II. EU-ASEAN Partnership and Cooperation Agreements (PCAs): Regulatory Convergence First, (Perhaps) FTA Later


12. In 2003, the EU Commission proposed a new partnership with Southeast Asia.[8] The partnership’s economic component was to be embodied in an action plan called “Trans-Regional EU-ASEAN Trade Initiative (TREATI), which would establish a framework for dialogue and regulatory cooperation on trade facilitation, market access and investment. The aim was supposedly to inform each side of the other’s regulatory systems (one wonders if the Internet was not sufficient for this purpose). The dialogue might eventually “develop into an exercise of approximation and harmonization”. [9]

13. We may get an idea of the nature of the regulatory dialogue that the EU had in mind by turning to the Japan-EU Regulatory Reform Dialogue, which has been held for over a decade now. Analysis of the dialogue reveals that in its efforts to convince Japan to change Japanese regulations, the EU uses three arguments. First, the EU proposed action conforms to WTO rulings. Second, the EU proposal follows EU regulations, which offer models that the EU urges Japan to adopt. If the two arguments fail, the EU simply states that the Japanese regulations are disadvantageous for EU interests and for this reason should be changed.[10] Based on the experience of this dialogue, the EU’s aims in proposing TREATI were not very different from those it pursued through ASEM – the modification of Asian laws and regulations in order to ensure market access for European firms. The expression “regulatory convergence” in reality refers to the adoption by the EU’s partner of EU-style regulations. In the Japan-EU Regulatory Dialogue, it has practically never happened that the EU has adopted a Japanese regulation as a model, even if the EU sometimes agrees to Japanese requests.

14. Realizing the sensitive nature of such a dialogue, the EU proposed to start meetings on TREATI as soon as at least two ASEAN member states indicated that they were ready for it.[11] From the ASEAN perspective, this strategy could have had the effect of a divide-and-rule strategy. The EU probably hoped that if two ASEAN states engaged in a dialogue with the EU, the others, fearing that they might not benefit from any resulting EU concessions, would be convinced to jump on the bandwagon.

15. The EU noted that even at this stage, ASEAN had already expressed a desire for an FTA with it, but the European Commission was reluctant to consider the proposal. According to the Commission, an FTA could only come after several conditions had been fulfilled: successful conclusion of the WTO negotiations; sufficient progress on regulatory governance; and preparation with the TREATI framework.[12] In other words, the EU first wanted ASEAN members to adopt EU-style economic regulations before the EU might even consider the possibility of an FTA. There was no guarantee that an FTA might indeed be negotiated. Once more, it is probable that the EU’s caution was attributable to its fears for its trade deficit with individual ASEAN members.

16. At ASEM 5, held in Hanoi in October 2004, the EU, Singapore and Thailand announced that they were initiating negotiations for PCAs.[13] It has been reported that such negotiations are also underway with Brunei, Indonesia, Malaysia and the Philippines.[14] However, the absence of reports of progress being made in the negotiations is remarkable. Perhaps, this is simply the reflection of the extraordinary lack of transparency of the process. Alternatively, it may be an indication that the negotiations have not been making much headway. If so, it could explain the EU’s change of heart and its agreement to launch FTA negotiations with ASEAN.

III. Towards an ASEAN-EU FTA

17. As mentioned above, it was the ASEAN that first expressed interest in an FTA with the EU. The proposal was reportedly made at the September 2004 meeting of ASEAN Economic Ministers in Jakarta. Philippine Trade Secretary Cesar Purisima told the Press that then EU Trade Commissioner Pascal Lamy made it clear that the EU preferred multilateral arrangements under the WTO and that the EU was only pursuing FTA negotiations that had been started before 1999.[15] Strictly speaking, this second statement was not accurate, since the EU negotiations for Economic Partnership Agreements (EPAs), which included FTAs, with African, Caribbean and Pacific (ACP) countries had started several years after the failed WTO meeting in Seattle.

18. According to press reports, the ASEAN members were led by Singapore in the effort to convince the EU to negotiate a trade agreement with the organization.[16] This leadership role would be consistent with the policy that Singapore has pursued since the late 1990s, which is driven by impatience with the slow pace of regional integration in Southeast Asia. Singapore has sought to achieve its free trade goals through bilateral agreements, hoping that its example would be followed by other ASEAN members. Following the conclusion of the Singapore-Japan Economic Partnership Agreement in 2002, an imitation effect has indeed been observed. Malaysia, which initially accused Singapore of undermining ASEAN, abandoned its opposition and negotiated its own FTAs.[17]

19. It is said that Peter Mandelson, the EU Commissioner who replaced Lamy, changed Lamy’s strategy, which would explain the EU’s willingness to consider an FTA with ASEAN. At the same time, EU sources openly admit that the failure of the 2003 and 2005 WTO Ministerial Conferences forced the EU to rethink its strategy.[18] Regrettably, there has been much less willingness on the EU part to admit that this failure was in large part due to the EU’s own refusal to make concessions to the developing countries.

20. In April 2005, the sixth consultation of ASEAN Economic Ministers and the EU Trade Commissioner, held in Vietnam, established a Vision Group to examine the feasibility of an FTA and other initiatives. The Vision Group was given a one-year deadline to complete its work. In July 2005, terms of reference of the Vision Group and of the impact studies were agreed upon. Further meetings were held in Brussels (10-11 November 2005), Bangkok (24-25 January 2006), Kuala Lumpur (25-27 March 2006) and Hanoi (10 April 2006).

21. The Vision Group’s working methods have been quite opaque. It has not even proved possible to identify the Group’s members, let alone their qualifications. It goes without saying that records of their meetings have not been made public. Even more remarkable is the fact that the qualitative and quantitative impact studies are not accessible to the public. All we know is that the Quantitative Study was carried out by the French think tank, Centre d’etudes prospectives et d’informations internationales, Center for International Prospective Studies and Information), while the qualitative studies were undertaken by another French think tank, the Institut français des relations internationales (IFRI, French Institute for International Relations) and the University of Limerick, in Ireland.[19] In this respect, the process suffers by comparison with that which led to the adoption of the proposal for a China-ASEAN FTA: all the country studies commissioned for this purpose are publicly available.

22. It is also worth pointing out the obvious: that no think tank from Southeast Asia did independent evaluations or at least worked together with the European think tanks named above. The fact that the EU alone bore the costs of the studies[20] was probably the decisive factor in the selection of exclusively European think tanks.

23. Press reports indicate that the ASEAN-EU Economic Partnership, one of whose components was an FTA, was adopted at the ASEAN-EU Economic Ministers’ Retreat, held in Manila on 17 May 2006. Again, there are no publicly accessible records of the discussions between the ASEAN and EU at the time. Indeed, it is fair to say that the meeting’s outcome was more widely reported in neighboring Southeast Asian countries than in the host country itself.[21]

24. At ASEM 6 in Helsinki, the President of the European Commission informed European journalists that the EU was considering negotiations for a free trade agreement with ASEAN, starting in 2007.[22] A month later, the EU plan was confirmed, and Korea was added to the list of negotiating partners.[23]

IV. The Rationale for an ASEAN-EU FTA

25. An analysis of the rationale of the FTA must precede the examination of its scope: if the rationale is not convincing, there will be little need to discuss the scope. Any analysis must rely not only on the ASEAN-EU Vision Group Report, but also on the European Commission’s own publications.

26. The rationales seem to be both negative and positive, although they are not explicitly characterized as such.

27. The negative rationale is allegedly associated with the risk that ASEAN-EU relations might suffer from the conclusion of FTAs by both organizations with other countries or organizations: “ASEAN and the EU will have to act promptly – if the partnership is delayed or postponed to the distant future, it may be overshadowed by other regional and bilateral initiatives.”[24] The implication is that if the EU concluded FTAs with other developing countries or regions, ASEAN goods entering Europe would have to pay higher tariffs than the goods originating from the countries with which the EU has an FTA. In this respect, the Vision Group cited the EU’s ongoing negotiations with Mercosur and the Gulf Cooperation Council. The specific risk is that “both may unintentionally penalize each other by trading on MFN basis only.”[25]

28. These arguments are misleading, to say the least. First of all, it is not only the tariff rate that determines the competitiveness of a product on the European market. The African, Caribbean and Pacific (ACP) countries have enjoyed, for more than thirty years now, duty-free access for their industrial goods entering Europe and much larger reductions of tariffs on agricultural products exported to Europe, yet they have not been as successful in increasing their exports to the EU as many ASEAN members. It is doubtful if ACP exports will be any more competitive than ASEAN products once free trade is established between the ACP and the EU. These circumstances probably explain why the ongoing FTA negotiations with the EU were not mentioned by the Vision-Group.

29. The ASEAN countries that could conceivably encounter the most difficulties arising from competition with the ACP countries are the least developed countries, which export agricultural products. But all least developed countries already enjoy duty-free access to the EU under the “Everything But Arms” Initiative (EBA) of the EU. Moreover, in agriculture, the EU’s Common Agricultural Policy (CAP) constitutes the major obstacle to market access. Hence, if the goal is market access for the products of least developed countries, the better approach would be to reform the CAP.

30. Second, as regards Mercosur, these countries, like the ASEAN countries (with the exception of Singapore and Myanmar) are subject only to the Generalized System of Preferences (GSP) and thus have less favorable access to the EU market than the ACP countries. In the past, the Mercosur countries’ exports have been concentrated in agricultural rather than industrial products, and in the last decade, they have consistently had trade deficits with the EU. In other words, they were less competitive than many ASEAN countries in EU markets. In the event of a Mercosur-EU FTA, the chances that Mercosur will be more competitive than ASEAN countries in exporting industrial products to the EU are questionable. If Mercosur companies are overwhelmed in their domestic markets by imports of industrial goods from Europe, there will be very few Mercosur companies that can export to Europe.

31. At any rate, the Mercosur-EU negotiations failed in October 2004, after nearly ten years of discussions. From the Mercosur perspective, the main reason for the failure lay in the EU’s persistent refusal to grant concessions on Mercosur agricultural exports to Europe. Any progress on the negotiations seems to be subject to the resumption of the WTO negotiations. In other words, it may take a long time before the threat to ASEAN exports from Mercosur exports materializes, assuming it ever does.

32. The reference to the MFN (Most-Favored-Nation) tariff rate, i.e., the tariff applied to goods coming from all sources, raises another implicit threat. At present, Southeast Asian exports to Europe are not subject to the MFN rate but to GSP rates. On the other hand, since the ASEAN members do not grant tariff preferences to the EU, European products enter their markets under the MFN rate. Consequently, it is already the case that ASEAN countries apply MFN rates to the EU. The Vision Group seems to be anticipating the possibility that if ASEAN-EU FTA negotiations do not succeed, the EU will withdraw GSP privileges from ASEAN and apply the MFN rate.

33. The positive rationale for the FTA is said to be the ability to attract foreign direct investment, The EU-25 (now 27) were said to be the largest sources of FDI to ASEAN, but European FDI to the latter has declined in favor of China and Hong Kong. A more “stable and predictable framework” could attract European firms once more to Southeast Asia.[26]

34. It is true that there has been some diversion of FDI away from ASEAN in favor of China, and that ASEAN countries are concerned about this trend. Nevertheless, the argument that an FTA will attract FDI to ASEAN is not convincing.

35. To begin with, the statement that the EU is the largest source of FDI is a statistical artifact. Since statistics for 25 countries are aggregated, it is almost inevitable that the sum will be larger than the corresponding figures for Japan and the US. In reality, only a handful of EU members invest in Southeast Asia, with Germany, the UK, and the Netherlands being the major sources. Japan is still the primary country of origin of FDI for most Southeast Asian countries.

36. Second, while China’s growth rate has been a powerful incentive for European companies to invest there, much of European investment is what economists call market-seeking. Their aim is to produce for the local market, and not to export (this second type is called resource-seeking). If an increase in export capacity through such means as joint ventures or transfer of technology is one reason for attracting FDI, then market-seeking FDI will not be helpful in achieving it. Survey after survey shows that most European companies prefer to export to Southeast Asia, rather than to invest there. Those that wish to invest do so in order to sell to the local market, in which case they will be competing with domestic firms. An FTA, if it succeeded in attracting FDI, would not attract the type of FDI desired by ASEAN members.

37. Third, it is European firms specialized in services (e.g., banking, insurance, telecommunications, education) that wish to invest in Southeast Asia. Again, FDI in services does not produce tradable goods, i.e., goods that can be exported. It will therefore not have any direct impact on exports to Europe. At most, FDI in services could improve production conditions and indirectly enhance the competitiveness of locally-produced goods. Even then, this outcome is not certain if the cost of services increases substantially and/or the quality of the services actually declines.

38. An EU official in Bangkok is reported to have given a supplementary reason for free trade: an FTA would lower the costs of raw materials imported (presumably from Europe) into Thailand and in this manner lower costs of production.[27]

39. There are of course many types of inputs, so that it becomes difficult to make general statements. Several considerations should be kept in mind. First, one reason why inputs from Europe may not be imported is that they are expensive. In this connection, the European Commission proudly refers to European companies’ “ability to sell products at premium prices.”[28] Second, if inputs from Japan compete with European inputs, and the tariffs on both are reduced as a result of the respective FTAs, the prices of the goods in relation to each other may well change very little. The only change will be due to the abolition of the tariffs. Third, if European inputs are not as efficiently produced as Japanese inputs and the abolition of tariffs on the former leads to an increase in Southeast Asian imports from Europe, free trade will in effect divert trade from the more efficient producer to the less efficient producer. Economists call this effect “trade diversion”, which is generally considered undesirable, even from the point of view of liberal economics.

Preliminary Conclusions

40. The secrecy surrounding the work of the ASEAN-EU Vision Group appears not to have bothered the European Commission and the EU member states, an attitude that is difficult to reconcile with the EU’s claims to promote democracy, human rights and the rule of law in the Third World.

41. Even with the little information that has been made available to the public, it is possible to raise fundamental challenges to the rationale behind the proposed ASEAN-EU FTA.

42.Unfortunately, the experience with the ACP countries and Mercosur demonstrates that the European Commission is impervious to any arguments marshaled by civil society against FTAs.

43. We should not forget that ASEAN is officially in favor of the launch of ASEAN-EU FTA negotiations. That said, given the haste and the secrecy in which the Vision Group’s work was carried out, it is plausible to assume that a number of ASEAN members have not weighed all of the consequences of an FTA. If this were indeed the case, they may lend a more willing ear to civil society arguments than the EU.

44. Should negotiations push through, then the EU, which probably feels that circumstances compelled it to accept the idea of an FTA, can be expected to adopt a tough attitude and to be less than generous with concessions. In that case, ASEAN should be ready, as Mercosur was, to break off negotiations rather than to end up with an unsatisfactory agreement.

---

[1]European Commission Doc. COM(96) 53 final, 14.02.1996, “Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions. The Global Challenge of International Trade: A Market Access Strategy for the European Union,” particularly p. 3.

[2]European Commission Doc. COM(1994) 314 final (13.07.1994), “Communication from the Commission to the Council. Towards a New Asia Strategy,” particularly Part IV, 2.2.1.

[3]ASEM 2, “Chairman's Statement,” London, 4 April 1998, §3.

[4]Asia-Europe Vision Group Report, 1999, p. 9.

[5] Alfredo C. Robles, Jr., “The Asia-Europe Meeting (ASEM): The Theory and Practice of Interregionalism,”, 2005, pp. 271-81. (Unpublished manuscript, De La Salle University).

[6]10th Senior Officials’ Meeting on Trade and Investment, “Chairman’s Summary,” Qingdao, China, 18-18 July 2005, §12.

[7]”Chairman’s Statement of the Sixth Asia-Europe Meeting,” Helsinki, 10-11 September 2006, §21.

[8]European Commission Doc. COM(2003) 399/4, “Communication from the Commission. A New Partnership with Southeast Asia.”

[9]Ibid., p. 16.

[10]Robles, pp. 222-24.

[11] European Commission Doc. COM(2003) 399/4, p. 16.

[12]Ibid.

[13]European Commission, “Launch of Negotiations for Partnership and Cooperation Agreements (PCAs) between the EU-Thailand and between the EU-Singapore,” Press Release, Hanoi, 8 October 2004.

[14]Kevin Tan, “EU-ASEAN Talks at Intense Exploratory Stage,” The Edge, 18 January 2006.

[15]Lawrence Agcaoili, “EU Puts on Hold Free-Trade Deal with ASEAN Bloc,” ABS-CBN News (Manila), 14 September 2004; Woranuj Maeerungsee, “ASEAN-EU FTA: Study Due Out Next April,” The Bangkok Post, 14 October 2005.

[16]John Burton, “EU-Asia Trade Pact in Prospect,” The Financial Times, 17 May 2006.

[17]Teofilo C. Daquila and Le Huu Huy, “Singapore and ASEAN in the Global Economy: The Case of Free Trade Agreements,” Asian Survey, 43:6 (November-December 2003), pp. 911-914.

[18]For example, Thierry Rommel, head of the EU mission to Malaysia, in Riyadi Suparno, “EU, ASEAN View FTA to Boost Trade,” The Jakarta Post, 15 July 2005.

[19]ASEAN-EU Vision Group, “Report of the ASEAN-EU Vision Group: Transregional Partnership for Shared and Sustainable Prosperity,” Hà Nôi, Viêt Nam, 10 May 2006, §§3.1-3.3, pp. 7-8.

[20]Ibid., §1.2, p. 1.

[21] Paul Gabriel, “EU to Make Stronger Presence in South-East Asia,” The Star (Kuala Lumpur), 6 August 2006.

[22]Philippe Ricard, “L’Union européenne veut placer l’Asie au coeur de sa politique commerciale,” [The EU wishes to put Asia at the heart of its trade policy] Le Monde (Paris), 12 September 2006; Paul Falzon, “L’UE ouvre la voie aux accords bilatéraux avec l’Asie,” [The EU paves the way for bilateral agreements with Asia] Le Monde (Paris), 13 September 2006.

[23]European Commission Doc. SEC(2006), 1230 (4 October 2006), Commission Staff Working Document. Annex to the Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions. “Global Europe: Competing in the World: A Contribution to the EU’s Growth and Jobs Strategy,” pp. 14, 16.

[24]ASEAN-EU Vision Group Report, §2.5, p. 4.

[25]Ibid., §2.3, p. 4.

[26]Ibid., §§2.1, 2.3, 3.8, pp. 3, 9.

[27] Woranuj Maneerungsee, “’Vision Group’ Says ASEAN and EU Regions Would Benefit from Pact,” The Bangkok Post, 6 September 2006.

[28]European Commission Doc. SEC(2005) 1230, p. 4.