ASEAN economic community: sui generis model and legal issues of integration

Ключові слова: АСЕАН, АЕС, АФТА, РСЕП, економічна інтеграція.

Relevance of the research and issues

Acknowledging that the development of cooperation between Ukraine and the ASEAN regional integration in the economic and trade spheres is an aim of Ukrainian diplomacy that meets the foreign economic interests of Ukraine;

Committed to enforce the Strategy of Foreign Policy of Ukraine approved by the Decree of the President of Ukraine №448/2021 dated August 26, 2021, namely para. 145 and 149 cooperation between Ukraine and ASEAN in military, space, technological spheres, as well as trade in knowledge-intensive goods;

Taking into account that on the 53rd ASEAN day celebration in Ukraine the Minister for Foreign Affairs of Ukraine, Dmytro Kuleba expressed the aim to reach the 5 billion USD trade turnout between Ukraine and ASEAN;

Recalling that the Ukrainian Parliament was granted the observer status in the ASEAN Inter-Parliamentary Assembly and establishment of ASEAN Research Center at the researcher's alma mater;

Convinced of the need for more comprehensive analysis of the ASEAN economic model and understanding of obstacles the ASEAN members have passed; Respecting the rule of law, the sovereignty of all ASEAN member states and inspired by the legal instruments' enforcement as well as smart concessions schemes development; Noting that ASEAN economic community is not only an aspiration of Eminent Persons Group enshrined in Article 2 of the ASEAN Charter at the 13th ASEAN Summit, but also already tangible work towards economic integration with 99% import tariff elimination as of 2021 and $23 billion intra-ASEAN as of 2020; Admitting that establishment of the economic community is supposed to lift the South-East Asia region higher, make it more competitive and improve the lives of all ASEAN people; Purpose of the article.

To this end, the researcher:

1) analyses three main stages of ASEAN economic integration development, determines its achievements and failures;

2) decomposes treaties and soft law in respect of legal mechanisms to be implemented by the states;

3) examines institutional model behind the ASEAN economic community and defines distinctive features of the ASEAN blueprint;

4) compares Ukraine-ASEAN trade turnout and evaluates perspectives of development;

5) concludes the AEC's future development, including RCEP perspectives.

Main body

The first phase of the ASEAN economic cooperation dated back from 1976 to the mid1990s. According to the Declaration of ASEAN Concord adopted in 1976 [1] the states obliged themselves to deepen cooperation on basic commodities and promote the growth of new production among ASEAN countries. In this first stage of economic cooperation, there were two tracks of collaboration Investment and Trade. In the post-war era, the ASEAN member states were in great need of multilateral economic development, which means both the need for foreign capital and improvement of regional chains of production. Thus, according to B.2 of the Bali Concord 1, a key point in the early stage of economic cooperation was an investment. ASEAN needed to attract foreign direct investment through industrial project schemes. The high parties resorted to creating ASEAN Industrial Project Scheme. It was a large-scale capital-intensive venture, one for each of ASEAN 5 member states [2]. Even though each member state had a venture only 2 de-facto operated. ASEAN industrial complementation scheme and ASEAN industrial joint ventures were external partnerships to foster resource pooling and develop the private sector. economic community trade asian

Apart from the investment in the first phase, ASEAN countries aspired to freer trade through Preferential Trading Agreements. It was not on a large scale, rather on a product-to-product basis. Preferential tariff rates were given for products that were produced locally within the ASEAN region but to qualify for the better tariff rates these products needed to have initially more than 50% of local content. Even though ASEAN worked towards lowering barriers and negotiating agreements the states maintained a sensitive list of goods that felt under protective mechanisms.

Why did the first phase of ASEAN trade and investment fail?

* Indecision on the product to cooperate on;

• Lack of guidelines and clear goals;

• Lack of resources host state to raise 60% costs;

• Private sector uncooperative;

• Domestic focus national resilience (industrialization through FDI);

• Priority of world trade over intra ASEAN trade (high non-tariff barriers to protect national markets; competitive rather than complementary markets and production bases).

Since the first phase didn't work so well member states tried to improve the second phase of economic cooperation in the 1990s again. They kept the dual-track -trade and investment. However, in the 1990s trade seems to come more to the forefront than investment. Investment had been always attracting foreign investment but the bigger emphasis was put on a trade. Globalization and greater world trade signalized that ASEAN needed greater resilience and strengths in size and numbers. With this end in 1992 states signed the Agreement on the Common Effective Preferential Tariff Scheme for the ASEAN Free Trade Area. By the mid-2000s the ASEAN free trade area was formally established but it was quite unclear as to the exact date of the formation. You can see that the initial date was 2008 then it got moved down to 2003 and then to 2002 when the first 6 ASEAN member states established the preferential zone. Worth mentioning that Cambodia, Laos, Myanmar, and Vietnam join the initiative much later. Article 4 of the CEPT for AFTA provided for faster removal of tariff barriers based on sectoral approach, namely first reduction of tariff rates to 20% and subsequent 5% quantum per reduction [3]. These concessions were intended to increase intraregional trade, business efficiency, and effectiveness. But at the end of the day despite such lofty aspirations, the exclusion lists remained very firmly. There was a temporary exclusion list for those ASEAN Member-states that were not ready to slash the tariffs. There was also the sensitive list that consisted mainly of agricultural products. Similar to Article XX of the GATT, ASEAN member states envisaged the list of general exceptions to lowing trading barriers, namely, health, and national security. Since the South East Asia region has similar production the general exclusions were often used by the parties.

From 1995 to 1998 in addition to CEPT for AFTA ASEAN member states also signed an agreement to increase free trade in services ASEAN Framework Agreement on Services and Framework Agreement on the ASEAN Investment Area (AIA). The idea was to extend national treatment to all investors with access to all industries (Art. 4 of the AIA) [4]. The 1996 ASEAN Industrial Cooperation Scheme superseded the prior industrial investment initiatives that failed. The adjustment of the law provided that two companies from two countries would get preferential tariffs and also preferential access to participating countries' markets.

But what were the obstacles from moving beyond the AFTA? The first is deliberate protectionism. Member states were not willing to lower their tariff barriers and their exclusion lists/ sensitive lists were the main concern. The ASEAN states didn't want to lose sovereignty in setting their national tariff rates which would lead to a loss in income if they lowered the common tariff rate. Member states wanted to grow together economically as a region but all the ASEAN member states had their trade and investment policies, bilateral and multilateral trade agreements that interfered with the regional economic trade rules. Still, AFTA is net trade creating. The second obstacle is low compliance with the rule of law. The pre-2007 compliance rate with ASEAN instruments was only 30 percent [5]. Surely, it's difficult to see the actual result of the law that is not enforced by the states. This led to a lack of dispute settlement mechanisms and attitude to allow violation of the treaty and a lack of monitoring mechanisms.

Thirdly, to make sure that the ASEAN economic cooperation gets implemented some experts say that it lacks supranational institutions and enforceable community law. From one perspective, it makes AEC sui generis, but on the other, it would increase investors' confidence. In law making process special attention was paid to soft law, recommendations and guidelines.

Before the member states signed the ASEAN Charter, cornerstones of the ASEAN Economic Community were enunciated in the 2003 Bali Concord 2. According to part B.1 of the Declaration of ASEAN Concord II, member states envisaged AEC as a free trade block that has a free flow of goods, services, and investment. It also laid down the foundation for a freer flow of capital, not just economic cooperation, but equitable economic development [6]. This idea was to impact the lives of ordinary people, so that level of poverty may be reduced as well as economic disparities. Bali Concord 2 set out 3 prongs of «Free» free trade in goods and services, freer investment flows. The instrument also empathized «freer flow of capital» for the banking and finance sector.

Part B.3 of the Bali Concord 2 provided the following legal prerequisites for the ASEAN Economic Community:

1) establishment of ASEAN as a single market and production base;

2) granting more favorable treatment to businesses;

3) plugging ASEAN industries into the global supply chain.

Practically it means:

1) more external and intra-ASEAN trade;

2) less fragmentation and lower differentiated costs, so there will more uniform lower costs;

3) greater efficiency and more cost-effectiveness.

To put this into practice ASEAN member states undertook to enforce soft law of the High-Level Task Force on ASEAN economic integration. To move towards the ASEAN economic community, in conformity with Bali Concord 2, new institutional mechanisms had to strengthen the implementation of existing economic initiatives such as the ASEAN Free Trade Area, a Framework Agreement on services, and the ASEAN investment area. More detailed research has shown a rather practical side of the commitments, as follows:

1) establish zero tariffs and removal of barriers to trade;

2) simplify customs procedure so that goods can move through customs faster;

3) bring up to WTO standards;

4) push towards using ASEAN minus X formula;

5) accelerate priority sectors and increase the movement of skilled labor, inter alia, technical experts, and professionals.

Positions 1-4 of the priority sectors listed in Bali Concord 2 were the most produced goods in ASEAN, namely, wood-based products, automotive, rubber products, and textiles. Later in 2015-2020, the ASEAN states recognized other sectors, inter alia, e-ASEAN, digitalization, and high-tech products as new priorities. For instance, the Kingdom of Thailand has recognized smart farming, startups, and high-value services in the new strategy of national economic development «Thailand 4.0».

Apart from the newly established institutions and treaties ASEAN members were far-sighted in creating an economic association. The states re-affirmed the ASEAN Economic Ministers' Meeting as the coordinator of all ASEAN Economic integration and cooperation issues. The initiative was also to resolve technical issues by the senior economic officials' meetings and then they even advocated a legal unit within the ASEAN secretariat to provide legal advice on trade disputes. Then there was also the idea to create a body called ASEAN Consultation to Solve Trade and Investment issues at the policy level to increase compliance. South-East Asia States wanted to establish the ASEAN compliance body and then also to enhance dispute settlement mechanisms. Obiter dictum, the contracting parties flagged that in the first instance they are going to resort to consultation, mediation, and conciliation. Although, ASEAN had a chance to create a dispute settlement body, the only trade dispute in history has been transferred to the WTO Dispute Resolution Mechanism. Additionally, the measures to enhance ASEAN economic cooperation encompass improvement of human resources and recognition of educational qualifications of ASEAN professionals, so they can move into more sophisticated industries and gain practical experience.

ASEAN is considered as a single market and production base. For the free flow of trade, the ASEAN has to lower tariff barriers as well as «hidden» barriers such as TBTs and SPS, ramp up the free flow of services and investments. The production base is unique to ASEAN's situation. The single market is deep and far-reaching cross-border liberalization for the fundamental obligation to ensure mutual market access and non-discrimination. In contrast to other economic associations, equitable development is the cornerstone of the AEC which makes it special. Bearing in mind the abovementioned and with due regard to the AEC principles, the ASEAN economic community is the sui generis model of integration. One should always keep in mind that the end goal of the ASEAN economic community is to reach a high level of general well-being for ASEAN people supported by innovative and inclusive economies based on human-oriented principles.

There is a reasonable concern about what does the AEC want to be?

Is it similar to the EU, NAFTA model or is it rather a sui generis model? What are the pillars of the ASEAN economic integration? Six years ago on the 27^th ASEAN Summit Member-states agreed on strategic measures to be implemented until 2025 to reach mutually beneficial regional integration. Declaration on the ASEAN Economic Community (Blueprint 2025) provided clear and precise measures for cohesive community and more importantly monitoring mechanisms and deadlines. The Roadmap of ASEAN to the ASEAN economic community was based on the following pillars [7]:

1. Being single market and production base;

2. Being a region with high competitiveness;

3. Being a region with equitable economic development; and

4. Being a region that is integrated into the global economy.

Declared principles are full of legal essence, thus the author suggests considering them in detail. Being the same market and production base is an important strategy for establishing the ASEAN Economic Community. This will make ASEAN more competitive. ASEAN has established new mechanisms and measures that will enhance the efficiency of the implementation of existing economic measures and accelerate economic integration in the priority fields. Being single market and production base of ASEAN is set on 5 freedoms:

1) free movement of goods;

2) free movement of services;

3) free movement of investment;

4) freer flow of capital;

5) free movement of skilled labor.

ASEAN has identified 12 priority industrial sectors under the ASEAN market, namely agriculture, fishery, rubber products, wood products, textiles, and garments. Electronics, automotive, air transport, health, e-ASEAN, and logistics.

Being a single market for goods and services will support the development of production networks in the region and strengthen ASEAN's potential to become the world's manufacturing center. The gradual elimination of non-tariff trade barriers would harmonize customs procedures and make them more standardized and easier. This would reduce transaction costs and promote the free movement of skilled labor.

As the author mentioned before, one of the key goals of ASEAN economic integration is to create a highly competitive region. A competitive region has six main components: 1) Competitive Policy; 2) Consumer Protection; 3) Intellectual Property Rights; 4) Infrastructure Development; 5) Environmental Measures Tax; 6) Electronic Commerce. To achieve the abovementioned results the ASEAN Member States are obligated to adopt competition laws and policies within the countries and support a culture of fair business competition.

According to D.1 of the ASEAN Economic Blueprint 2025, equal economic development has two components: 1) the development of small and medium-sized enterprises; and 2) the Initiatives for ASEAN Integration. It aims to narrow the development gap at both the SME level and to strengthen the integration of Cambodia, Laos, Myanmar, and Vietnam to fulfill their obligations and strengthen ASEAN's competitiveness as well as to enable all ASEAN member countries to benefit from economic integration [8].

From 2016 to 2021 ASeAn achieved essential goals of economic integration such as the reduction of ASEAN tariffs on imported goods to 0% on 99.2% of tariff lines [9]. The second valuable achievement is the implementation of the ASEAN self-certification system (ASEAN Single window), where registered exporters can certify the origin of their products and exercise their tax rights in ASEAN. The adoption of the new 2020 ASEAN Trade in Services Agreement helped ASEAN Members' Service Regulations become more effective and fewer impediments to trade in services. Greater transparency on service regimes may facilitate cross-border electronic transactions and build trust in online commerce.

Moreover, enforcement of the Regional Comprehensive Economic Partnership, which is the world's largest FTA, starting from January 1^st, 2022 will expand opportunities for, indeed, equal development of the region where both developing and developed economies enjoy free trade in goods and services, while the other world states are under exclusion of the most favored nation treatment. According to ASEAN statistical yearbook 2020, the ASEAN total trade in goods in 2019 accounted for 2,816,432 million USD, intra-ASEAN trade was at the rate of 632,604 million USD, while extra-ASEAN trade in goods totaled 2,183,827 million USD [10]. In 2019 ASEAN top 10 export of goods valued at 1,423,830 million USD, the most exported goods were electrical machinery and equipment, television images, nuclear reactors, boilers, mechanical appliances, and mineral fuels. Worth mentioning that the biggest volume of trade ASEAN maintained with the non-ASEAN states, but members of the Regional Comprehensive Economic Partnership. Based on the IMF Balance of Payment Manual. 6^th edition, ASEAN export of services accounted for 444,779 million USD with the biggest contribution of Singapore, Thailand, and Malaysia.

As it was mentioned before, Ukraine has the goal to reach a 5 billion USD trade turnout with ASEAN. Since Ukraine has no preferential agreement with the ASEAN, the researcher calculated the up-to-date trade turnout between Ukraine and in general with each ASEAN member state. According to the State Statistics Service of Ukraine, during 2020 the trade turnout between Ukraine and «ASEAN countries» accounted for 2,903 billion USD [11]. In contrast to 2020 which was a hard year in terms of movement restrictions and trade uncertainty, during the 1st-3rd quarter of 2021 the Ukraine ASEAN trade in goods was far effective with 2,543 billion USD [12]. (For more precise information please see the tables compiled by the author hereunder.) Traditionally, ASEAN countries imported the most from Ukraine cereals and ferrous metals. Ukraine imported the most industrial goods, namely electronic machines, boilers, engines. Both individual efforts of Ukrainian trade representatives, the economic departments of Ukrainian Embassies in ASEAN, and accession to the Treaty of Amity and Cooperation in Southeast Asia may strengthen confidence in bilateral investment and trade.

As the Regional Comprehensive Economic Partnership comes into force on January 1^st, 2022 ending ten-year negotiations on a multilateral trade agreement special attention should be paid to ASEAN-RCEP coexistence. The largest free trade agreement in the world accounts for 29% of global GDP (25.8 trillion USD). Moreover, RCEP is the first multilateral trade agreement between China, Japan, and South Korea. It is also the first free trade agreement between Japan and New Zealand. As a result, the import tariffs of these countries are greatly reduced by filling the gap in the trade network. On the other hand, ASEAN and CLMVT countries have already enjoyed low levels of intra-regional import tariffs. The reason behind it is that ASEAN is linked both under the ASEAN Free Trade Area (AFTA) and the bilateral FTAs with the existing 5 major trading partners.

The most important new chapter for upgrading regional FTAs to the RCEP is the regionalization of Rules of Origin provided by Charter 3 RCEP. Before the RCEP negotiations took place, the existing Rules of Origin only covered the member countries. Due to Article 3.3, RCEP products that use raw materials from non-Party countries at a large proportion will not qualify as a product manufactured in a member country [13], Therefore, the tax privileges from the FTA cannot be used. For example, cars assembled in Thailand from Japanese parts cannot take advantage of the rules of origin under the ASEAN FTA, but they take advantage under the Rule of origin agreed in RCEP.

Ukraine-ASEAN foreign trade in goods in 2020 (based on each state in USD thousands)