Eyes on the Trans-Pacific partnership - its impact on the ASEAN Economic Community

 Introduction 5 October 2015 will go down as a date of great importance for Singapore, Malaysia, Brunei Darussalam, Vietnam and 8 other countries in the Asia-Pacific Economic Cooperation, as it marked the successful conclusion of negotiations for the Trans-Pacific Partnership (“TPP”). This brings to an end 5 long years of intense negotiations between the parties, which at various points in time, had threatened to break down. At its simplest, the TPP may be classified as a free trade agreement between the participating countries - Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. However, its scope and significance extends far beyond traditional trade issues, and touches on many other aspects of the law, including data protection, intellectual property and competition policy. It is for this reason that the TPP is seen as a “landmark 21st century agreement”. The full text of the TPP has recently been released by the parties on 5 November 2015. Given its voluminous nature, this update will only broadly summarise the key aspects of the TPP and suggest its possible interaction with the ASEAN Economic Community (“AEC”), which is slated to kick in shortly. While each participating party will still have to ratify the TPP in their respective countries, which may take up to 3 years, businesses which operate across borders in these countries should start reviewing, analysing and thinking about appropriate preparatory steps to take to fully benefit from this agreement between countries which represent 40% of the world’s Gross Domestics Profit. Scope of the TPP The TPP seeks to integrate the participating Asia-Pacific Economic Cooperation (“APEC”) countries into a single manufacturing base and market by, inter alia, eliminating or reducing tariffs and non-trade barriers, harmonising rules and improving transparency in their respective regulatory environment. It consists of 30 chapters, ranging from traditional trade issues, such as trade in goods and rules of origin, to emerging and more novel trade issues, including the Internet and the digital economy and participation of state-owned enterprises. It also imposes labour standards and environmental conditions on the participating countries. Some of the key points in the TPP are highlighted below:  Regional trade of goods and services: The TPP eliminates or reduces tariff and non-tariff barriers across substantially all trade in goods and services, facilitating the freer trade of goods and services among the countries. This includes removal of tariffs in industrial goods and agricultural products, textiles and apparel, introduction of rules requiring non-discriminatory investment policies and removal of qualitative restrictions on the supply of services. In addition, the TPP also promotes regional cooperation of supply chains by simplifying the rules of origin, in particular, by treating inputs from one TPP party as the same as materials from any other TPP party. The TPP parties are also to ensure that their technical regulations, standards and conformity assessment procedures will not create unnecessary barriers to trade. CLIENT UPDATE 2015 NOVEMBER COMPETITION AND TRADE 2 © Rajah & Tann Singapore LLP  Investment protection: The TPP provides for the basic investment protections found in other investment-related agreements, such as national treatment; most-favoured-nation treatment; minimum standard of treatment for investments in accordance with customary international law principles; prohibition of expropriation; prohibition on certain performance requirements; and free transfer of funds related to an investment. However, the TPP does recognise the sovereignty of individual governments in their ability to manage volatile capital flows, and to maintain the integrity and stability of the country’s financial systems. On this, the TPP parties have also adopted a “negative-list” basis, which means that their markets are fully open to foreign investors except where an exception in the country-specific annexes applies.  Telecommunications: The TPP sets out network access rules which cover major telecommunications services suppliers and mobile suppliers. This includes ensuring that there is reasonable access to essential telecommunications facilities, transparency in the licensing process, and non-discriminatory technology licensing regimes. More interestingly, the TPP provides that operators from other TPP countries can benefit from wholesale international roaming rates offered by a certain party. This will definitely be a space to watch as it will enable greater competition.  E-commerce and the digital economy: Under the TPP, the parties have committed to ensuring the free flow of global information and data, which is recognised as being essential to the growth of the Internet and the digital economy. The TPP prohibits the imposition of customs duties on electronic transmissions, and prevents parties implementing discriminatory measures or outright blocking measures which favour national producers or suppliers. In addition, the TPP parties agree that consumer protection laws, including online consumer protection, must be maintained, and there must be enforcement of privacy and other consumer protections in the TPP markets, including cooperation on policies regarding personal information protection, online consumer protection, cyber-security threats and cyber-security capacity. With the continual growth in e-commerce as the preferred manner of doing business, such co-operation can only benefit businesses and end consumers.  Implementation of competition framework: The TPP parties agree to adopt or maintain national competition laws that prohibit anticompetitive business conduct, and for such laws to be applicable to all commercial activities in their territories. The TPP parties are also required to establish or maintain authorities responsible for the enforcement of national competition laws. In relation to competition law, the TPP sets out obligations on due process and procedural fairness, as well as private rights of action for injury caused by a violation of national competition law. Finally, under the TPP, the parties agree to cooperate in relation to competition policy and enforcement, which potentially involves the exchange of information between national regulators. The agreement here is not new, and with the AEC regulating the same of the ASEAN countries and the sheer global adoption of competition laws, the expectation is for greater fair competition across the world.  State-owned enterprises: On State-Owned Enterprises (“SOEs”), while recognising that SOEs play an important role in the provision of public services, the TPP countries agree that their SOEs must enter into commercial transactions on the basis of commercial considerations, and must not discriminate against the enterprises, goods and services of other parties. The courts of the TPP parties are also provided with jurisdiction over the commercial activities of foreign SOEs in their territory. In addition, the TPP parties have also agreed not to cause adverse effects to the interests of other TPP parties in providing non-commercial assistance to SOEs or injure another party’s domestic industry by providing non-commercial assistance to their SOEs which produce or sell goods in such other territories. CLIENT UPDATE 2015 NOVEMBER COMPETITION AND TRADE 3 © Rajah & Tann Singapore LLP  Protection of intellectual property rights: The TPP seeks to provide for a comprehensive protection and enforcement framework which covers all forms of intellectual property rights, including patents, trademarks and copyrights. It establishes standards for patents based on the WTO’s TRIPS Agreement and international best practices, protects trademarks and other signs used by businesses to distinguish their products, and establishes commitments related to copyright protection in the digital environment. In particular, the TPP parties are required to establish or maintain a framework of copyright safe harbours for Internet Service Providers, but such safe harbours should not be contingent on them monitoring their systems for infringing activity. The TPP parties have also agreed to put in place legal procedures aimed at preventing the misappropriation of trade secrets, as well as implement criminal procedures and penalties for theft of trade secrets, including cyber-theft and cam-cording.  Focus on small and medium enterprises (“SMEs”): The TPP importantly seeks to ensure that economies at all levels of development and businesses of all sizes can benefit from trade. As an acknowledgement of the importance of SMEs in economic growth, it focuses on promoting the participation of SMEs in trade. As such, the TPP parties have agreed to create user-friendly websites targeted at SMEs to provide easily accessible information on the TPP and ways SMEs can take advantage of it. It also establishes a SME Committee to review how well the TPP is serving SMEs. The aim is to empower SMEs to compete in an increasingly globalised world.  Protection of labour rights: The TPP parties have agreed to adopt, maintain and practice the fundamental labour rights as recognised in the International Labour Organisation 1998 declaration, such as the freedom of association, right to collective bargaining and elimination of discriminatory practices. The parties have also agreed to have laws governing minimum wages, hours of work, and occupational safety and health. In addition, the TPP parties have committed to ensuring that administrative and judicial proceedings for violations of labour law are fair, equitable and effective. The majority of the TPP parties already have such rights entrenched in their countries, but it is nevertheless worth restating.  Environmental protection: As with most trade agreements, the TPP requires the parties to effectively enforce their environmental laws, and not to weaken environmental laws under the guise of encouraging trade or investment. Environmental protection goes to ensuring sustainability, and unless all of the TPP parties ensure effective enforcement, dire consequences could be faced by all collectively. In addition, TPP parties are required to fulfil their obligations under the Convention on International Trade in Endangered Species of Wild Fauna and Flora, to promote sustainable forest management, and to protect and conserve wild fauna and flora, and such other multilateral environmental agreements of which they are parties to.  Anti-corruption: On this front, the TPP parties recognise the importance of having in place strong anti-corruption laws and commit to ensuring that anti-corruption laws are effectively enforced. This will include putting in place measures to manage conflict of interests, training of government officials, taking steps to discourage gifts and implementing processes which facilitate the reporting of acts of corruption. These are rules which are in existence – but what would be important is to ensure their effective enforcement. The TPP serves as a critical step towards and is intended to provide the blueprint for integration across the region, with the ultimate aim of achieving a single production and market base in the Asia Pacific region. In this regard, the TPP has been expressly designed for future expansion to other Asia Pacific economies that are willing to meet the high standards of the TPP. Interaction between the TPP and the AEC Only 4 ASEAN Member States – Singapore, Malaysia, Brunei Darussalam and Vietnam – are currently parties to the TPP. Given this, the interactions between the TPP and ASEAN, as a region, will likely be an interesting one to watch given the AEC. In this section, we will discuss some of the key implications of the TPP on the AEC. CLIENT UPDATE 2015 NOVEMBER COMPETITION AND TRADE 4 © Rajah & Tann Singapore LLP Briefly, the AEC is an initiative by the ASEAN member countries to form a partial economic union between the region, by transforming it into an area with free movement of goods, services, investment and skilled labour, along with a freer flow of capital. It aims to achieve this via four key pillars: (i) a single market and production base; (ii) a competitive economic region; (iii) equitable economic development; and (iv) integration into the global economy. Further information on this can be found at the “Business in ASEAN” portal at http://www.businessinasean.com/. One of the key projected benefits of the TPP in the ASEAN region is its unification of trade standards among the TPP parties who also include some ASEAN member states. Whilst this at first blush will appear to create conflict between the different groups of countries and possibly within ASEAN, we believe it will assist the participating countries in unifying their trade standards in the ASEAN region, working in conjunction with the AEC. In this sense, the TPP aligns with the objectives of the AEC, as they both share the same objective of integrating the region into a single manufacturing base and market. Indeed, as part of the implementation of the AEC, the ASEAN Member States have already agreed to implement certain commitments and adopt various measures in areas which overlap with the TPP, for example, the development of competition policy, consumer protection and intellectual property rights. As an illustration, as part of the AEC’s objective of creating a competitive economic region, ASEAN Member States are required to introduce nation-wide competition policy and law by the end of 2015, which would also satisfy the competition-related obligations in the TPP. However, given that the 4 ASEAN Member States who are parties to the TPP do already have a national competition law in place, it remains to be seen if this will have any impact on the introduction of the national competition policy by the other Member States. However, whilst recognising that the TPP is a significant milestone, one should temper this with a realisation that its impact should not be overstated, as it is still merely a trade agreement. The AEC itself was mooted in 2003 and agreed upon by the ASEAN member countries in 2007, but some eight years later, it has still yet to come to fruition, although 2015 remains on the cards. In addition, bearing in mind the overlapping nature of the AEC and the TPP in terms of areas such as free movement of goods and services, detractors may argue that the actual practical impact of the TPP may be limited in the ASEAN region. Still on detractors, some economic analysts have suggested that the TPP may not benefit the AEC as a whole, but only those participating in the TPP. Even when complete, the TPP will only include four ASEAN Member States, thereby missing ASEAN’s largest players. This may raise concerns in several areas. As an example, regarding the regulatory coordination of intellectual property rights, given the TPP’s demanding requirements as compared to the AEC’s Intellectual Property Rights Action Plan 2011 – 2015, the TPP could displace the four ASEAN members from ever harmonising their intellectual property laws with their non-TPP neighbours. Therefore, the introduction of the TPP may create a position where unification among one region comes at a cost of fragmentation in another. The TPP may also have a significant impact on the non-participating ASEAN member countries in terms of the flow of trade. In particular, Indonesia, Thailand and the Philippines may feel the competitive disadvantages for their exports, as the TPP could cause a degree of trade diversion away from ASEAN’s non-TPP members. The concept of cumulation regarding rules of origin (where materials from one TPP party are treated in the same way as materials from any other TPP party when making a TPP good) may encourage TPP parties to do businesses with each other, instead of producers in other ASEAN countries, thereby potentially fragmenting the unity of the region which the AEC intends to achieve. Yet, on the flipside, the bold may find opportunities by taking advantage of the best of the TPP and that of the AEC to grow their business and open more doors. As such, it remains to be seen whether the non-TPP ASEAN member countries will be able to utilise the AEC to develop ASEAN-wide production networks which are able to ride on the benefits of the TPP, or whether the disconnect will be too great. CLIENT UPDATE 2015 NOVEMBER COMPETITION AND TRADE 5 © Rajah & Tann Singapore LLP Impact on Malaysia In terms of the TPP’s impact on Malaysia, the Government takes the stance that the trade agreement would open up market access opportunities, enable Malaysian goods to compete on a global level and bolster foreign investors’ confidence. Interest from foreign companies based in non-TPP countries in Malaysia has risen as a result of Malaysia’s involvement in the TPP, mostly due to the benefits that flow from the TPP. Aside from deepening Malaysia’s economic integration within the Asia Pacific region, trade links with countries such as the United States, Canada, Mexico and Peru could be established, none of which could have existed before due to the lack of framework. As for long-term benefits, the TPP is envisaged to lower cost of goods and increase production efficiency by taking advantage of the heightened competition and larger economies of scale. According to figures from the Ministry of International Trade and Industry, a successful adoption of the TPP will create a market of 793 million people, with collective GDP of USD 27.5 trillion. This could be contrasted with the limited domestic market of 29.5 million people with a GDP of US 300 billion. In short, the TPP will create a seamless market with preferential access which facilitates investment opportunities globally and also regionally. Conversely, critics of the TPP have scoped in on the issue of intellectual property rights, specifically on the lengthening of terms of patents. Most patents filed in Malaysia are owned by foreign nationals. The problem becomes apparent when patent laws are fortified; the benefit will pass on to foreign patent holders. The predicted effect suggests that it would run counter to Malaysia’s goals in joining the TPP, namely in lowering the prices of goods. The enhanced monopoly afforded to patent holders would mean higher prices and decreasing the competition in the market, especially in the pharmaceutical industry. It is important to note that patent protection for pharmaceutical drugs still remains at 20 years. The TPP states that the patent period would only be extended in the event there is an unreasonable or unnecessary delay in patent or marketing approval. This means that the duration of any patent, if extended, is dependent on the efficiency of Malaysia’s patent or marketing approval system and not a specific provision extending patent protection under the TPP per se. Specifically, on the area of biologics and test data protection, which enjoy a 5 year minimum exclusivity period, the TPP requires applicants to register the item for registration of pharmaceuticals in Malaysia within 18 months from the date the product is first granted marketing approval in any other country. Another concern is focused on a provision called investor-state dispute settlement (“ISDS”). The provision functions as a dispute resolution mechanism where investors could have recourse to international arbitration in addition to domestic courts. Critics suggest that the ISDS poses a threat to the sovereignty of its signatories. They worry that changes in government policies can lead to claims of unfair treatment and the foreign investor could seek compensation for loss of expected future profits. However, ISDS’s are not new to Malaysia as these are common in many free trade agreements. An ISDS provision has also been used by Malaysian companies on two occasions which resulted in a decision in favour of the Malaysian investor and the matter being settled. Impact on Singapore The TPP consists of some of Singapore’s largest trading partners, including Malaysia, the United States and Japan, with the TPP parties alone accounting for approximately 30% of Singapore’s total goods trade in 2013. However, compared to the other ASEAN member countries, Singapore may have relatively less to gain in participating in the TPP. This is because Singapore, with 21 free trade agreements and economic partnership agreements currently in place with 32 economic partners, has effectively already partnered with almost all of the TPP parties. Yet, for a small country like Singapore, where free trade remains critical and protectionism must be frowned upon, participation in the TPP can only strengthen the linkages between Singapore and advanced and developed economies such as the US and Japan. Singapore businesses will also be able to tap on growth opportunities in the fast-growing Latin American region. Additionally, the TPP opens up a CLIENT UPDATE 2015 NOVEMBER COMPETITION AND TRADE 6 © Rajah & Tann Singapore LLP considerable number of new markets, such as Canada and Mexico, for Singapore-based companies, and facilitates additional business opportunities through the elimination of tariffs on Singapore’s exports. Apart from the increased market access, the TPP will also be hugely beneficial in terms of regional market integration for Singapore, not just at present but also in the future, in terms of the introduction of a Free Trade Area of the Asia Pacific. Singaporean businesses with operations in the TPP region will find it easier, faster and cheaper to get their products to market in light of the elimination of most trade tariffs and the increased extent of duty-free treatment for goods. In addition, the simplification and unification of the rules of origin means that Singaporean manufacturers will more easily qualify for lower tariff rates under the TPP when utilising raw materials from TPP parties. The TPP’s focus on SME participation in trade will also be hugely beneficial to Singapore. As SMEs contribute to more than 50% of Singapore’s GDP, the facilitation of their participation in global trade will definitely be an asset to the development of Singapore’s economy. Under the TPP, Singapore-based SMEs will be better able to leverage off the regional opportunities, and be better able to operate in the region. What to expect moving forward 5 October 2015 merely marked the conclusion of negotiations between the participating countries in the TPP. All 12 participating countries must now return to their own constituencies and obtain approval for the signing of the TPP. The ratification process of the TPP will take time for a number of reasons. As such, final implementation of the TPP will still have some way to go, and may take approximately 2-3 years more. Whether the TPP’s benefits to the participating ASEAN member countries will be fully realised will also ultimately depend on domestic economic policy and how national governments prepare for the changes. However, given the impact of the TPP, businesses may wish to begin reviewing their business and operational model, and start adopting appropriate business strategies in order to best capture the benefits of increased market access and lower tariffs of the TPP. Any steps towards freer trade can only be beneficial. Fast movers will have much to reap. ASEAN Economic Community Portal Ahead of the launch of the AEC in December this year, businesses looking to tap the opportunities presented by the integrated markets of the AEC can now get help a click away. Rajah & Tann Asia, United Overseas Bank and RSM Chio Lim Stone Forest, have teamed up to launch “Business in ASEAN”, a portal that provides companies with a single platform that helps businesses navigate the complexities of setting up operations in ASEAN. By tapping into the professional knowledge and resources of the three organisations through this portal, small- and medium-sized enterprises across the 10-member economic grouping can equip themselves with the tools and knowhow to navigate ASEAN’s business landscape. Of particular interest to businesses is the "Ask a Question" feature of the portal which enables companies to pose questions to the three organisations which have an extensive network in the region. The portal can be accessed at http://www.businessinasean.com/. 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