Post-ASEAN Economic Community: Economic Cooperation Prospects

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Wong & Partners is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.

Post-ASEAN Economic Community:

Economic Cooperation Prospects

Impacts of AEC on Businesses

Meng Yew Wong Wong & Partners 8 December 2015

Hilton Kuala Lumpur, Malaysia

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Agenda

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Agenda

‒ ASEAN and the AEC

‒ Impacts on Trade of Goods

‒ Impacts on Trade of Services

‒ Impacts on Investments

‒ ASEAN 2025: Forging Ahead Together

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AEC Milestones

1967

•Birth of ASEAN

1977

•Agreement on ASEAN Preferential Trading Arrangements

1993

•ASEAN Free Trade Area (AFTA) entry into force

1995

•ASEAN Framework Agreement on Services (AFAS) signed

1997

•ASEAN Vision 2020

2003

•Bali Concord II (ASEAN Community)

2007

•Cebu Declaration (accelerate timeline to 2015)

2007

•AEC Blueprint

2008

•ASEAN Charter

2010

•ASEAN Trade in Goods Agreement (ATIGA) entry into force

2012

•ASEAN

Comprehensive

Investment Agreement (ACIA) entry into force

2015

•Formal Establishment of AEC

2016 - 2025

•AEC Blueprint 2025

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Development of Agreements in the Region

ATIGA 2009 CEPT 1992 AFTA

1992

Flow of Goods Flow of Services

AFAS Dec 1995

Flow of Investment

ACIA 2010 IGA 1987

AIA 1988 GATS

Dec 1995

+

=

+

=

ASEAN FTAs:

Concluded: China (2005), Korea (2007), Japan (2008), India (2010), Australia and New Zealand (2010).

Negotiating: Pakistan, EU, RCEP, Russia, Canada Others: Trans-Pacific Partnership

ATISA (pending)

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6

Economic Transformation of ASEAN

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7

Economic Transformation of ASEAN

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If ASEAN were one country…

First in the world

Second in the world

Third in the world

Fourth in the world

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ASEAN Trade with Korea

‒ Korea is ASEAN’s 5^th largest trading partner (after China, the EU, Japan and USA)

‒ ASEAN exports to Korea increasing and currently stands at USD51.9b, 1.8 times the value in 2007

‒ ASEAN imports from Korea growing at an even faster pace to USD79.8b, 2.7 times the value in 2007

‒ Korea also one of main sources of FDI into ASEAN. In 2014, Korea is the 6^th largest investor into ASEAN after the EU at USD29.2b (21.5%), Japan at USD13.3b (9.8%), USA at USD13b (9.6%) and China at USD8.9b

(6.5%)

‒ ASEAN’s ongoing efforts to strengthen investment regimes and improve on the region’s attractiveness as a single investment destination have continued to bear fruit. Since 2012, FDI inflows into ASEAN have

surpassed the US$100 billion mark.

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ASEAN Economic Community (AEC)

Single Market and Production Base

− Competitive policies

− Consumer protection

− IP rights

− Infrastructure Development

− Taxation and E-Commerce

Competitive Economic Region

− Free flow of goods

− Free flow of services

− Free flow of investment

− Free flow of skilled labor

− Freer flow of capital

Region of Equitable Economic Development

Region Fully Integrated into Global Economy

− SME development

− Initiative for ASEAN Integration

− Coherent approach to external economic relations

− Enhanced participation in global supply network

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Current 12 Priority Integration Sectors

11

Goods

− Agro-based products

− Automotives

− Electronics

− E-ASEAN (ICT equipment)

− Fisheries

− Rubber-based products

− Textiles and apparels

− Wood-basedroducts

Services

− Air travel

 ASEAN Open Skies Policy

− Healthcare

 Pharma and cosmetics MRA

− Tourism

 Visa exemption

− Logistics

 Multimodal transport

Future

As may be identified by the Ministers

responsible for ASEAN economic integration.

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ASEAN: Towards the AEC

December 2012 July 2014

How important are the integration policies of the ASEAN Secretariat to your strategy in South-east Asia?

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Potential Impacts of the AEC

 Supply chain optimization

 Access to markets

 An integrated production base

 Mutual recognition arrangements

 Creation of a competitive economic region

 Integration into global economy

 Equitable economic development

 Elimination of non-tariff barriers

 Technical requirements and standards

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Opportunities presented by the AEC

– Streamlining of administrative processes in trade: implementation of the ASEAN Single Window (ASW) will unify customs systems of the region.

– Liberalisation of trade in goods: products deemed important to national security and sovereignty are excluded. All countries have a ‘sensitive list’ of products.

– Fewer restrictions on cross-border movement of people: applies to leisure travelers and professionals.

– Fewer barriers to entry of foreign capital: streamlined administrative processes in capital markets entry. Goal is to have a common

agreement on contentious issues such as level of foreign ownership in specific industries.

– Harmonization of standards and technical requirements: will save

transaction time and avoid high costs of multiple testing requirements.

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Impacts on Trade in Goods

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Free Flow of Goods

‒ Agreements : Agreement on the Common Effective Preferential Tariff (CEPT)  ASEAN Trade in Goods Agreement (ATIGA)  ASEAN Free Trade Area (AFTA)

‒ Certain elements under AFTA : Tariff Liberalization,Non-Tariff Barriers Elimination, Rules of Origin (ATIGA Form D), Trade Facilitation (ASEAN Single Window, Self-Certification)

Tarriff Liberalization

1 JANUARY

2010

1 JANUARY

2015

ASEAN 6 CLMV

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Free Flow of Goods - Rates

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ASEAN Economic Community Blueprint 2025 – Trade in Goods

Trade in Goods (Strategic measures) Further

Strengthen ATIGA

Simplify and Strengthen the Implementation of

the Rules of Origin (ROO)

Accelerate and Deepen the Implementation of

Trade Facilitation Measures

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AEC Blueprint 2025 – What to expect for trade in goods

‒ Among the key focus areas for furthering the freedom of trade in goods outlined in the 2025 AEC Blueprint are the following:

 Full roll out of National Single Windows and expansion of the ASEAN Single Window beyond the Form D

 Wider implementation of trade-facilitating initiatives such as the Authorised Economic Operator programme and Self-Certification program

 Target the elimination of Non-Tariff Measures (“NTM”)

 Reduce requirements for certificates/permits/licenses

 Align with international standards

 Employ good regulatory practice to minimise compliance costs of meeting NTMs

 Remove quotas and quantity restrictions

 Harmonisation of standard and technical regulations

 Expand the standards conformance to beyond priority integration sectors

 Upgrade technical capacity and physical infrastructure for an effective assessment regime in the region

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Potential Barriers to Integration

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Case Study: Trade in Goods

Korean Holding Company

Indonesian market

Thailand market

Singapore market Malaysian

Manufacturing Facilities

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The AEC will likely mean

‒ More standardized products and services across ASEAN

 particularly B2B & higher-value/premium market segments

‒ Sales and marketing approach to be based on factors other than countries: customer types, industry sectors, cities, towns and rural areas across ASEAN.

‒ More new factories across ASEAN.

‒ More manufacturing consolidations and fragmentations.

‒ More companies with a strategy oriented around the

ASEAN region.

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Go to market: Local vs regional structures

Source: Economist Corporate Network 23

• Oversight & performance management

• Brand management

• Decisions around portfolio of products & services

• Consumer marketing plans

• Trade marketing plans

• Manufacturing

ASEAN level

Country level

• Local deployment of regional marketing plans

• Sales activation

• Driving distribution

• Managing local relationships

ASEAN level

Country level

• Oversight & performance management

• Brand management

• Deploying global R&D base

• Sharing global best practices, esp with marketing

• Decisions around portfolio of products

& services

• Consumer marketing plans

• Trade marketing plans

• Manufacturing

• Sales activation

• Driving distribution

• Managing local relationships

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ASEAN: Shifting manufacturing landscape

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Indonesia and Myanmar see manufacturing investment grow swiftly

Survey of 75 manufacturing firms: No of factories today and in 5 years’

time

Source: Economist Corporate Network survey of 171 multinational firms, July

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Impacts on Trade in Services

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Liberalization of Trade in Services - Regionally

Vietnam

,

 Negative List

 More favourable to ASEAN investors

 Aligned with region in areas of education, transport, internet and telephone service, but not communication, distribution, healthcare and travel

Indonesia

 Philippines allows foreign investment in any activity in the Philippines, except restricted activities. The ‘negative list’ is updated every 2 years

 Restricted Activities include

 Retail trade with paid-up capital less than USD2.5 million, private security agencies, small-scale mining, construction of defence structures, private radio communications network, private recruitment companies, exploration, development and utilization of natural resources, ownership, establishment and administration of education institutions, financing of companies regulated by SEC and investment houses regulated by SEC

Philippines

 Thailand allows ASEAN investors to hold up to 70% in certain services businesses such as professional, telecoms, construction and distribution services.

 Closed for certain sectors such as for special reasons (e.g. newspaper, farming and fisheries) for national safety or security, or those having adverse effect on natural resources or environment (e.g.

mining)

Thailand

 100% foreign equity allowed in certain subsectors including:

 Telecommunications, technical and vocational schools, private hospitals, departmental and specialty stores, accounting (including audit) and taxation and courier services

 Sectors liberalised including:

 International schools, legal services, medical specialists, engineering services, architectural services and private universities

Malaysia

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Services: Services Sectors to be liberalised

1. Business Services / Professional Services 2. Communication Services 3. Construction and Related

Engineering Services 4. Distribution Services 5. Educational Services 6. Environmental Services 7. Financial Services

8. Health Related and Social Services

9. Tourism and Travel Related Services 10. Recreational, Culture, and

Sporting Services 11. Transport Services

12. Other Services not Included Elsewhere

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Services Sector / Sub-sector Current Liberalization Measures Commitment under GATS / AFAS / FTA

Transport & Logistics

1. Maritime transport service 2. Internal waterways transport 3. Air transport services 4. Space transport 5. Rail transport services 6. Road transport

7. Pipeline transport

International integrated logistics services (IILS) covering freight

forwarding, warehousing, transportation and other related value added services (distribution, procurement, supply chain management) allows 100% foreign equity.

GATS allows foreign equity not exceeding 30%

through a local joint venture in the following sub- sectors:

 maritime transport services (exclude cabotage and government cargo);

 maritime agency services

 vessel salvage and refloating services except on inland water

AFAS provides for liberalization in stages up to 70% in 2014.

Malaysia (Example)

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Services Sector / Sub-sector Current Liberalization Measures Commitment under GATS / AFAS / FTA

Transport & Logistics

1. Maritime transport service 2. Internal waterways transport 3. Air transport services 4. Space transport 5. Rail transport services 6. Road transport

7. Pipeline transport

In general, Singapore does not impose limitation on foreign shareholding.

GATS allows foreign equity not exceeding 30%

through a local joint venture in the following sub- sectors:

 maritime transport services (exclude cabotage and government cargo);

 maritime agency services

 vessel salvage and refloating services except on inland water

AFAS provides for liberalization in stages up to 70% in 2014.

Singapore (Example)

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Thailand (Example)

Commitments under AFAS

Below are the core sectors / sub-sectors that are aligned with AFAS

Services Sector / Sub-sector

Sub-sector Liberalization Measures under 8^th Package

Liberalization Measures under 9^th Package

Transportation/

Maritime Transport Services

Passenger transportation (excluding cabotage

transport) Allow 51% foreign equity Allow 70% foreign equity

International sea cruises (cruise carrier with more than 200,000 dwt capacity) (CPC Version 1.1: part of 65119) This subsector does not include transportation of passengers on coastal route between domestic port

Allow 51% foreign equity Allow 70% foreign equity

Maintenance and repair of vessels exceeding

100,000 dwt (part of CPC 8868) Allow 51% foreign equity Allow 70% foreign equity

Vessel salvage and refloating services (CPC 1.1 67630)

This subsector does not include:

• towing services supplied to distressed vessels;

 on coastal waters or on open sea, cf.

65140

 on inland waters, cf. 65240

• lifeboat services, marine fireboat services and other marine search and rescue services;

 police sevices, cf. 91260

 marine fireboat services, cf. 91260

 other public order and safety affairs related services, cf. 91290

Remark : CPC stands for Central Product Classification

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Thailand (Example)

Commitments under AFAS

Below are the core sectors / sub-sectors that are aligned with AFAS

Services Sector / Sub-sector

Sub-sector Liberalization Measures under 8^th Package

Liberalization Measures under 9^th Package

Transportation/

Rail Transport Services

Maintenance and repair of rail transport equipment on a fee or contract basis (CPC 8868)

Railway car cleaning services under the service

contract of railway authority Allow 70% foreign equity Allow 70% foreign equity Transportation/

Space Transport Services

Transport services via space (CPC 1.1 :66300)

This subclass includes:

-space passenger transportation services This subclass does not include:

- launching and placing of satellites in space - services provided by space laboratories

Transportation/

Services Auxiliary to All Modes of Transport

Storage and warehousing services of frozen or

refrigerated goods (CPC 74210) Not indicated Allow 70% foreign equity

Storage and warehouse services for maritime

transport Allow 49% foreign equity Allow 49% foreign equity

Remark : CPC stands for Central Product Classification

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Indonesia (Example)

A comparison between the Negative List and the AFAS Commitments

Below are the sectors / sub-sectors that are aligned with AFAS

No Sector Line of Business AFAS and Negative List

4 Transport Services International Passenger Transport Excluding Cabotage and International Freight Transport Excluded Cabotage

Open 60% for ASEAN Investors

Vessel Salvage and Refloating Open 49% foreign ownership Internal Waterway Transport (Ferry

Transport , and River and Lake Transport in the Negative List)

Open 49% foreign ownership

Pushing and Towing Services and Supporting Services for Internal Waterway Transport

Open 49% foreign ownership (it can be 95% if under PPP) Freight Transportation Open 49% foreign ownership Maritime Freight Forwarding Services Open 49% foreign ownership

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Indonesia (Example)

Below are some the sectors which have a discrepancy with AFAS:

No Sector or Subsector AFAS Negative List

Transport Services

1 Pushing and Towing Services for Maritime Transport

Open 51% for foreign investors Open 49% for foreign investors

However it can be 95% if under PPP

2 Freight Transportation (limited to Transportation of frozen refrigerated goods)

3 Maritime cargo handling services

4 Cold storage and warehousing services

Outside Port Area and 1st Area for Storage services of frozen or refrigerated goods and other storage or

warehousing services

However for cold storage, it can be up to 67% in Kalimantan, Sulawesi, Nusa Tenggara, Maluku, and Papua

5 Storage and warehousing services

Outside Port Area and 1st Area for storage services of frozen or refrigerated goods

However for cold storage, it can be up to 67% in Kalimantan, Sulawesi, Nusa Tenggara, Maluku, and Papua

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ASEAN Economic Community Blueprint 2025: Trade in Services

Trade In Services

ASEAN Framework Agreement on

Services (AFAS)

ASEAN Trade in Services Agreement

(ATISA)

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AEC Blueprint 2025 – What to expect for trade in services

‒

Among the key focus areas for furthering the freedom of trade in services outlined in the 2025 AEC Blueprint are the following:

 Implement ATISA as the legal instrument for further integration

 Go beyond revising limitations on foreign equity participation – look to enhance other mechanisms to attract FDI in the

services sector

 Explore alternative measures to further liberalise services sector

 Increase exchange of best practices in the region

 Engaged in joint promotion activities to attract FDI

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Case Study: Trade in Services

Vietnam market

Indonesia

market Thailand market Malaysian

Subsidiary

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Impacts on Investments

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Investment Liberalization under ASEAN Comprehensive Investment Agreement (ACIA)

‒ ACIA is focused on creating free and open investment regime in ASEAN through:

 progressive liberalisation of investment

 provisions of enhanced protection to investments of Member States

 improvement of transparency and predictability of investment rules

 joint promotion of the region as an integrated investment area

 cooperation to create favourable conditions for investments

‒ ACIA deals with liberalization of 5 main types of investment:

Manufacturing Fishery Forestry Mining and

quarrying Agriculture

Services incidental to

the above 5 sectors

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ASEAN Economic Community Blueprint 2025: Promotion of Investments

Promotion of Investments Strategies

ASEAN Comprehensive Investment Agreement

(ACIA)

Progressive liberalisation of existing

investment restrictions in manufacturing, agriculture, fishery, forestry and mining

Significantly strengthens investment

protection

Ensure transparency of investment laws,

regulations and administrative

guidelines.

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AEC Blueprint 2025 – What to expect regarding promotion of investments

‒ Among the key focus areas for furthering the attractiveness of ASEAN as an investment destination outlined in the 2025 AEC Blueprint are the following:

 Increase transparency of investment laws, regulations and guidelines

 Continue liberalisation of investment restrictions

 In Manufacturing, agriculture, fishery, forestry, mining and incidential services

 Push for continued phasing out / reduction of the ACIA Reservation Lists

 Strengthen investment protection

 Continue to promote ASEAN as a open, transparent and predictable investment destination

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Case Study: Investment Agreements

Vietnam market

Indonesia

market Thailand market Malaysian

Subsidiary

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ASEAN 2025: Forging

Ahead Together

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ASEAN 2025: Forging Ahead Together

‒

At the recent 27th ASEAN Summit, Kuala Lumpur, Malaysia held on 18-22 November 2015, 10 ASEAN Member States signed the KL declaration on ASEAN 2025: Forging Ahead Together, which adopted the following:

 ASEAN Community Vision 2025

 ASEAN Political-Security Community Blueprint 2025

 ASEAN Economic Community Blueprint 2025

 ASEAN Socio-Cultural Community Blueprint 2025

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Summary of ASEAN

Economic Community

Blueprint 2025

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ASEAN Economic Community Blueprint 2025

• Focus: to facilitate seamless movement of goods, services, investment, capital and skilled labour within ASEAN

A Highly Integrated and Cohesive Economy

• Focus: to improve region’s competitiveness and overall productivity A Competitive, Innovative, and Dynamic ASEAN

• Focus: enhance economic connectivity involving various sectors and to further integrate and cooperate in key sectors to maximise their contribution in improving the overall competitiveness of ASEAN and strengthening soft and hard networks in the region Enhanced Connectivity and Sectoral Cooperation

• Focus: to promote human rights and fundamental freedoms, higher quality of life and the benefits of community building, reinforcing our sense of togetherness and common

identity

A Resilient, Inclusive, People-Oriented, and People-Centred ASEAN

• Focus: to work towards a common position and enhance ASEAN’s role and voice in global economic fora

A Global ASEAN

The AEC Blueprint 2025 will build on the AEC Blueprint 2015 consisting of five interrelated and mutually reinforcing characteristics, namely:

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ASEAN Economic Community Blueprint 2025

‒ The immediate priority is to complete the implementation of

measures unfinished under the AEC Blueprint 2015 by end-2016.

‒ The continuing commitments of Cambodia, Lao People’s

Democratic Republic, Myanmar and Viet Nam (“CLMV”) under the AEC Blueprint 2015 up to 2018 are also incorporated under the AEC Blueprint 2025.

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ASEAN Economic Community Blueprint 2025

integrated and ^deeply

highly cohesive ASEAN economy

more equitable and inclusive

economic growth in ASEAN

robust productivity growth through

innovation, technology and human resource development and

regional R&D

promote good governance, transparency, and responsive

regulatory

widen ASEAN people-to-

people, institutional, and

infrastructure connectivity create a more

dynamic ASEAN, capable of responding and adjusting to new

challenges incorporate a

sustainable growth that promotes a science-based use of green technology

and energy promote ASEAN

Protocol on Enhanced Dispute

Settlement Mechanism (EDSM)

and speedy DR methods reinforce ASEAN centrality in the

emerging regional economic architecture

common position and

enhance ASEAN’s role

and voice in global economic

fora

Focus areas of the AEC 2025

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Status of Trade Facilitation

Measures

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Country Updates - Malaysia

‒ Self-certification for manufacturers registered with MITI implemented under ATIGA

‒ National Single Window fully implemented w.e.f. 1 January 2016 under “U-customs” system

‒ Proposed platform under “U-customs” to replace the existing

ePCO (electronic preferential certificate of origin) system to accept applications for the cost analysis and application for endorsement of any certificate of origin

‒ Mutual Recognition Arrangement (MRA) for Authorized Economic Operator (AEO) status with Japan

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Country Updates – Malaysia (Cont’d)

‒ Implementation of the ASEAN Common Technical Requirements and ASEAN Common Technical Dossiers through the revised March 2015 Drug Registration Guidance Document issued by the National

Pharmaceutical Control Bureau under the Ministry of Health

‒ Implementation of the ASEAN Mutual Recognition Agreements for Engineering Services and for Architectural Services through the Engineers (Amendment) Act 2015 and the Architects (Amendment) Act 2015

‒ New Guidelines on Financial Penalties and Leniency Regime published by the Malaysian Competition Commission

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Singapore

‒ Singapore Customs implemented ASEAN Self-Certification Scheme from 1 November 2010

‒ Singapore Customs chaired the ASEAN Task Force to develop the ASEAN Harmonised Tariff Nomenclature (“AHTN”) 2012

 AHTN incorporated into TradeNet system

‒ Singapore is a signatory to the following Mutual Recognition Agreements (“MRAs”):

i. Agreement on the ASEAN Harmonized Cosmetic Regulatory Scheme;

ii. Agreement on the ASEAN Harmonized Electrical and Electronic Equipment (“EEE”) Regulatory Regime

iii. ASEAN Agreements on Traditional Medicines and Health Supplements (anticipated to be signed in November 2015)

‒ Singapore implemented removal of requirement to state FOB

value in Box 9 of ATIGA Preferential CO Form D in specific cases.

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Country Updates - Indonesia

‒ As part of the economic deregulation package in Indonesia, the government has issued several regulations in relation to the trade sector (particularly regarding Non Tariff Barrier) e.g. MOT

Regulation 50/2015 and MOT Regulation 73/2015;

‒ MOT Regulation 50/2015 revokes the requirement of Special Importer Identification Number for import clearence;

‒ MOT Regulation 73 /2015 revokes the requirement to obtain label certificate for import clearance. That said, certain goods must still bear required labels before they can be distributed in Indonesia.

‒ The Indonesian government is also under ongoing discussion to revise several regulations related to import licenses.

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Country Updates - Thailand

‒ Customs Act (No.21) B.E. 2557 (2014) on transit, transshipment and advance rulings for customs tariff classification, customs value and origin of the imported goods

‒ Proposed new Customs Act for more transparent and flexible

customs procedures, to make customs procedures more efficient, and to be in line with a context of AEC, on 21 July 2015

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New regulations for advance ruling

Details Previous ruling Current ruling

Three types of advance ruling available:

1. Customs valuation 2. Tariff classification 3. Rule of origin

 

Legally binding

 ^

Validity period



(Two years)

^

Service fees



(THB 2,000)

^

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Proposed new Customs Act

Issue Current law Proposed law

1. Reward sharing system

Relevant officers

- Up to 25 percent of penalties with no cap Informants

- Up to 30 percent of penalties with no cap

Relevant officers

- Up to 15 percent of

penalties with a cap of THB 5 million per case

Informants

- Up to 30 percent of

penalties with a cap of THB 10 million per case

2. Customs offence All the custom offences for smuggled goods, evasion of duty, and evasion of

prohibition have the same penalty level.

Different degrees of penalty for different offence levels.

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Proposed new Customs Act

3. Time period for post-audit

No time limitation 5 years from the date of import or export

4. Timeframe for

consideration of the Appeal Committee

No timeframe 180 days from the date of receiving an appeal

5. Timeframe for

claiming duty refund

2 years from the date of import or export

3 years from the date of import or export

6. Duty surcharge No cap Capped at an amount equal to duty shortfall

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Proposed new Customs Act

7. Power to seize or attach the

properties of debtors

N/A Customs officers have

authority to seize and attach the properties of debtors (like revenue officers) 8. Importation date of

restricted goods

The importation date is at the time when the vessel enters into Thai territory.

It is deemed that the restricted goods import into Thailand when there is a customs clearance of such

restricted goods.

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Wong & Partners is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology