East Asia Forum http://www.eastasiaforum.org Economics, Politics and Public Policy in East Asia and the Pacific Sat, 01 Aug 2015 12:00:52 +0000 en-US hourly 1 Japan’s defence and diplomacy heading in the wrong direction http://www.eastasiaforum.org/2015/08/01/japans-defence-and-diplomacy-heading-in-the-wrong-direction/ http://www.eastasiaforum.org/2015/08/01/japans-defence-and-diplomacy-heading-in-the-wrong-direction/#comments Sat, 01 Aug 2015 12:00:52 +0000 http://www.eastasiaforum.org/?p=47116 Author: Arthur Stockwin, Oxford University

Japan is at a momentous turning point. On 16 July 2015 the government of Shinzo Abe used its big majority in the House of Representatives to override objections from opposition parties and pass legislation permitting collective self-defence (CSD). But this is one of several misdirected solutions following years of conservative revisionism.

If CSD is permitted, Japanese Self-Defense Forces may fight alongside US forces in conflicts not directly related to the national security of Japan. The upper house of the Japanese Diet now has to debate the legislation, with the government determined to enact it by the end of the parliamentary session on 27 September.

This overturns decades of official interpretation of the ‘Peace Constitution’ of 1947 that CSD was not acceptable except on a case-by-case basis. Even though the Abe government is supported for its attempts to revive the economy, it lacks majority support in relation to the current bills.

For the first time since November 2014, those disapproving of the Abe cabinet in the monthly Asahi Shimbun poll on government performance outnumber those approving it. Snap polls conducted by the Asahi, Mainichi and Yomiuri newspapers, and by the national broadcaster NHK, reveal unhappiness with the current legislation ranging between 56 and 67 per cent. Abe justifies CSD with the term ‘proactive pacifism’, seemingly based on George Orwell’s Big Brother principle that ‘black equals white’.

This has not happened in a political vacuum. Since the Abe government began in December 2012, it has worked hard to dismantle much of the post-war settlement set up during the Allied Occupation and following the return of full Japanese sovereignty in April 1952.

Principal among the government’s targets has always been the ‘Peace Constitution’, with its peace clause, its liberal chapter on human rights, its separation of religion from the state, and its designation of the emperor as a ‘Symbol of the State’ rather than ‘Head of State’. But the constitution is very difficult to revise, and today it appears unlikely that the mandatory 50 per cent plus one majority in a national referendum on a revised draft would be achieved, even if two-thirds could be obtained in each parliamentary chamber (which may well be possible at present).

Well aware of these obstacles, Abe decided on ‘revision by reinterpretation’ given the political hurdles of ‘revision by redrafting’. The current CSD legislation is the prime example of this approach. It has been under attack by increasingly well-organised campaigns of articulate opinion outraged by a government that ignores constitutional proprieties and risks dragging Japan into wars not of its own making. Such concerns are reinforced by recent agreements with the United States for increased cooperation and ‘interoperability’.

It has been a central goal of the Abe government to reverse previous war apology approaches. The gold standard for such apologies was the war apology made by the former Socialist prime minister Tomiichi Murayama on 15 August 1995, the 50th anniversary of the defeat. Murayama’s apology was a thoughtful reflection on the terrible events between the late 1930s and 1945, and contained key words that have stuck in the craw of conservatives ever since, including ‘mistaken national policy’, ‘colonial rule and aggression’ and ‘apology’ (o-wabi).

Another significant war apology was that of a senior Liberal Democratic Party politician, Yohei Kono, in August 1993, concerning the so-called ‘comfort women’ issue. The Abe government has put extensive resources into rebutting the contention that ‘comfort women’ were coerced into serving the Imperial Armed Forces as prostitutes. More generally, the government has sought to maintain previous war apologies formally, but attack their content in successive speeches so as to rob them of any real meaning and substance.

Another crucial piece of legislation steered through parliament by Abe was the Designated Secrets Law, which imposed draconian sanctions against government officials and journalists convicted of publicising vaguely defined ‘designated State secrets’. This was widely attacked as suppressing freedom of speech, as was the government’s appointment of those closely associated with its own views to the board of NHK.

Abe’s 2013 pilgrimage to the Yasukuni Shrine, where the souls of 14 wartime leaders are among those enshrined, attracted hostile reactions from China and South Korea. Relations between China and Japan have deteriorated severely since the Abe government was elected. For this, the governments of both countries are equally responsible: Japan for its insensitive revisionism and nationalism, and China for its expansionist policies in the East and South China Seas, for its belligerence over the Senkaku/Diaoyu islands, as well as for its military build-up.

The result of all this is deeply unfortunate. Antagonistic relations between Japan and China were far from inevitable. After the economic opening of China from the late 1970s, Japan–China relations developed magnificently, and with moderate Japanese leadership, good will could have prevailed. The mutual economic benefit of Japanese investment in China could have borne political fruit. As it is, the advantages of economic interaction are jeopardised by Japanese reactionary nationalism and Chinese military expansion.

Arthur Stockwin is an emeritus fellow and founding director of the Nissan Institute of Japanese Studies at the University of Oxford.

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How restrictive are ASEAN’s Rules of Origin? http://www.eastasiaforum.org/2015/08/01/how-restrictive-are-aseans-rules-of-origin/ http://www.eastasiaforum.org/2015/08/01/how-restrictive-are-aseans-rules-of-origin/#comments Sat, 01 Aug 2015 00:00:12 +0000 http://www.eastasiaforum.org/?p=47110 Authors: Olivier Cadot, University of Lausanne and Lili Yan Ing, ERIA

Asia accounts for more than 50 per cent of the world’s automobile production, 62 per cent of liquid display screen, 86 per cent of smart phones and 100 per cent of digital cameras. Much of this production is based on production networks: that is, value chains that criss-cross the region, with the various stages of the production of each good taking place in different countries, depending on the comparative advantage of each.

To lower barriers to the formation of these production networks, a number of countries are forming bilateral and regional trade agreements. While big players in the region — China, India, Japan and South Korea — are progressing quite slowly in this respect, Southeast Asian countries are far more active in forming regional trade agreements. In 1992, Southeast Asian countries formed the ASEAN Free Trade Area. By January 2010, ASEAN had trade agreements in effect with its major trading partners: China, Japan, South Korea, India, plus an agreement with Australia and New Zealand. Now, 60 per cent of ASEAN’s total trade is covered by free trade agreements (FTAs).

Rules of origin — which specify under what circumstances a good may be said to originate from a particular country, thereby qualifying it for lower tariffs negotiated in preferential trade agreements — stand in the middle of these two developments. Rules of origin can either facilitate the dispersion of production or make it difficult. They are essentially local-content requirements imposed on exporters of final goods who want to claim the benefit of preferential tariffs within a trade bloc.

Rules of origin prevent firms from outside the preferential agreement from simply exporting their goods to an intermediate country that has preferential tariff rates with the final destination. The rules can take several forms — for example, there can be product-specific rules, which often examine whether there has been a change in tariff classification, the degree of regional value content or other technical requirements. There are also regime-wide rules that specify the extent to which goods that originate in another country in the preferential trade zone can count as ‘originating’ in another for tariff purposes.

ASEAN’s rules of origin have a relatively simple and transparent structure: many take the form of a 40 per cent regional value content rule or the change-of-tariff-heading approach. Often, businesses have the flexibility to use either approach to demonstrate that their exports qualify for lower tariff under the terms of ASEAN FTAs.

Preferential tariffs rates are only of much use when tariff preference margins are substantial — that is, when the preferential tariff in the FTA is substantially lower than the most-favoured nation (MFN) tariff that applies to other countries. If rules of origin are very restrictive, then the cost of complying with them can sometimes exceed the benefit gained from access to lower tariffs. If this is the case, businesses will simply trade at MFN rates.

ASEAN’s rules of origin do impose some costs, equivalent to a tariff of around 3.4 per cent on all goods, and the equivalent of a trade-weighted average tariff of 2.09 per cent. But the effects of this restrictiveness differ from sector to sector. While it is small in sectors like electronics or capital equipment, it peaks in sectors like fats, leather products, textile and apparel, footwear, and automobiles. Although moderate, restrictive rules of origin may contribute to observed low take-up rates.

Because of this heterogeneity, ASEAN’s relatively restrictive rules of origin may not have a huge impact on trade flows, as a large proportion of international trade in the Asia Pacific area is in the electronics and capital equipment sector where MFN tariffs are low and the attractiveness of preferences is (with or without restrictive rules of origin) limited anyway.

Nonetheless, simplifying rules of origin could offer some gains to ASEAN economies. This could be helpful in areas like machinery and automobiles, and also in light industries like apparel, footwear, and prepared foods, because these sectors play a significant role in exports and account for a large number of jobs.

Olivier Cadot is a professor at the University of Lausanne. Lili Yan Ing is an economist at the Economic Research Institute for ASEAN and East Asia (ERIA).

This article is based on the authors’ discussion paper published here by ERIA.

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2015 is the year of Chinese cyber power http://www.eastasiaforum.org/2015/07/31/2015-is-the-year-of-chinese-cyber-power/ http://www.eastasiaforum.org/2015/07/31/2015-is-the-year-of-chinese-cyber-power/#comments Fri, 31 Jul 2015 12:00:57 +0000 http://www.eastasiaforum.org/?p=47100 Author: Greg Austin, EastWest Institute

In February 2014 Chinese President Xi Jingping declared his intent to do everything necessary for China to become a cyber power. Since then Xi and his government have been hyperactive on all relevant fronts: political, legal, economic, organisational and diplomatic. The Chinese leadership’s attention became even more focused on cyber issues in May 2014 when the United States indicted five Chinese military personnel for cyber espionage involving commercial secrets of US-based corporations.

But, as documented in my 2014 book Cyber Policy in China, Xi’s cyber focus had been decades in the making. China has been struggling since 1983 to overcome its technological backwardness for the information economy and, since around 2000, for a potential cyber war.

US Secretary of State John Kerry shakes hands with Chinese President Xi Jinping in Beijing, China, May 17, 2015. Tensions are growing between the U.S. and China over suspicions that Beijing was behind the biggest cyber breach of federal personnel records. (Photo: AAP)

Xi’s government has taken many measures to turn China into a cyber power. In September 2014, Xi told the country that it needed a new cyber military strategy. In December 2014, the government introduced new regulations for cyber security intended to help promote the rapid growth of China’s domestic cyber-security industry. In May 2015, China issued a new military strategy in which the government declared for the first time in such a document the idea that ‘[o]uter space and cyber space have become new commanding heights in strategic competition among all parties’.

Also in May, the National People’s Congress released a draft bill on National Security, which — according to Xinhua — gives cyber security a special place in its provisions for strengthening government controls over foreign technologies and related investment in China. The bill passed in July 2015, the same month China released a draft law on network security with sweeping new provisions on control of foreign technologies and data management.

Accumulating reports of China’s continuing success in cyber espionage against the United States, such as the recent theft of private data held by the Office of Personnel Management on more than 20 million U.S. citizens, might also be taken as evidence of rapid progress towards Xi’s ambition.

Yet, when the World Economic Forum published its annual Network Readiness Index in April 2015 comparing the cyber capability of 143 countries, China was still sitting in 62nd place, the same spot it occupied the previous year. This was down from 36th place in 2011 and lower than countries like Jordan, Mauritius and Costa Rica. (China’s low position is due, in part, to the per capita comparisons in the index that distort the relative wealth and technological capabilities of countries.)

China has, of course, made great strides, but the United States, Japan, Korea, Singapore and Europe have raced ahead as well. As noted by China 2030, a 2012 joint report by the World Bank and the Chinese government’s Development Research Center, ‘innovation at the technology frontier is quite different in nature from simply catching up technologically’.

From the techno-nationalist frame in which many Chinese view cyber power, as do those in the West suspicious of China, these developments might seem ominous and a possible presage to some sort of confrontation between China and the more powerful West. Chinese leaders have definitely become more fearful of ‘hostile Western influences’ and are very anxious to overcome their technological inferiority through greater indigenisation of cyber-related industries.

But this reading would not represent the totality of the Chinese leadership’s position on the balance to be struck between China’s aspirations for sovereign capabilities and a globalised cyber industrial complex.

On the one hand, even a superficial reading of new Chinese laws and draft bills on cyber policy, reveals unusual attention to the importance of international economic relations. Chinese leaders know that the country’s cyber sector will remain highly dependent on foreign technology transfer and investment from the most advanced countries for many years, probably decades.

On the other hand, in spite of reports of a blacklist of US-based companies that have been named publicly by Edward Snowden as participating in cyber espionage against China, China continues to solicit and accept massive investments from these companies. For example, during a June 2015 visit to China, Cisco’s incoming CEO, Chuck Robbins, announced that the company would invest US$10 billion in China — a move that was widely seen as an effort to rebuild trust with the country.

In 2015 China also signed up (unofficially) to expansive new norms (or normative principles) elaborated by the UN Group of Governmental Experts on cooperative relations in cyber space. The political weight of China’s support for these prinicples is reflected in a formal agreement with Russia, in which the two countries agree not to undertake actions like ‘unlawful use or unsanctioned interference in the information resources of the other side, particularly through computer attack’.

China’s formal position is that national security in cyber space can only be achieved through international collaboration, not just with the 60 or so like-minded countries — such as Russia — that support Chinese positions in international forums, but also with the technology-leading countries, like the United States and Japan, and their partners in Europe.

Greg Austin is a professorial fellow at the EastWest Institute in New York and a Visiting Professor in the Australian Centre for Cyber Security at the Australian Defence Force Academy.

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Bougainville looks towards the referendum at 2015 election http://www.eastasiaforum.org/2015/07/31/bougainville-looks-towards-the-referendum-at-2015-election/ http://www.eastasiaforum.org/2015/07/31/bougainville-looks-towards-the-referendum-at-2015-election/#comments Fri, 31 Jul 2015 00:00:00 +0000 http://www.eastasiaforum.org/?p=47095 Authors: Kerryn Baker and Thiago Cintra Oppermann, ANU

Bougainville went to the polls in May 2015 for the third Autonomous Bougainville Government election since the Bougainville Peace Agreement was signed in 2001. The election was a significant political milestone for the region, marking the beginning of a five-year window in which a referendum on independence is scheduled to be held. It also saw the first woman member of the House of Representatives to be elected in an open seat, Josephine Getsi of Peit constituency.

Panguna villagers vote in Papua New Guinea's autonomous region of Bougainville back in May, 2010. This was the second ever general election and the tiny Pacific island now prepares for the 2020 referendum on full independence from PNG. (Photo: AAP)

Elections were held for the seats in the House of Representatives and for the presidency of the Autonomous Region of Bougainville. In the house there are 33 open seats, three seats reserved for women, and three seats reserved for ex-combatants. Each voter has four ballots: for the presidency, for their constituency, and for their regional women’s and ex-combatant representatives. The election used a system of limited preferential voting, in which voters rank their top three preferred candidates on each ballot.

Bougainville presents significant logistical challenges when it comes to election administration. While there were some considerable issues, overall the election was relatively peaceful. For the most part, the result was accepted by the Bougainvillean people. Despite delays, both polling and counting were completed within their respective designated two-week periods. The success of the election was due in large part to the community goodwill towards the electoral process within Bougainville.

Campaigning kicked off with nominations on 30 March, which included colourful motorcades and some of the largest rallies seen in the campaign. A total of 342 candidates nominated, including 35 women. Only 12 of these women were contesting open seats; the remainder competed for the three seats reserved for women. Nine men, and no women, contested the presidency.

Campaigning was mostly peaceful. The presidential race was dominated by the issues of the referendum, good governance and economic development, with mining also significant in certain regions. None of the presidential candidates campaigned for autonomy. Candidates differed as to how forcefully they proposed independence from Papua New Guinea but all argued in its favour. The referendum was thus discussed mostly in terms of candidates representing themselves as the best option to achieve a successful referendum.

In Bougainville, ‘good governance’ has acquired the character of a piety that nobody disowns, but its practice is another matter. Candidates defending their seats faced barrages of (credible and not-so-credible) accusations of corruption. Often the absence of visible delivery of services by a politician was construed as evidence of corruption in itself; yet the delivery of some services was also labelled corrupt by some. According to one such critic, ‘the work of a politician is to pass laws and set policy, not to give schools’ – yet even this critic went on to complain that his approach to a politician for funds had been rebuffed.

The expectation that politicians will personally deliver services, resentment at preferential gifting, and pervasive, politicised rumour of corruption are all facets of an underlying political economy of distribution and its discontents. This is deeply enmeshed at all levels of Bougainvillean society, from the state to the household. It is extremely difficult for politicians and voters to extricate themselves from expectations and obligations to present and receive ‘gifts.’

The pervasiveness of this politics of distribution poses a particular challenge to women. The political economy of gifting is fundamentally gendered and favours men, while women are expected and encouraged to be ‘clean’ candidates. This emphasis on women’s ‘purity’ means that harsh judgement falls on women who act in ways that would be tolerated or even welcomed in the case of men. While some women — including Josephine Getsi and a few others who placed highly — performed exceptionally well, most of the women who contested races against men polled last or second-to-last.

One major issue arising from the election was the quality of the electoral roll. Issues with the roll have also been noted in past elections. But as Bougainville looks toward a referendum by 2020, the extent of these problems in 2015 was of particular concern. Many people were turned away from polling stations because their names did not appear on the final roll, including many who claimed to have voted in previous elections. In all regions, many appeared to have been disenfranchised; at some polling stations, observations showed up to three in ten people being turned away.

Discontent over the electoral roll among the general public was often expressed in terms of national identity. One community leader stated: ‘If your name is not on the roll, this means you are not Bougainvillean’. This suggests the issue with the roll constitutes much more than a technical problem. In the lead-up to the referendum on independence, amending the electoral roll must be a priority. Unless significant effort is put towards not only improving the quality of the electoral roll but also affirming public faith in its integrity, there could be serious repercussions for the referendum process.

Kerryn Baker and Thiago Cintra Oppermann are research fellows in the State, Society and Governance in Melanesia Program, Coral Bell School of Asia Pacific Affairs, The Australian National University.

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Why fears over the Australia–China FTA are overblown http://www.eastasiaforum.org/2015/07/30/why-fears-over-the-australia-china-fta-are-overblown/ http://www.eastasiaforum.org/2015/07/30/why-fears-over-the-australia-china-fta-are-overblown/#comments Thu, 30 Jul 2015 12:00:52 +0000 http://www.eastasiaforum.org/?p=47087 Author: James Laurenceson, ACRI

After 10 years of negotiations and the official signing in June 2015, the Australia–China free trade agreement (FTA) still isn’t a done deal. A coalition of Australian trade unions is seeking to ‘stop the China FTA’ at the final hurdle, a vote in federal parliament.

The union’s main claim is that the FTA locks out Australian workers by making it easier for Chinese companies investing in Australia to import Chinese labour. In response, the Australian Labor Party opposition leader, Bill Shorten, has committed the party to ‘fight’ to amend the agreement. Of course, to do so after it has been signed would amount to reopening negotiations. This would be an unprecedented step that would open up the possibility of China also seeking changes to the agreement.

A protestor wears a mask of Federal Opposition Leader Bill Shorten as unionists call for the rewriting of the China free trade agreement outside the 2015 ALP National Conference at the Melbourne Convention Centre in Melbourne, Friday, July 24, 2015. (Photo: AAP)

At the outset it’s useful to remember what Australia does not give up.

The FTA doesn’t make it easier for Chinese investors to buy Australian residential real estate, Australian rural land or agribusinesses. There’s no change in the rules for Chinese government-owned companies wanting to buy Australian assets either.

Private Chinese investors will be able to buy assets in non-sensitive sectors with a value up to AU$1.1 billion (approximately US$804 million) without needing approval from the Foreign Investment Review Board (FIRB). That’s up from the current value of AU$252 million (approximately US$184 million).

But this is hardly a big concession. Australia gave investors from the US, New Zealand and Chile the higher threshold years ago. And more recently Japan and South Korea have been added to the list. There will also be some small tariff cuts such as getting rid of a 5-per-cent duty on clothes made in China. But again, the same small tariff cuts have already been given to Australia’s other big trading partners.

And then there’s what Australia gains.

China is offering to slash tariffs by up to 30 per cent on goods made in Australia. No wonder the National Farmers Federation were effusive in their praise that the deal would ‘…provide billions of dollars in export value to Australian farmers’.

China is also giving Australian businesses best-ever access to its rapidly growing services sector.

There’s also a most favoured nation clause thrown in for good measure. This means if China strikes a better deal with another country in the future then Australian producers will receive the same benefits.

Now back to the objections.

Union anger is mostly directed at a memorandum of understanding (MOU) on investment facilitation arrangements (IFAs). But IFAs only set up the possibility of bringing in skilled labour on large scale infrastructure projects in certain economic sectors. For example, IFAs do not apply to residential real estate projects.

In June 2015 critics of the FTA claimed it was a fact that IFAs meant there was no need for companies to prove they couldn’t find skilled Australian workers before bringing them in from China.

But it’s right there in the MOU: ‘A labour agreement will … set out the number, occupations and terms and conditions with the terms of the IFA … including any requirements for labour market testing’.

So now they’ve switched to a different objection: ‘[T]he interpretation of what constitutes sufficient labour market testing is entirely left up to the department [of Immigration and Border Protection]’.

The key consideration is that it will be the Australian government, answerable to the voting public, that will set the bar on labour market testing, not the Chinese government or Chinese companies.

There’s another reason why Australian workers will be favoured. The MOU adds: ‘All direct employers under an IFA and workers granted visas under an approved IFA labour agreement will be required to comply with applicable Australian laws, including workplace law, work safety law and relevant Australian licensing, regulation and certification standards’.

That means if Australian workers are available there’s nothing to be gained by bringing them in from China.

Some fear that employers may try to skirt these rules. But in that case the solution is to enforce the rules that the agreement clearly sets out, not seek to renegotiate the agreement itself. Another union complaint is a side letter to the FTA that removes a mandatory skills assessment for temporary workers from China in 10 professions, including electricians. But this requirement was only introduced in 2009 and applied to just 10 countries. Temporary workers from the world’s other 150 plus countries never had to worry. The skill level needed to get a visa won’t change. And if the Australian authorities want further assessment, they reserve the right to ask under the Australia–China FTA.

Finally, there are fears that an Investor State Dispute Settlement mechanism included in the agreement could allow Chinese companies to sue the Australian government if it introduced policy measures that damaged their commercial interests. But legal experts emphasise two points. First, the ISDS is two-way: it acts to protect Australian companies in China just as it does Chinese companies in Australia. Second, the protections covered by ISDS in the Australia–China FTA are  limited compared with other trade agreements and only extend to ‘national treatment’. All this means is that policy measures cannot discriminate between Australian and Chinese firms. For example, there’s nothing stopping the Australian government from introducing a tax as long as the tax applies to both Australian and Chinese companies.

Writing in The Australian newspaper recently Rowan Callick was right to say that the cost of eroding the Australia–China FTA is too big. Even in the detail the objections don’t stack up.

James Laurenceson is the deputy director of the Australia China Relations Institute (ACRI) at the University of Technology, Sydney.

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ASEAN yet to lay the foundations of the AEC http://www.eastasiaforum.org/2015/07/30/asean-yet-to-lay-the-foundations-of-the-aec/ http://www.eastasiaforum.org/2015/07/30/asean-yet-to-lay-the-foundations-of-the-aec/#comments Thu, 30 Jul 2015 00:00:50 +0000 http://www.eastasiaforum.org/?p=47076 Author: Pattharapong Rattanasevee, Burapha University

The ASEAN Economic Community (AEC) is set to arrive at the end of 2015. It is a significant step forward and could be a crucial turning point for ASEAN. But without a strong central authority and mandate, ASEAN integration will remain in a mess and the AEC remain an illusion.

The goal of the AEC is to implement economic integration initiatives by creating a single market across ASEAN nations. This requires a strong central authority that can harmonise and standardise regional regulations, and it must be recognised by all member countries.

ASEAN will need a guardian of competition. It will need to significantly improve the current trade competition policy and arbitration. The scheme itself requires a consensual agreement among members that should be implemented as a bundle. That is, governments should not be allowed to pick and choose among components or sectors.

ASEAN is dealing with a colossal and ambitious task but with limited resources and capacity.

But how limited are these resources? ASEAN has no intention to become a supranational organisation like the European Union, where members coordinate within the context of intergovernmentalism. The internal dynamics of ASEAN institutions have been designed to uphold the roles of national governments and the norms of the association — known as the ASEAN Way.

The ASEAN Secretariat — the current central authority and only real institutional organ — remains at the margins of ASEAN policymaking. It does not possess the mandate or power to command individual member states, or the power to devise common policies on its own. It is a glorified secretary, responsible for only administrative support, sorting out the daily paper work and arranging meetings for the organisation.

There is no guarantee that the central authority will implement policy effectively and ASEAN will be unlikely to enforce compliance from obstinate members. Interestingly, Barry Desker pointed out that during the preceding 40 years of ASEAN, only 30 per cent of agreements were actually implemented.

ASEAN will need to increase funding if it is to strengthen the ASEAN Secretariat. The current operational budget relies on equal contributions by the member states, reflecting the norms of equality and stemming from the belief that different contributions might lead to a hierarchy of powers. The payment has never been increased substantially and has been kept low enough to ensure the poorest members can pay. ASEAN also receives substantial funding from dialogue partners and external donors — mostly through specific projects or operations — but this is not sustainable in the long run if ASEAN wishes to present itself to the world as a non-aligned power.

The ASEAN Secretariat lacks professional staff, making it difficult for it to become a powerful central administration and the backbone of the association. It employs roughly 300 staff: 65 managers and experts, 180 local staff and 55 people from donor organisations. These figures are miniscule compared to other organisations with similar size and missions. They do not fairly represent a community of 625 million people and a nominal GDP over US$2.5 trillion. The ASEAN Secretariat has also been facing difficulties attracting talented and capable people. Working for ASEAN is not seen as prestigious or well-paid, unlike other regional organisations that could offer up to US$74,000 for bright talents.

These problems raise the question about how prepared ASEAN is to implement a single market scheme, and how feasible that scheme will be. The region contains countries that are prone to financial shortfalls, domestic weakness, poor governance, corruption and coordination problems.

The member states lack an ‘ASEAN mindset’ to facilitate cross-national and cross-sectoral interactions. The AEC will not thrive unless there is a significant improvement to how ASEAN policy is implemented. ASEAN does not need to — and will not — depart from the ASEAN way to become a supranational or fully-consultative organisation like the EU. But its central administration is a basis of continuity. It needs to be given mandate and resources in order to acquire the capacity to encourage compliance and support its administrative functions. This could narrow the gap between ASEAN’s rhetoric of cooperation and its actual commitments. It could improve the poor implementation record.

Additionally, the contribution system should be substantially revised. It is not realistic nor applicable to the growing activities of the association and the excessive tasks of the ASEAN Secretariat. It should consider a GDP-based contribution system or seek other sources of revenue such as a share of taxes, import duties and licensing.

Finally, ASEAN awareness must be promoted among private sectors and ordinary citizens. The AEC could bring tremendous benefits to their daily lives. Improved ASEAN awareness would encourage public scrutiny and would put massive pressure on governments to focus on accomplishing the AEC in time.

ASEAN is not quite ready for the AEC. But with some significant improvements to how the ASEAN Secretariat is run, it may just be possible.

Dr Pattharapong Rattanasevee is a lecturer at Burapha University, Chonburi, Thailand.

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China needs to turn its capital ideas into SOE reform http://www.eastasiaforum.org/2015/07/29/china-needs-to-turn-its-capital-ideas-into-soe-reform/ http://www.eastasiaforum.org/2015/07/29/china-needs-to-turn-its-capital-ideas-into-soe-reform/#comments Wed, 29 Jul 2015 12:00:00 +0000 http://www.eastasiaforum.org/?p=47069 Authors: Zhengjun Zhang and Sarah Du, King Parallel

State-owned enterprise (SOE) reform in China has come a long way.

SOEs contribute to 23.4 per cent of industrial revenue and 21.6 per cent of profits — a significant drop from more than 80 per cent of both industrial revenue and profits at the start of the reform and opening up in the late 1970s. In 2014, 88 Chinese SOEs were included in Fortune Global 500, Fortune magazine’s annual list of the top 500 corporations worldwide by revenue.

SOEs now make up just 4.9 per cent of firms in China’s mining, manufacturing and utilities sectors. But there are still a few long-term problems that must be resolved.

State capital is deployed across too many sectors, including some purely commercialised ones. SOEs show general features of weak competitiveness: they are small, poorly structured and inefficient. For example, 76.6 per cent of all SOEs in China are classified as small or micro firms. There is excessive concentration of shareholding and administrative meddling, which makes it hard for SOEs to set up governance mechanisms that suit a market economy. Even for listed firms, the state ownership share is over 70 per cent in many cases.

These problems spring from some of the policy defects of SOE reform. First, the goals of state ownership are unclear. It is hard for SOEs to formulate and communicate clear objectives at all relevant levels. This makes it difficult to build effective accountability systems, and inhibits the rational re-allocation of state capital. Second, the government has been used to intervene, and there has been lack of supervision of how ownership rights are exercised. As a result, ownership entities have been executing a kind of enterprise management rather than capital management. Third, warped corporate governance has spawned ineffectual boards of directors, one-size-fits-all remuneration policies and a tendency for internal bureaucratisation.

China has several quite unique characteristics. It has a large population (close to 1.4 billion); it is a middle income country with US$3200 per capita disposable income in 2014; and it is a transition economy that is still developing its market mechanisms and institutional systems. With these characteristics, China needs to keep a large toolbox to deal with potential challenges on its development path.

One tool inside the box is the control of ownership of SOEs. SOEs can be assigned objectives that are different from those of developed Western economies. But the weaknesses of SOE corporate governance in all jurisdictions across the globe are very similar. This brings a real challenge for SOE reform in China: how can China use its SOEs as a unique and important developmental tool while addressing the problems of SOE governance that can be concluded in many countries?

China should use state ownership to remedy market failures, stabilise the foundations of the economy and implement the government’s industrial policies. State capital should be deployed to more sectors than in developed countries. It should be used to ensure the provision of public goods, to offset additional regulatory cost for natural monopolies and to carry out specifically designated functions. State capital should also be deployed in sectors with particular strategic significance.

If the state is to exercise ownership over an SOE then it should meets three conditions. First, the rights, responsibilities and benefits of each department or entity of the state that is exercising ownership over the enterprise must be aligned. Second, there must be a system of checks and balances overseeing policymaking, implementation and supervision of ownership. Third, there should also be well-defined channels to reach the objectives of ownership.

Boards of directors should be independent, expert and accountable. They should possess almost complete authority for strategic decision-making in accordance with market principles and the rights and responsibilities of their type of SOE.

In the medium to long term, China needs to improve its state ownership policies and management systems. The state should define the goals of ownership and delineate the boundaries of the state economy. It must streamline the channels through which the state exercises its ownership rights and the relationship between different bodies. The government should distribute more state capital to sectors that need SOEs, such as public services, natural monopolies, imperfect contracts and industries that pursue national strategies. SOEs should be restructured in order to strengthen competitiveness and eliminate inefficiencies.

By establishing state-owned capital investment companies, the government can find opportunities to implement these much-needed reforms.

China should unveil its plans for state capital and the structure of future SOEs. Mixed public and private capital should still be promoted for commercially-oriented SOEs operating in competitive sectors. China needs to reform SOE governance, strengthen the market principles of governance, introduce a new system of governance that would classify SOEs by category, and clearly define the principles by which the state participates in corporate governance. By implementing these reforms, China can realise the goal of ‘capital management’ over ‘enterprise management’.

State capital and SOE reform needs coordinated and coherent policy. The reform designs made at the top should flow down to concrete policy plans. China needs to further clarify the broad goals and specific objectives, as well as the rights and responsibilities of SOEs.

Zhengjun Zhang is the managing partner and CEO of King Parallel, Beijing. Sarah Du is director of State Ownership and SOE Consultancy, King Parallel.

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Malaysia’s mess is Mahathir-made http://www.eastasiaforum.org/2015/07/29/malaysias-mess-is-mahathir-made/ http://www.eastasiaforum.org/2015/07/29/malaysias-mess-is-mahathir-made/#comments Wed, 29 Jul 2015 00:00:09 +0000 http://www.eastasiaforum.org/?p=47063 Author: Dan Slater, University of Chicago

At least embattled Malaysian Prime Minister Najib Razak is right about one thing. The current mess in Malaysian politics is the making of his greatest nemesis, Mahathir Mohamad, who led the Southeast Asian nation with an iron fist from 1981–2003. What Najib fails to fathom is that Mahathir has not produced this mess by criticising his leadership, but by paving Najib’s path to power in the fashion he did during his decades in office. Mahathir may believe that he can end the crisis by bringing Najib down. But history should judge Mahathir himself as the author of a long national decline that has culminated in this latest crisis.

To be sure, Najib’s fingerprints are all over the current mess. The proximate source of the crisis has been the collapse of Najib’s pet sovereign-investment company, 1Malaysia Development Berhad (1MDB). This has caused Malaysia’s stock market and currency, the ringgit, to plummet in turn. All this has transpired amid credible allegations that the prime minister siphoned an eye-popping US$700 million into his personal bank account.

But this road toward ruin commenced with Mahathir, not Najib. It is vital to realise that Mahathir rose to power in blessed circumstances. Malaysia’s economy had been growing healthily for decades, thanks to the prudent economic management of a highly capable bureaucracy. Governance and tax collection were effective, and debts were few. Natural resource wealth, including oil, was professionally stewarded. A decade of muscular redistribution to the country’s ethnic Malay majority had restored social stability after the race riots of 1969. Incoming foreign investment was copious and about to mushroom even further. Mahathir commanded one of the most cohesive ruling parties (the United Malays National Organization, or UMNO) and coalitions (the Barisan Nasional, or BN) in the world. The regime was authoritarian, but not intensely repressive or disliked in comparative terms. In short, Mahathir was holding a winning hand when he became prime minister in 1981.

Then came the debt. Obsessed with following in the footsteps of Asia’s technological leaders, Mahathir began borrowing heavily to fund his ‘Look East’, state-led heavy-industrialisation program. Privatisation was part of his growth package, but the beneficiaries were businessmen of loyalty more than talent. When the global economy went into recession in the mid-1980s, patronage started drying up. UMNO split, largely in reaction to Mahathir’s strong-armed style of rule. Mahathir’s two most talented rivals, Tengku Razaleigh and Musa Hitam, bolted from UMNO despite their deep personal ties to the party, mostly to get away from Mahathir himself. Mahathir responded by launching a police operation under the pretext of racial tensions, imprisoning and intimidating political rivals, and cementing his autocratic control.

Hence by the late 1980s, all of the defining features of Malaysia’s current crisis under Najib’s leadership were already evident under Mahathir. The regime was increasingly repressive. The office of prime minister was becoming a haven of autocracy. Ethnic tensions had been reopened to political manipulation. The economy was worrisomely indebted. UMNO was shedding some of its most capable leaders. This was the beginning of Malaysia’s sad national decline, under Mahathir’s watch and at his own hand.

Fast-forward a decade and all of these syndromes would recur in even nastier forms. The Asian Financial Crisis of 1997–98 punished Malaysia for the unsustainable dollar-denominated debts it had accumulated under Mahathir’s single-minded push for breakneck growth. Mahathir blamed everybody but himself for the crash. He sacked and imprisoned his popular and gifted deputy, Anwar Ibrahim, largely for his temerity in suggesting that Malaysia needed deeper reforms to regain economic health.

Mahathir didn’t pull Malaysia out of its crisis with economic reform or adjustment, but with more and more borrowing and spending. This was possible because Malaysia was still sitting on the fiscal reserves it had been amassing for half a century, since the British colonial period. Mahathir grandiosely claimed that his imposition of capital controls had saved the economy. But capital flight had basically run its course by the time controls were implemented. Mahathir imposed them to facilitate political repression as much as economic recovery. The spectre of anti-Chinese riots in neighbouring Indonesia was then callously manipulated to keep ethnic Chinese voters in the BN fold in the 1999 elections.

Hence even before the turn of the millennium, Malaysia was hurtling down the very trajectory of decline we are witnessing in the current crisis. Like Mahathir, Najib assumed autocratic control over the economy and embarked on reckless borrowing and investment schemes, especially 1MDB. Like Mahathir, Najib unleashed a torrent of repression under antiquated security laws to protect his own position amid rising criticism from civil society and from within UMNO. Like Mahathir, Najib has recklessly played the ethnic and religious card as his position has weakened. And in consummate Mahathir style, Najib has now even sacked his deputy, Muyhiddin Yassin, for questioning Najib’s repression of the media in response to the 1MDB scandal. In sum, Mahathir has nobody to blame more than himself as he watches Najib drive Malaysia even further into the ground.

Neither Najib nor any of his current plausible replacements appear capable of reversing Malaysia’s decades-long decline. Herein lies perhaps Mahathir’s worst legacy of all. By forcing the three most capable politicians beside himself out of UMNO during their prime, Mahathir ensured that only relative lightweights would command leading positions in Malaysia’s most powerful political institution. If Malaysia is to exit this crisis on a path to restored health rather than steeper decline, the political and economic reforms first demanded in the reformasi movement of the late 1990s will finally need to put in place: either by a new generation of leadership within UMNO, or by Malaysia’s repressed but resilient political opposition.

Dan Slater is associate professor in political science at the University of Chicago.

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Is China a market economy? http://www.eastasiaforum.org/2015/07/28/is-china-a-market-economy/ http://www.eastasiaforum.org/2015/07/28/is-china-a-market-economy/#comments Tue, 28 Jul 2015 12:00:56 +0000 http://www.eastasiaforum.org/?p=47057 Authors: Gary Clyde Hufbauer and Cathleen Cimino-Isaacs, PIIE

There’s a potential mega-battle brewing over trade rules and the provision of market economy status for China that could reach the World Trade Organization (WTO) in 2016.

Whether particular countries grant China market economy status has important implications for the adjudication of anti-dumping cases. In international trade, dumping occurs when a country exports a product at a price below the normal cost of production or price paid in the exporting country.

China anti-dumping case

When China joined the WTO in 2001, Article 15 of China’s Protocol of Accession to the WTO generally allowed other WTO members to disregard Chinese prices and costs in anti-dumping cases and instead base the calculation of dumping margins using external benchmarks. An exception was made if Chinese producers could ‘clearly show’ that market economy conditions prevailed in the industry. Article 15 essentially authorised ‘nonmarket economy’ methodologies long used by the United States and the European Union in anti-dumping cases against communist countries.

Taking advantage of this provision, authorities in the United States, the European Union, Japan and Canada, among others, almost always use surrogate prices and costs to calculate Chinese dumping margins. Rarely are the authorities satisfied that market economy conditions prevail in Chinese industries.

This comparison with surrogate prices and costs typically leads to much higher dumping margins and thus much higher penalty duties imposed to bring the delivered price in the importing country closer to ‘normal value’. Since China is a leading target of dumping cases worldwide, the non-market economy methodology is a sore point with Chinese officials. A decade ago, China mounted a vigorous diplomatic campaign asking trade partners to accord it market economy status. The campaign succeeded with New Zealand, Singapore and Malaysia in 2004 and Australia in 2005, among others, but it did not persuade the United States, the European Union, Japan, Canada and several others.

All this brings us to the prospect of controversy come December 2016. Article 15(a)(ii) of China’s Protocol states:

The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail.

But buried in Article 15(d) is the critical sentence: ‘In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession’.

Chinese officials strongly argue that this sentence requires all countries to accord China market economy status on 11 December 2016, 15 years after China’s accession, and that WTO members can no longer use surrogate costs and prices in anti-dumping cases.

Some US and EU lawyers read the text differently. While they agree that Article 15(a)(ii) will effectively disappear, they do not agree that the Protocol confines WTO members to a binary choice between market economy (with its strict comparison of export prices with Chinese prices or costs) and non-market economy status (which allows comparison with surrogate prices or costs). They point to the opening language in Article 15(a), which states:

[T]he importing WTO member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China.

To be sure, under Article 15(d), the whole of Article 15(a) potentially disappears, but only ‘once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated’.

Come December 2016, the United States and European Union might well argue that China has not established that it is a market economy. They could modify their current surrogate practices and instead use ‘mix-and-match’ approaches — claiming that some Chinese firms or industries operate under market conditions and others do not. For those that do not, they could use surrogate prices or costs.

Whether the United States takes a hard-line mix-and-match approach, rather than grant China market economy status across the board, could well turn on policy considerations rather than legal parsing. Among these considerations will be the general atmosphere of commercial relations with China in 2015 and 2016, including the evolution of the renminbi exchange rate (devaluation would inspire a hard-line approach) and the outcome of the US–China Bilateral Investment Treaty negotiations (success would have the opposite effect).

With that observation from the economic text of realpolitik, we recommend that the United States should adopt a rebuttable presumption of market economy status in post-2016 anti-dumping cases. If a US petitioner can show that the Chinese firm accused of dumping is state-owned or state-controlled, does not publish financial accounts in accordance with international standards, or in other ways ignores commercial considerations in its business dealings, then the US Commerce Department could revert to surrogate prices or costs.

This approach would have two benefits: it would encourage Chinese state-owned and state-controlled firms to publish financial accounts and operate according to market principles, and it would answer fears by some US firms that they are being forced to compete with the Chinese Ministry of Finance.

If something like this mix-and-match approach is adopted, China might well initiate WTO litigation in response to an affirmative anti-dumping decision. But 2018 seems the earliest date for a final decision by the WTO Appellate Body. And even if China prevails in the WTO, the targeted Chinese firms would not receive retroactive refunds for anti-dumping duties collected prior to the ruling. Again, this hard commercial reality would encourage Chinese firms to publish accounts and operate according to market principles.

Answering these questions is of grave importance. The market economy battle, along with another potential battle over currency manipulation, has been spurred by the politically charged belief in the United States that China does not play fair — a legacy of many years of US trade deficits. These disputes could shape future trade rules, disputes and remedies for years to come.

Gary Clyde Hufbauer is a senior fellow and Cathleen Cimino-Isaacs is a research associate at the Peterson Institute for International Economics (PIIE).

This article is based on a previous post published here by the Trade and Investment Policy Watch blog of PIIE.

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China aims to set the regional cooperation agenda http://www.eastasiaforum.org/2015/07/28/china-aims-to-set-the-regional-cooperation-agenda/ http://www.eastasiaforum.org/2015/07/28/china-aims-to-set-the-regional-cooperation-agenda/#comments Tue, 28 Jul 2015 00:00:26 +0000 http://www.eastasiaforum.org/?p=47053 Author: Chen Dongxiao, SIIS

In late October 2013, the Chinese Communist Party Central Committee held a conference of Diplomatic Work with Neighbouring Countries  in Beijing, where it unveiled new priorities under its New Neighbourhood Diplomacy guidelines. The new approach makes China’s neighbourhood, covering both continental and maritime Asia, the top strategic priority for the first time. The key message of the conference was to reassure to the region that China will step up its proactive engagement with its neighbours. This is to be achieved by converting its rising economic and political clout into more regional public goods and paving the way for a community inspired by a common destiny.

Multiple strategic initiatives underpin China’s new emphasis on regional diplomacy. On the economic side, the prospect of downward pressure on regional growth and the fragmentation of regional trade and investment negotiation processes are two major challenges for China. The Silk Road Economic Belt and the 21st Century Maritime Silk Road—now synthesised as the Belt and Road Initiatives—are arguably Beijing’s boldest flagship proposals under the New Neighbourhood Diplomacy approach. The Belt and Road Initiatives aim to visualise a new mode of regional economic cooperation by tapping the huge potential for regional investment and trade, and taking advantage of economic complementarities between China and other regional countries. It is  also expected to further common interests by upgrading regional production, transportation and value chains.

For China, the initiative is already beginning to bear fruit. The Asia Infrastructure Investment Bank (AIIB), a new regional development bank initiated and led by China, has proved popular—attracting 57 founding members, including the UK, Germany, France, Australia, South Korea and many other advanced economies. More than 60 countries have expressed their interest in partnerships with the Belt and Road Initiatives. And many countries along the proposed Silk Road Economic Belt and the 21st Century Maritime Silk Road have already began talks with Beijing on coordinating policy, connecting facilities and better integrating trade and finance, as well as establishing people-to-people ties.

Ambitious as it is, the Belt and Road Initiatives are also the most complex projects Beijing has ever undertaken. Without efficient collaboration between the multiple stakeholders—including governments, NGOs, enterprises and the general public, both at home and abroad—it is unlikely to succeed.

In parallel with the Belt and Road Initiatives, China is also promoting another landmark initiative: the Free Trade Area of the Asia Pacific (FTAAP). The FTAAP has set the tone for the 2014 APEC economic leaders’ meeting in Beijing. China’s endorsement of the FTAAP demonstrates its commitment to more open, liberalised and high-quality trade and investment, as well as a more integrated regional economy.Beijing believes that the FTAAP can provide an overarching framework that transcends the narratives of competition between the Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP)—the two leading regional trade negotiation groups in the Asia Pacific—and help develop a roadmap for mutual accommodation and co-evolution of various regional trade & investment arrangements. Like the Belt and Road Initiatives, FTAAP is a long-term process and can only be realised through cooperation with other key economies, particularly the US, Japan and India.

Even more challenging is the issue of regional security. Today China faces multiple regional security challenges that range from diverging security perceptions, a rising security dilemma and deficiency of security public goods to managing maritime disputes and a plethora of other regional traditional and non-traditional threats. Under the guidelines of the new neighbourhood diplomacy policy, China is now engaging with regional security issues in more a more active way. It is participating in and sometimes leading  regional security capacity and confidence building measures (CBMs), such as collective natural disaster relief, joint rescue and patrol, and anti-terrorism exercises, as well as rebuilding security in Afghanistan and mitigating tensions on the Korean Peninsula. China has also been building up regional security institutions by upgrading the security cooperation in the Shanghai Cooperation Organization (SCO), resetting the Conference of Interaction and Confidence-Building Measures in Asia (CICA) and initiating many bilateral and multilateral CBMs meetings with neighbouring countries, including those between China and the ASEAN defence ministers.

China fully recognises that there is not yet a consensus on what kind of security order is appropriate for the Asia Pacific region at a time when there is a major rebalancing between rising and established powers. For instance, there is disagreement over whether the US-led alliance system is still legitimate and sustainable given the relative decline of US influence in the Asia Pacific. The lack of agreement over the regional security order will hamper security cooperation in the long run.

In May 2014, at the CICA summit meeting, President XiJinping talked about developing a commitment to a new security order based on the ideals of common, comprehensive, cooperative and sustainable security. He also encouraged Asian countries to play a leadership role in building this new order, with the engagement of key players outside the region. The Chinese understanding of a new security order in the Asia Pacific implicitly challenges the exclusiveness of the US-led alliance system. It has therefore caused suspicion and scepticism on the part of the US and some of its key allies in the region. How to reconcile these differences and develop a shared definition of regional security order among all major stakeholders? How to work out inclusive regional security architectures where China, the US and many other regional key players can not only peacefully co-exist but also cooperate in providing more security public goods for the whole region? These questions remain  key challenges for China if it is to play a bigger role in regional leadership in the future.

Professor Chen Dongxiao is President of the Shanghai Institutes for International Studies.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Leadership in the region‘.

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