASEAN Members agreed “in a manner consistent with [their] national objectives [to] encourage and create favorable conditions for investments from the other Contracting Parties.” Unfortunately, all investment under the agreement were also governed by host country laws and regulations,[footnoteRef:56] creating more than a little confusion as to how the agreement and national law would relate to each other, particularly in light of the absence of any references to “international law” Nor was there any mechanism to resolve conflicts between the ASEAN rules and local law.[footnoteRef:57] [56: Id. 425 n.108] [57: Id.425]

At least one investor-stated arbitration has taken place under the 1987 treaty, in 2003. A Singapore beer producer with a factory constructed around 1994 in Myanmar (which joined ASEAN in 1997). The Singapore firm brought proceeding against Myanmar (which joined ASEAN in 1997). The Singapore firm brought proceeding against Myanmar, purportedly under the 1987 agreement, after that government’s armed agents seized the Mandalay factory and froze certain bank accounts. Information on the proceeding is sketchy; secondary sources indicate that the tribunal declined jurisdiction because the investment had not been registered in Myanmar in accordance with the Agreement, despite the lack of any required registration provisions.[footnoteRef:58] [58: David A. Gantz, Regional Trade Agreement 425 nn.109-110 (2009)]

A series of minor amendments to the 1988 Agreement were agreed upon in 1996, when the six ASEAN Parties agreed to endeavor to simplify their investment procedures and approval processes, and to promote transparency and predictability with regard to its laws and regulations.[footnoteRef:59] [59: Id. 425 n.111]

A separate, somewhat more successful, 1996 agreement created the ASEAN Industrial Cooperation Scheme (“AICS”), which replaced the AIJV scheme of the 1980s. This AICS resembles the AIJV in that it is open only to participating countries operating in more than one of the ASEAN member nations (albeit with the national equity reduced to 30%). While it promises that the enterprise will enjoy the AFTA preferential tariff rates of 0-5% for the covered products, the national governments set the actual tariff rate within the specified range. Non-participating Members are not required to provide the tariff benefits. For example, if company X establishes approved production facilities in Singapore, Malaysia and Indonesia, the products will enjoy preferential tariff treatment for trade among these three countries, but not for exports to the remaining ASEAN members (unless provided to the product otherwise under AFTA). By 2003, 104 projects had been approved under the AICS, primarily for large Japanese multinational investors (e.g., Toyota, Honda, Sony) in the automotive, electronics and a few other sectors.[footnoteRef:60] Nevertheless, the absence of significant intra-regional market access for goods produced in several countries, years after the creation of AFTA, speaks volumes about the continuing reluctance of ASEAN members to take regional market-opening seriously.[footnoteRef:61] [60: Id. 425-426 nn.112-114] [61: Id. 426]

Yet another framework investment agreement created the ASEAN Investment Area (“AIA”) in 1998. The innovations beyond AICS are relatively minor despite the professed objective of the jointly promoting “ASEAN as the most attractive investment area.” For example, the commitment to free flow of investment is targeted for 2020; national treatment for ASEAN investors is required only by 2010 but only by 2020 for outside investors, despite a phase-out of the temporary exclusion list for most members by 2010, Vietnam by 2013, and Laos and Myanmar by 2015. (Cambodia was not yet an ASEAN Party.) The temporary exclusion list deadlines were accelerated to 2003 for all Members except Cambodia, Laos and Vietnam (2010). The AIA is also subject to numerous exceptions and exclusions that reflect no clear criteria and to a non-transparent process.[footnoteRef:62] It also lacks detailed and specific obligations for host states. [62: David A. Gantz, Regional Trade Agreement 426 nn.115-119 (2009) ]

Investment protection and promotion are among the subjects treated in the 2007 Economic Blueprint. Among other commitments are the strengthening of provisions for investor-dispute settlement; repatriation of capital, profits and dividends; transparency with regard to expropriation and compensation; full protection and security; and treatment of compensation for losses results from strife. The Blueprint also calls (again) for more transparent and consistent investment rules and the achievement of a free and open investment regime within ASEAN by 2015. It contemplates a broad extension of national treatment and most-favored-nation treatment and reduction of restrictive investment measures, including performance requirements. The latter are already precluded under the WTO’s TRIMs Agreement.[footnoteRef:63] [63: Id. 426 nn.120-121]

Despite the modest progress represented by the AIA and the additional promise of the Blueprint, these measures, particularly with the relaxed timetables, are not likely to be significant in encouraging foreign investors to view ASEAN as a single investment area. Rather, the international investment community is likely to continue to see ASEAN as a collection of diverse economies, some of which offer greater potential returns than others, as well as easier access and less red tape than anything covered by the AIA. Many ASEAN members have been actively concluding bilateral investment treaties with the countries most likely to provide significant quantities of foreign investment as well as their neighbors. For example, by 1996 all of the ASEAN nations except Brunei and Myanmar had anywhere from two to forty-two BITS in force. Some of these were with other ASEAN members, e.g., Malaysia with Cambodia, Indonesia, Laos and Vietnam. Investment protection provisions were included in U.S. trade agreements with Singapore and (in a more limited manner) Vietnam.[footnoteRef:64] [64: Id. 426-427 nn. 122-125]

Unless and until AFTA eliminates intra-regional tariffs for originating goods the benefits offered by the AIA and the Blueprint will not be important to most investors. Utilization of a bilateral BIT in place of the regional arrangements may well reduce the bureaucratic hurdles in dealing with the regional AIA system, an unnecessary additional layer over the national laws and regulations. It seems unlikely that the Blueprint will result in significant improvements.[footnoteRef:65] [65: David A. Gantz, Regional Trade Agreement 427 (2009)]

ASEAN-China FTA

There are inherent risks in discussing a potentially significant regional trade arrangement that will not be concluded definitively before 2010 even though it is partially effective. A Framework Agreement for an FTA between ASEAN and china was concluded in 2002, with a commitment to negotiate the FTA within ten years (later shortened to eight). ASEAN is also considering other FTAs (as a group) with Australia, Japan, Korea, India and New Zealand. Negotiations with Japan were reportedly concluded in April 2008. That FTA provides that it will go into force when Japan and one ASEAN Member have ratified the agreement.[footnoteRef:66] In other words, there is no assurance that it will actually be a Japan ASEAN FTA, at least in the near term and will effectively function as a series of parallel bilateral FTAs as seems likely with the China agreement as well.[footnoteRef:67] [66: Id. 427 nn.126-128] [67: Id. 427]

An RTA with the European Union has also been discussed although the current situation with Myanmar makes direct ASEAN negotiations with not only the EU but Australia, New Zealand, and the United States politically difficult of impossible, given public sentiment in the developed nations and the widespread economic sanctions currently imposed on Myanmar. The United States has shown interest only in a future Asia-Pacific FTA, which would include the ASEAN nations as well as others that are part of the Asia Pacific Economic Forum (APEC), in the longer-term. Negotiations with India and perhaps Korea could well move forward.[footnoteRef:68] Whether such RTAs will be a) concluded; b)concluded with all ten ASEAN Members; c) ratified by all Members; and d) implemented (particularly by the least developed Members that are likely overwhelmed by existing obligations) seems much less likely in the foreseeable future.[footnoteRef:69] [68: Id. 427-428 nn.129-132] [69: Id. 428]

The desirability of a China-ASEAN FTA is by no means obvious for either China or the members of ASEAN. As a number of observe have noted, the Chinese and ASEAN economies are not highly complementary and there have historically been political and territorial rivalries between China and some of the ASEAN nations (e.g., Vietnam), particularly over mineral rights in the South China Sea. As discussed earlier, China did not welcome ASEAN when it was first created in 1967 because of the correct perception that ASEAN was motivated in significant part by concerns over communism in the region. Despite the competitiveness for investment and exports, ASEAN by 2003 was China’s fifth-largest trading partner and China the sixth-largest for ASEAN.[footnoteRef:70] [70: David A. Gantz, Regional Trade Agreement 428 nn.133-134 (2009)]

ASEAN Members face daily the reality that China has become a global power economically, the destination of the lion’s share of direct foreign investment in Asia and politically the dominant nation in the region. As one scholar succinctly observes, “[for] better or worse, the rise of China is a development that we [ASEAN] can ill-afford to ignore”[footnoteRef:71] Presumably, the ASEAN members have decided that better market access to China for ASEAN goods is worth the risk of making it easier for China to export Chinese products to the ASEAN nations. Also, closer economic relations through an RTA may offer a forum for resolving economic differences that would not otherwise exist. Whether an ACFTA will ultimately enhance or detract from the AFTA and from the ASEAN Charter is impossible to predict; the risk exists.[footnoteRef:72] [71: Id. 428 n.135] [72: Id. 428]

For China, the motivations are likely more political than economic, although clearly economic issues are factors, With the accession of China to the WTO in November 2001, China has overcome much of its fear that membership in international organizations will threaten its sovereignty or “stability”. There also appears to be a strong belief that China’s power and status is enhanced by membership in international organizations and that further trade agreements will assist in its efforts to modernize its domestic economic system.[footnoteRef:73] [73: Id. 428 n.136]

Moreover, it is reasonable for China to expect that its partners in an FTA will be inclined to support China’s goals in the WTO and other international fora, at least where those goals do not conflict with those of ASEAN or individual ASEAN members. Like Brazil’s efforts to engage essentially all of the South American nations in a MERCOSUR dominated by Brazil, China has an interest in cultivating regional good will and engaging its neighbors in regional economic arrangements that could lead to grater economic and political cooperation. Also like Brazil, China likely whishes to counteract the influence of the United States in its neighborhood. Given China’s voracious appetite for raw materials, an FTA with ASEAN is also consistent with China’s efforts to conclude regional trade agreements with nations elsewhere that are sources of raw materials, such as Chile and Peru.[footnoteRef:74] [74: David A. Gantz, Regional Trade Agreement 428-429 nn.137-138 (2009) ]

The ASEAN- China Framework Agreement

The idea for a China-ASEAN RTA seems to have originated at the end of 2000, where ASEAN supported a proposal of Chinese Premier Zhu Rongji to create an expert group to “study how economic cooperation and free trade relations between ASEAN and China can be deepened. Establishment of negotiations toward ACFTA within ten years was officially endorsed a year later, and the Framework Agreement was concluded in November 2002. As of late 2007, it had only been ratified by Indonesia, Laos, the Philippines and Vietnam.[footnoteRef:75] [75: Id. 429 nn.139-141]

The ACFTA Framework Agreement sets forth a broad and relatively detailed plan as well as certain legal requirement:

a. progressive elimination of tariffs and non-tariff barriers in substantially all trade in goods;

b. progressive liberalization of trade in services with substantial sectoral coverage;

c. establishment of an open and competitive investment regime that facilitates and promotes investment within the ASEAN-China FTA;

d. provision of special and differential treatment and flexibility to the newer ASEAN Member States;

e. provision of flexibility to the Parties in the ASEAN-China FTA negotiations to address their sensitive area in the goods, services and investment sectors with such flexibility to be negotiated and mutually agreed based on the principle of reciprocity and mutual benefits;

f. establishment of effective trade and investment facilitation measures, including, but not limited to, simplification of customs procedures and development of mutual recognition arrangements;

g. expansion of economic co-operation in areas as may be mutually agreed between the Paties that will complement the deepening of trade and investment links between the Parties and formulation of action plans and programmes in order to implement the agreed sectors/areas of co-operation; and

h. establishment of appropriate mechanisms for the purpose of effective implementation of this Agreement.[footnoteRef:76] [76: David A. Gantz, Regional Trade Agreement 429-430 n.142 (2009)]

Elimination of tariffs on all but certain “sensitive” items is to take place by 2010 for China and the ASEAN Six and for the other ASEAN Members by 2015. The actual tariff reduction and elimination schedules are still under negotiation and the effective dates will likely be delayed if the accord is not concluded in 2010. China also agrees to provide most-favored-nation treatment as of 2002,[footnoteRef:77] although today this is significant only for Laos, since the rest of the group are well WTO Members. This is not only an ambitious plan, but constitutes recognition by China that the ultimate ACFTA will not be fully reciprocal but will provide special treatment to the newer members. (How completely such treatment will include Vietnam, now a WTO member and with a growth rate approaching China’s, remains to be seen.) [77: Id. 430 nn.143-144]

Special Treatment for newer ASEAN Members appears to be contemplated even though a full FTA explicitly consistent with GATT Article XXIV (8) is intended, with elimination of restrictions on substantially all trade in goods between the Parties.[footnoteRef:78] Given the fact that China and the ASEAN Members are developing countries the 1979 GATT Enabling Clause applies. [78: David A. Gantz, Regional Trade Agreement 430 n.145 (2009)]

The Framework Agreement is more than simply an agreement to agree and to reduce tariffs in the future because it incorporates a mechanism to begin certain tariff reductions well before the ACFTA is completed through its “Early Harvest” provisions. This mechanism contemplates tariff reductions beginning in 2004 for all Parties to the ACFTA, with China and the original six members of ASEAN subject to more rapid decrease in tariff rates than the other four. The included tariff items are divided into three categories, those with current tariffs of over 15% (China plus ASEAN Six) and 30% (other ASEAN four); 5%-15% and 15%-30%, respectively;[footnoteRef:79] and under 5% and under 15%, respectively. For China and the ASEAN Six, all tariffs on the Early Harvest items reached zero as of January 1, 2006. For the other four, zero tariffs are to be achieved by 2010. [79: Id. 430 nn.146-147]

The Early Harvest is limited to certain products, primarily agricultural products in Harmonized System chapters 01-08, subject, as in prior ASEAN practice, to exclusion lists set forth by each Party individually. The tariff concessions are available only to Parties that have extended them to each other. For example, Brunei, Indonesia, Myanmar, Singapore, Thailand and China listed no exclusion among the HS tariff categories include, while Cambodia’s exclusion list comprised thirty items, and Vietnam’s, fifteen items. (Laos, Malaysia, Philippines and China with respect to those countries had not completed their lists by March 2003.)[footnoteRef:80] [80: Id. 430 nn.148-150]

The Framework Agreement also provides for stronger cooperation in the areas of agriculture; information technology; human resource development; investment; and Mekong river basin development, among others. The means of cooperation are left vague. Investment negotiations are also postponed until later: the Parties simply undertake to “enter into negotiations to progressively liberalise the investment regime, strengthen co-operation and transparency in investment, and provide for investment protection, again without specifics. Dispute settlement mechanisms also remain subject to subsequent negotiations with the parties required in the interim to settle disputes “amicably by consultations and/or mediation.” A dispute settlement protocol was concluded in 2004, which effectively provides for binding arbitration without intervention of politicians, in the sense that arbitration in theory goes forward once the complaining party appoints its arbitrator. However, there is no secretariat or other mechanism to facilitate what is in effect and ad hoc arbitral process.[footnoteRef:81] The significantly improved (on paper at least) ASEAN dispute settlement mechanism does not apply with regard to matters arising under the ACFTA Framework Agreement. [81: David A. Gantz, Regional Trade Agreement 430-431 nn.151-154 (2009)]

The responsibilities of ACFTA secretariat are absorbed by the ASEAN Secretariat and China’s Ministry of Foreign Trade.[footnoteRef:82] [82: Id. 431 n.155]

ASEAN Economic relations with the United States

As the U.S. trade deficit with the ASEAN nations grows, ASEAN fears that the United States will turn to increasingly protectionist policies to close the gap. In the near future, however, the United States will probably retain its position as ASEAN’s biggest market, but ASEAN exports to the United States will not likely experience an increased growth rate any greater than the “sluggish” growth rate of the U.S. economy, mainly because the U.S. recession impedes demand for imports. Currently, NAFTA further threatens ASEAN’s economic standing vis-a-vis the North American market, especially given recent dim estimates of trade and investment diversions resulting from NAFTA. ASEAN also worries about the possible implications of the expansion of NAFTA throughout the Americans. Fears that NAFTA might evolve into a protectionist bloc highlight the potential that ASEAN might turn to a greater emphasis on Western Europe.[footnoteRef:83] [83: Haas, Deborah A. "Out of Others' Shadows: ASEAN Moves Toward Greater Regional Cooperation in the Face of the EC and NAFTA." American University International Law Review 9, no. 3 847 nn.178-185(1994) ]

ASEAN-U.S. Initiative

Prior to the formation of AFTA, recommendations arose for the creation of an umbrella agreement between ASEAN and the United States. The proposal would encompass provisions for both specific bilateral arrangements and multilateral efforts. The creation of the United States-Caribbean Basin Initiative fueled ASEAN’s desire to contemplated similar arrangments A joint committee examined the umbrella framework proposal and the ASEAN-U.S. economic situation. It suggested that the initial umbrella should establish guiding principles, based on GATT compatibility, for the conduct of trade and economic relations between the United States and ASEAN. The committee also recommended a free trade agreement under the auspices of the ASEAN-U.S. Initiative umbrella.[footnoteRef:84] [84: Haas, Deborah A. "Out of Others' Shadows: ASEAN Moves Toward Greater Regional Cooperation in the Face of the EC and NAFTA." American University International Law Review 9, no. 3 856 nn.236-239(1994) ]

Discussions of an umbrella bilateral agreement highlight ASEAN’s fear that the United States might, under its normal bilateral relations, pit one ASEAN member against another in order to gain the economic upper-hand. By pushing one individual ASEAN member into too many concessions, the rest become vulnerable.[footnoteRef:85] [85: Id. 856-857 nn.240-241 ]

Despite these concerns, the United States and ASEAN recently created a bilateral agreement to promote free trade between the parties, much in the image of the ASEAN-U.S. Initiative. The United States views the agreement, named the U.S.-ASEAN Alliance for Mutual Growth (AMG), as a way to capitalize on AFTA and reduce the U.S trade deficit with ASEAN. ASEAN considers AMG and opportunity to increase its access to U.S. markets.[footnoteRef:86] [86: Id. 857 nn.242-244]

Aside from AFTA, none of the proposals for free, or even more open trade in Asia, were widely accepted until the APEC summit meeting. Some Asia, were widely accepted until the APEC summit meeting. Some Asian scholars have expressed skepticism over the success of any Asian framework because those recommended before APEC all lacked the prospect of potential of superpower endorsement. APEC provides superpower support, but its potential for success remains questionable.[footnoteRef:87] [87: Id.857 nn.245-246]

Dispute Settlement

As divergent as any is the issue of conflict resolution within ASEAN. Member countries vary fundamentally in their sources of law: Cambodia, Indonesia, Laos, Vietnam, and Thailand follow civil law; Singapore, Malaysia, and Myanmar have inherited English common law precedent, supplanted with local legislation and decision-making; and Brunei uses a dual system of Sharia and common law. Many perceive Singapore as having the most transparent and respected legal system in the region, while in other countries practitioners worry about whether any hard-fought judgment is actually enforceable.[footnoteRef:88] [88: Jones Days, The ASEAN Economic Community: Investment Opportunities and Challenges in the World’s Newest Market, (Feb.11,2016),http://www.lexology.com/library/detail.aspx?g=6dfc7188-cef3-4ad8-8bc5-8ee6230f6c4e ]

Given the divergent legal systems and protections, investors have sought dispute resolution through arbitration, particularly in the area of investor-state conflicts. These relationships are frequently governed by bilateral investment treaties ("BITs"), multilateral investment treaties ("MITs"), or free trade agreements ("FTAs"), which confer certain rights and remedies to investors aggrieved by their host countries. Typically, these instruments refer investor-state disputes to arbitration, and various ASEAN agreements require such arbitrations to be seated in regional centers such as Kuala Lumpur and Singapore.[footnoteRef:89]  [89: Id.]

While these agreements can offer valuable protections to businesses and investors, they must rely on the ad hoc network of investment treaty pacts – of which there are more than 3,000 worldwide – and the unpredictability of potentially varying terms among them.[footnoteRef:90] [90: Id.]

Even with investment treaties in place, businesses cannot assume that they are static or permanent regimes: in 2014, for example, amid complaints that investment treaties overly favored foreign investors to local interests, Indonesia announced plans to terminate over sixty of its BITs.[footnoteRef:91]  [91: Id.]

ASEAN has taken some steps toward regional solutions and multilateral agreements. Signed in 2009, the ASEAN Comprehensive Investment Agreement ("ACIA") allows investors (under specific conditions covering limited industries) to arbitrate against their host countries by submitting claims to various regional and international bodies. While the ACIA may provide some comfort to foreign investors in ASEAN, the development of regional and consolidated dispute resolution mechanisms – like IPR protection – clashes against ASEAN values such as noninterference and national sovereignty and remains an ongoing goal.[footnoteRef:92] [92: Id.]

The patchwork of treaty-based investor protections, the complexity of the region’s various legal regimes, and recent movement toward regionalized dispute resolution each require caution. Companies should thoroughly consider the available protections in the local country, and they should continuously evaluate how disputes are resolved. Companies should also monitor developments in the ACIA and other dispute resolution mechanisms and amend, as necessary, their dispute resolution mechanisms with counterparties to take advantage of developments in the law and to protect their businesses and investments within ASEAN. [footnoteRef:93] [93: Jones Days, The ASEAN Economic Community: Investment Opportunities and Challenges in the World’s Newest Market, (Feb.11,2016),http://www.lexology.com/library/detail.aspx?g=6dfc7188-cef3-4ad8-8bc5-8ee6230f6c4e ]

The “ASEAN Way” traditionally has been a synonym for a vague consensus-based means of resolving differences among the members, resulting as often as not in delayed action or paralysis. The rationale for this approach was not only cultural but historical; as noted earlier, ASEAN initially was more concerned (for good reason) with maintaining peace and security in a violent region than in crafting a western-style, rules-based model dispute settlement mechanism.[footnoteRef:94] [94: David A. Gantz, Regional Trade Agreement 422 (2009) ]

The first serious (although ultimately unsuccessful) effort was in the 1976 Treaty of Amity, Chapter IV of which was devoted to “Pacific Settlement of Disputes” and was in significant part a non-aggression treaty. It created a High Council of ministerial level representative of the Members. The Council was to take cognizance of a matter where direct negotiations were not successful in resolving the dispute, and offer its good offices, or mediation, but only with the consent of the parties. The voluntary, politically-oriented rather than legally-oriented nature of this process, while perhaps consistent with “ASEAN Way” concepts, made its success problematic. Apparently the High Council was never utilized for dispute settlement even though a number of non-ASEAN members ultimately signed on.[footnoteRef:95] [95: Id. 422 nn. 82-83]

ASEAN recognition of the need for better dispute settlement was slow in coming. For example, at the time AFTA and the CEPT were created in 1992, the constituting agreement contained no dispute settlement provisions. A companion agreement provided only that “Any differences between the Member States concerning the interpretation or application of this Agreement or any arrangement arising therefrom shall, as far as possible, be settled amicably between the parties. Whenever necessary, an appropriate body shall be designated for the settlement of disputes.”[footnoteRef:96] The Members left until later the creation of an “appropriate body” [96: David A. Gantz, Regional Trade Agreement 422 n.84 (2009)]

In 1996, the ASEAN members, obviously mindful of the WTO’s new dispute settlement mechanism, concluded a Protocol on Dispute Settlement. Coverage is broad; the annex lists forty-six “covered agreements,” including those constituting AFTA. The mechanism provides for the usual bilateral consultations, followed by the availability of good offices, conciliation or mediation provided (if the parties agree) by the “Meeting of Senior Economic Officials” (“SEOM”). If the dispute is not resolved within sixty days, the SEOM may establish a panel or refer the matter to a special body in charge of any special or additional rules and procedure (unspecified). If a panel is established, its functions are similar to panels under the WTO’s Dispute Settlement Understanding. The results are subject to appeal, not to a quasi-judicial body but to politicians, the ASEAN Economic Ministers (“AEM”). The economic ministers participate in the deliberations but do not vote. Perhaps most significantly, where the AEM (or the SEOM if there is no appeal) makes a decision it is by simple majority, not by consensus. The compliance, compensation and suspension of concession obligations also generally follow the DSU.[footnoteRef:97] [97: Id. 422-423 nn.85-89]

Eight years later, in 2004, ASEAN adopted an “Enhanced Dispute Settlement Mechanism. The revised mechanism, perhaps reflecting operational difficulties under the 1996 Protocol, moves closer to a rules-based, quasi-judical, system. While a political body, the SEOM, is still responsible for establishing a panel, the SEOM no longer has discretion as to whether to do so. Rather, a panel must be established unless there is a consensus not to do so. The 2004 Protocol also provides for the creation of an Appellate Body by the AEM, with the members to be experts in law and international trade, not political operative.[footnoteRef:98] There is still no direct role for private stakeholders. [98: Id. 422-423 nn.90-92]

The Enhanced Dispute Settlement Mechanism (although ratified only by Malaysia, Myanmar, Vietnam and Singapore to date[footnoteRef:99]) can only be described as a radical departure from the “ASEAN Way.” Here, ASEAN has greatly narrowed the discretion of the political bodies (SEOM and AEM), sought to assure that if and when the mechanism becomes fully operational the actual determination of violations is by non-governmental experts and made it difficult for the defending member to block action under the dispute settlement mechanism.[footnoteRef:100] [99: Id. 423 n.93] [100: David A. Gantz, Regional Trade Agreement 423 (2009)]

In the last decade, as a reflection of the growing importance of the rule of law in regional integration, more and more regional DSMs are moving towards and adjudication regime, patterning the WTO and other advanced RTAs such as EU and NAFTA. While it sometimes appears as if each new regional agreement is reinventing the wheel, some general rules can be detected in desinging a new DSM. In particular, a combination of six legal factors jurisdiction, institutional feature, binding effect and enfocement, standing of non-state actors, enforceability of awards at national court, and transparency of proceedings may legally classify variuos types of DSM and provide alternatives to construct an effective DSM.[footnoteRef:101] [101: Regional Trade Agreements and the WTO legal system 430-431 nn.80-82 (Lorand Bartels and Fedrico Ortino et al. eds 2006)]

Traditionally, ASEAN has followed the ‘ASEAN way’ in both decision making and dispute settlement. The ASEAN way reflects the reluctance of members to be too legalistic and the preference of political and diplomatic rather than judicial or quasi-judicial resolution of disputes. Nervertheless, the 2004 Protocol on Enhanced Dispute Settlement Mechanism (the Protocol) indicates the ASEAN’s movement towards a legalistic, rule-based institution.[footnoteRef:102] In comparison with its predecessor, the Protocol considerably improved the institutional framework of DSM, particulary by establishing an independent Appellate Body. On paper, this new DSM has moved away from a negotiation forum and is adjudiciatory in nature. [102: Id. 431,433 nn.83-85]

This new Protocol, with 21 articles and two Annexes, provides detailed rules for the whole dispute settlement process- from consultation, panel proceeding, appeal, to implementation and compensation. Articles 1 and 2 set out the general framework of this DSM, i.e. the coverage of application and administration of the Protocol. Here, the Senior Economic Officials Meeting (SEOM) is introduced as an equivalent of the DSB in the WTO DSM. Articles 3 and 4, identical to Articles 4 and 5 of DSU, provide the consultation, and good office, conciliation, or mediation procedures, with the same timetable as the DSU.[footnoteRef:103] [103: Regional Trade Agreements and the WTO legal system 433 nn.86-87 (Lorand Bartels and Fedrico Ortino et al. eds 2006)]

Article 5 to 11 of the Protocol concern the panel process, from the establishment of the panel to the function of the panel. The ASEAN panel, established by SEOM, has its own working procedures, as provided by Annex II of the Protocol. Notably, the ASEAN panels are under even thougher time pressure than the WTO panel, since they have to submit their findings and recommendations within 60 days of their establishment.[footnoteRef:104] [104: Regional Trade Agreements and the WTO legal system 433 n.88 (Lorand Bartels and Fedrico Ortino et al. eds 2006)]

The panel ruling is appellable to an independent Appellate Body established by the ASEAN Economic Ministers (AEM), which has a similar function to the WTO Appellate Body, according to Article 12. This is one of the most significant improvements of the 2004 Protocol. This Appellate Body, composed of seven persons who are unaffiliated with any government, has the power to uphold, modify or reverse the legal interpretations adopted by the panel. Once issued, its report shall be adopted by the SEOM and ‘unconditionally accepted by the parties’, unless the SEOM decides by consensus not to adopted the report. Moreover, the ASEAN panel or Appellate Body report may not only recommend that the member concerned should bring the measure into conformity, as the WTO panels and Appellate Body do, but also suggest ‘ways in which the Member could implement the recommendations’.[footnoteRef:105] [105: Id. 433 nn.89-91]

With respect to implementation, the Protocol imposes a fixed period- 60 days to comply with the report after the adoption of that report from panels of Appellate Body, unless the parties to the dispute agree on a longer period of time, as provided by article 15(1). In exceptional circumstances, if the actions required to comply with the panel of Appellate Body report are complex enough, the request for a long period of time shall not be unreasonably denied. Most importantly, the issue of implementation maybe raised at the SEOM by any member at any time after their adoption and will remain on the SEOM’s agenda until the issue is resolved. Before finally resolved, the party concerned is obligated to provide the SEOM with a status report in writing of its progress in the implementation at least 10 days prior to each such SEOM meeting.[footnoteRef:106] [106: Id.433-434 nn.92-95]

The Protocol also differentiaties from the DSU in terms of compensation and the suspension of concessions, since it takes a broader interpretation of the ‘sector’, supplementary to the principle that the suspension of concessions should be in the same sector.[footnoteRef:107] Article 16(3)(e) reads, ‘for the purpose of this article, “sector” means: with respect to goods, all goods’. Accordingly, if the losing party fails to implement a panel or Appellate Body report concerning trade in goods, the relation may involve all sectors of trade in goods and the pressure for compliance is therefore increased.[footnoteRef:108] [107: Regional Trade Agreements and the WTO legal system 434 n.96 (Lorand Bartels and Fedrico Ortino et al. eds 2006)] [108: Id. 434]

Finally, Article 17 of the Protocol established an ASEAN DSM fund to meet expenses of the panels, the Appellate Body and any related administration costs. This fund is a revolving fund, separate from ASEAN Secretariat regular budget.[footnoteRef:109] [109: Id. 434 nn.97-98]

Generally, the new ASEAN DSM is predominantly modelled on the WTO DSM. Most provisions in the Protocol can find their equivalents in the WTO DSU. However, at some points, the Protocol may be considered as an advanced version of the DSU, since it learned lessons from the current controversie of the WTO DSM and cured some of its drawbacks. For example, the new ASEAN panels and Appellate Body are entitled not only to draw the conclusion of consistency of the national measure in dispute, but also to make pratical suggestions to the implementation. This might be an effective means to avoid future disagreements on the meaning of compliance in the panels or Appellate Body reports. The 60 days deadline also ensure the promptness of compliance, which is always controversial due to the ambiguous ‘reasonable period of time’ in Article 21.3 of the DSU. Moreover, the possibility of any member to raise the issue of implementation in the SEOM and the obligation of the losing party to report its implementation status to the SEOM significantly increase the pressure of compliance and, indeed, makes the process more focused on securing the community rules than on pure dispute resolution. It provides, in another sense, an example of the potential advantage of regional arrangements although the insufficiencies suffered by the DSU have been widely discussed, the slow process of multilateral trade negotiation makes it impossible to improve them in a short period of time. But at the regional level, given the limited number of members, it is easier to reach consensus and improve the DSM.[footnoteRef:110] [110: Id.434]

The ASEAN DSM covers all ASEAN economic agreements, even the future ones. Institutionally, it is a combination of an ad hoc panel system and a permanent Appellate Body. The reports from this DSM are binding and there are strong enforcement mechanisms. In addition to the menu of enforcement options similar or the WTO, the Protocol also placed the issue of implementation on the agenda of every SEOM meeting until it has been resolved.[footnoteRef:111] In this way, there will be public embarassment for non-compliance, which could be a very powerful punishment for goverments of ASEAN Members, given the cultural tradition of ASEAN countries. [111: Regional Trade Agreements and the WTO legal system 434-435 n.99 (Lorand Bartels and Fedrico Ortino et al. eds 2006) ]

Nevertheless, there is no standing for non-state actors and its reports are not enforceable at national court. With respect to transparency, the whole proceeding is confidential although, in limited circumstances, the non-confidential summary of the information contained in parties’ written submissions could be disclosed to the public.[footnoteRef:112] [112: Id. 435 n.100]

Alternative proposed ASEAN RTA.

Over the past decade, East Asian countries have changed dramatically, starting to catch the global phenomenon of legalization and localizing it By endorsing the WTO DSM, East Asian countries implicitly accepted legalization as an emerging ‘transnational norm’ Statistically, the proportion of complaints brough by East Asian states has doubled as a share of total complaints when compared to the historical average under the GATT, though arguably they continue to underutilize the WTO DSM when compared with their importance in world trade.[footnoteRef:113] [113: Id. 441 nn.152-154]

In addition to their willingness to resolve disputes in legalized forums outside the region, inter alia the WTO, East Asian countries, in particular the ASEAN governments, also showed their endorsement of legalization in regional intergration. The adoption of a DSM by ASEAN in 1996 backed up the argument that ASEAN is on its way from a consensus-based diplomatic forum to a more legalized institution. When the ASEAN countries chose the WTO DSM as the model, which bore little resemblance to as ASEAN way of settling disputes, and improved its DSM most recently, they cleary indicated their strong desires to be active norm-takers to build congruence between legalization- the ‘transnational norm’, and the ASEAN way- the local beliefs and practices.[footnoteRef:114] Although no conclusive empirical evedence is available yet to assess the utilization of the ASEAN DSM and it is too early to come to a conclusion as to its real impact on the future FTAs in East Asia, this movement, at least, makes the ASEAN governments’ undertaking to create ‘a more predictable and rules-based free trade area’ very clear and will definitely influence the attitudes of other East Asian countries in terms of the design of a DSM.[footnoteRef:115] [114: Regional Trade Agreements and the WTO legal system 441 nn.155-157 (Lorand Bartels and Fedrico Ortino et al. eds 2006)] [115: Id. 441]

However, the problem still exists of how to incorporate this ‘foreign norm’ to the pre-existing and, to a large extent, stubborn, Asian tradition. East Asian countries are facing the challenge to be creative learners to ‘restructure the norms to ensure a better fit with prior local norms so that the localized norm may enhance, but not undermine, the performance of their institutions.[footnoteRef:116] [116: Id. 441 n.158]

Recommendation

ASEAN economic cooperation

ASEAN should actively strive to achieve the goals of AFTA. AS the world increasingly divides into disparate trade blocs, ASEAN should strive to continue the great economic achievements its member countries have attained int the world economy. ASEAN nations recognize that with economic success comes reponsibility, and loss of status as a developing economic threat, particularly if it joins Japan and the other newly industrialized countries in an Asian trade bloc, although development of an active Asian trade bloc currency seems unlikely. ASEAN will likely forge ahead with AFTA to present itself as a vehicle for viable effective economic cooperation in Southeast Asia.[footnoteRef:117] [117: Haas, Deborah A. "Out of Others' Shadows: ASEAN Moves Toward Greater Regional Cooperation in the Face of the EC and NAFTA." American University International Law Review 9, no. 3 864 nn.287-289(1994). ]

Legal Framework

If ASEAN promte heightened cooperation, it should create formal legal structures to serve in concert towards this goal. Prospects for an ASEAN legal framework depend on the willingness and ability of the member countries to make neccesary adjustments to their national laws. As compared with the EC, ASEAN appears to have great chance of success among all the other regional organizations[footnoteRef:118] As a result of these anticipated accomplishments, ASEAN is often compare to the EC in its attemps toward regional cooperation. Nevertheless, the growing similarities and differences between the two regional groupings make it difficult to use the EC legal regime as a model for development of ASEAN legal structure. [118: Haas, Deborah A. "Out of Others' Shadows: ASEAN Moves Toward Greater Regional Cooperation in the F ace of the EC andNAFTA." American University International Law Review 9, no. 3 864-865 nn.290-291(1994) ]

In its present form, ASEAN cannot exert any legal control over the regional economy. Consequently, proposed advances in economic integration, potentially through AFTA, will require more that the declared intentions and general purposes announced through the Singapore Declaration. Such integration will require a legally binding code at the regional level, which can regulate the conduct of member states, their conformity with codified rules, and the consequences of non-compliance.

Attempts at integration ought to delineate a course of action and set of procedures for implementing the recognized policies. The major impediments to a legal framework likely will remain.[footnoteRef:119] As mentioned, ASEAN will have difficulty choosing between the different models of legal regimes, or the member states may decide to craft their system. [119: Id. 865 nn.292-294]

The Guideline for compromising ASEAN Laws and Creating an ASEAN legal system.

The first stage in formulating regional legal rules should focus on harmonizing the laws of the member countries. Recognizing that the EC model cannot be superimposed on an ASEAN legal system, the ASEAN states must first take certain preliminary steps to create an ASEAN legal regime. The threshold stage involves designating fields in which to formulate regional legal rules. These fields include trade, business, industry, transportation, communications, science and technology. In the second stage, member states should harmonize those national laws governing certain areas that effect the common ASEAN interest so that each country will have similar rules governing particular activities. An ASEAN governing body, perhaps the ALA, may promulgate “model laws.” For the immediate future, regional community laws should avoid reaching into “intimate legal areas,” such as marrige, family, and inheritance law.[footnoteRef:120] Probing into these delicate spheres may offend an individual member’s cultural sensitivities and legal philosophies and frustrate any chance of harmonization. [120: Haas, Deborah A. "Out of Others' Shadows: ASEAN Moves Toward Greater Regional Cooperation in the F ace of the EC andNAFTA." American University International Law Review 9, no. 3 865-866 nn.295-299 (1994) ]

Until recently, the EC approach to regional cooperation remained the only successful model. Today, ASEAN may look to the newly emerging NAFTA as another possible means of patterning regional cooperation, at least with regard to free trade. Without calling for a new regional court system, NAFTA provides for its own system of dispute resolution that is more developed than any ASEAN has devised.[footnoteRef:121] The NAFTA approach to dispute resolution may prove a more acceptable and realistic model that ASEAN may decide to emulate in its dispute settlement mechanisms. ASEAN may also find that it need not take the bold step to create its own legal system and instead, maintain the current, traditional mechanisms through diplomatic, rather than judicial, channels.[footnoteRef:122] [121: Id. 866 n.300] [122: Id. 866]

The Future of ASEAN

The global rather than regional focus of ASEAN’s more dynamic Members (Singapore, Malaysia, Thailand, the Philippines and Vietnam) and the disparities of level of development are factors that are not likely to change in the foreseeable future. Ongoing challenges include the obsessively cautious “ASEAN Way” of negotiating and concluding agreements without the rigor and predictability of the rule-based approach and the lack of implementation of a meaningful dispute settlement mechanism. The latter has meant that enforcement of obligations and the prevention of individual country back-sliding has been difficult or impossible. Moreover, the growing network of RTAs concluded by some (but not all) ASEAN Members with third countries has resulted in an increasing complex and overlapping web of obligations, difficult even for the more advanced Members to implement effectively and transparently.[footnoteRef:123] [123: David A. Gantz, Regional Trade Agreement 432 (2009)]

Not surprisingly, from 1992 to 2000, neither intra-regional trade nor direct foreign investment increased significantly in the ASEAN region. As one observer has suggested, at forty ASEAN is neither an economic nor a political community but a diplomatic one, and even there one sees signs of weakening.[footnoteRef:124] Pessimism feeds upon itself, creating a serious risk that those who favor deeper regional integration will become discouraged and less engaged in the region in favor of what they see as the more promising route of deepening economic relationships with willing global economic partners, either through APEC or otherwise.[footnoteRef:125] [124: David A. Gantz, Regional Trade Agreement 423 nn.163-164 (2009)] [125: Id. 423]

Despite these persistent difficulties, recent developments suggest somewhat greater promise for ASEAN economic integration. Evidence of the new approach is seen, first of all, in the 2004 Enhanced Dispute Settlement Mechanism which if ratified by all of the ASEAN Members will substitute a rules-based approach similar to the WTO’s DSU for a political consultations model which was really no dispute settlement mechanism at all. For the first time, independent, not-governmental officials would be able to determine WTO style the existence of a violation without the likelihood that the decision will be blocked at the political level. Second, the ambitious 2002 ASEAN-China Framework Agreement is much more detailed and tightly drafted than earlier accords, suggesting and important shift to a rules-based approach. Under the Framework Agreement’s “Early Harvest” program and its 2004 Trade in Goods accord some tariffs have been eliminated, even though the list of covered tariff lines is small.[footnoteRef:126] [126: Id.423]

Also important is the “ASEAN-X” concept, in which ASEAN Members are to be permitted to conclude deeper integration arrangements bilaterally or in groups, without requiring the consensus of the entire ASEAN Ten. While the concept initially was confined to services negotiations, it will likely be followed in other areas as well, as suggested by the Charter, and is being applied de facto to ASEAN FTA negotiations with nations such as Japan. The ASEAN-X approach to addressing the all too common situation in which national policies are put above regionalism, and there is clear lack of political will toward deeper integration among the full group, particularly if there are costs to be incurred.[footnoteRef:127] When some ASEAN Members conclude agreements that are important and beneficial, there may be a demonstration effect exerting pressure on the recalcitrant Members to accede as well. Admittedly, ASEAN-X may also increase the risk of fragmentation as the more liberal Members move ahead with investment and trade liberalization, leaving the others further behind. The likely fragmentation will also further complicate any efforts by ASEAN to function as a group, and exacerbate conflicts among overlapping agreements, to the detriment of traders, investors and governments. [127: Id.423 n.165]

Finally, the 2007 Charter, building on the Bali Concord II, offers the promise of a more effective and dynamic regional economic bloc although it will enter into force only upon the deposit of all ten national instruments of ratification. Whether the political will that led to the Charter will carry over to prompt ratification and implementation remains to be seen. Early support is promising; as of early October 2008 all of the ASEAN Members except Indonesia had ratified the Charter. One can hope the Charter will lead to a “second birth” of ASEAN, replacing the existing legal framework that has proven unsuitable for achieving most of ASEAN’s objectives[footnoteRef:128] even if the EU-style single market objective proves unattainable, as is highly likely. [128: David A. Gantz, Regional Trade Agreement 433 nn.166-168 (2009)]

Perhaps the existence of the Charter itself will in the interim serve as a stimulus to perfecting AFTA, implementing more favorable conditions and regulations governing investment, continuing to improve the dispute settlement mechanisms, deepening trade in services, and in general continuing the slow conversion of the traditional “ASEAN Way” to the rules-based system that has been implemented at the WTO and in most successful RTAs.[footnoteRef:129] [129: Id. 433 ]