Changing Landscape of Finance and Trade in Asia
The new generation free trade agreements are not only about trade, but they are also about investments.
European Union, in the early 2000s, entered into Economic Partnership Agreements (EPAs) with African, Carribean, and Pacific countries. These agreements were about opening up the economies of these countries for trade. This entails removing import tariffs; standards and regulations on health, environment etc. This trade included investment particularly in key sectors like infrastructure, service, finance etc. Very importantly, the EPAs, were comprehensive in nature as they included policy support and economic reforms programmes, which is almost the same to that of the World Bank and the Asian Development Bank. EU was very proud of this agreement because of its liberalisation agenda.
Today, in 2019, in the last ten years, we have seen FTAs mushrooming, which are between two countries (bilateral); some countries, not all (Plurilateral); and regional. One example of the Regional FTAs is ASEAN, whose goal is to make common producer, distributor and market base. This involves harmonising regulations, on key issues like trade, investments etc, across all the ASEAN countries. The Plurilateral Agreements came out of the World Trade Organisation (WTO), which is a multilateral organisation — all the countries have to agree on all the agreements. But, because the progress was very slow on many fronts — due to struggles from the people, unions etc. — WTO changed its rules and allowed countries, from one region or more, to enter into trade agreement together. There are also mega-FTAs like Trans-Pacific Partnership (TPP), Regional Comprehensive Economic Partnership (RCEP), which are massive. TPP includes all the countries except China, whereas, RCEP includes all countries except the USA. There are many other mega-FTAs. Then there are individual countries like India, Japan, China etc which have FTAs with regions like EU, ASEAN and so forth.
One would think that if you are negotiating with one, you could negotiate with the other. But this is more complicated than this. So, China, which is no worse an investor than other countries, wants three Special Economic Zones (SEZs) in Vietnam. Not only this, he wants these zones to be declared as Special Administrative Zones, where the Chinese citizens can enter and settle without a passport. In other words, these would be the Chinese colony in Vietnam. Of course, the Vietnamese citizens are protesting this proposal. However, one of the interesting things is that the Ministry of Commerce has not discussed this proposal with the Ministry of Foreign Affairs. Now, since Vietnam is a member of WTO, ASEAN, RCEP, according to the Most Favoured Nation rule, it should extend the same facility to all the other member countries. Just imagine the repercussions of this for a small country like Vietnam.
This is one of the dangers of the FTAs, which emphasise on regulatory coherence, a checklist of sorts on land acquisition, FDI, full repatriation, tax holidays, liberalisation, environment clearances, working conditions, investor rights protection, no discrimination between domestic and foreign investors among many others. All this creates hurdles in developing domestic industries and services. This is one part of the investor protection.
Other, and scarier, part is that of Investor-State Dispute Settlement (ISDS), which is present in every contemporary FTA now. This mechanism protects the rights of the investors from any change in the investment regulations. There are two places the investors can take their grievances: World Bank’s International Centre for Settlement of Investment Disputes (ICSID), and the United Nations Commission on International Trade Law (UNCITRAL). Investors have complained against Laos, Thailand and other nations to the two agencies. Australia was sued by a cigarette manufacture company for trying to protect the public health by making the health warning larger on the packets. So basically, any investor can sue the government if the laws, regulations prevent the investor from maximising the profit. If the investor approaches the ISCID and UNCITRAL, the onus of proof is on the state. Moreover, many of these investments are tied with bilateral aids like Overseas Development Assistance (ODAs), which have contracts for investors. This is why we see the heads of the states visiting other countries with the investors. China, which is giving huge aids in the South East Asian region, assumes much importance. Though the aid is given ‘without any conditionalities,’ the quid pro quo is implicit.
The aid is welcomed by the host countries as unlike the loan from the World Bank and ADB, which comes with the policy conditions, the aid comes with favourable conditions like soft interest loans and more importantly without any policy conditions. All the donor wants in return is access to resources like land, commons etc. It is very transactional. For the governments, who want cash or infrastructure, this is attractive. However, when there is any problem with the investor, the governments find themselves weak because the donor country can pull out its aid. There is no dialogue about human rights or democracy deficit in the parliament. Thus the mixture of finance and politics has made the investor-state relationship so important to understand.
Then, we have a Foreign Direct Investment (FDI), which goes to industries like the plantation, timber extraction, or other mega-infrastructure development. The scary thing is, a lot of time it is not clear what this infrastructure is for and what it is supposed to do. Even a road is supposed to take you from point A to B. Whereas, the infrastructure is built to extract resources. One wonders the purpose of infrastructure. So what is the purpose of infrastructure? First, moving resources because of this mushrooming of the global value chain model, which is the next level of breaking up production. Adani can extract coal in Australia, import it to India to produce power, and sell the energy to Bangladesh. This phenomenon is also visible in the case of the garment and electronic industries. After a point of time, we don’t know which part of the product came from where. These infrastructures leave large destruction behind them. This process also impacts workers and work. The precarious working conditions, ban on unionisation, alienation of the workers are some of the results. Today, there exists not only physical infrastructure but also digital and financial infrastructure. The other purpose of mega-infrastructure is financial profit making. There is a massive amount of money today in infrastructure, which is in energy, roads, port, real estate, waste and sanitation etc. It does not matter who uses the infrastructure as the project is the money. In the chain, there is a whole economy of people who make the money. I think, the financial gains, just be getting the money moving is huge. These projects are a way of getting the people to move their money out of savings bank account to the money market. An example of this is the Capital Gains Tax, which the Government of India charges on the sale of the property. One of the legal ways to avoid this tax is to invest in various infrastructure bonds.
Another big trend in the South East Asian Region is the SEZ, which has made a comeback in the last 10-15 years. The vision is to make the entire Mekong region a large SEZ through economic corridors and SEZs. The idea behind all this is that government will cede a part of their territory to create a special investment zone. The policy coherence, which I mentioned earlier, becomes important as it enables countries to be a part of the same economic arrangement. The policy coherence ensures, similar laws and regulations related to taxation; land acquisition; labour work conditions and safety; the absence of labour union due to the prevention of ‘industrial action’. The workers in these countries do not get a year’s contract to keep the costs low by not giving any job benefits. The governments do not do anything to prevent the race to the bottom. The workers who try to raise voice against all this are fired from their job. Not only this, their photos and details are put up in the entire SEZs.
Amidst all this comes China’s Belt and Road Initiative (BRI), which is a massive investment initiative. The interesting thing is that this initiative is a part cultural and part self-righteous vision that China is finally going to reclaim its central power in the world. And China is not going to do this by brute force. It would do that through culture, well-being, harmony, peacefulness. There are many Belt and Road Initiatives: physical, which is the old silk route; maritime silk route; digital silk route entails setting up digital centres to make sure that technology advancement is promoted in the region; and lastly, there is cultural silk route, which involves setting up Confusion centres, scholarships. cultural halls etc. And of course, the side of which we see the most is the infrastructure. There is a lot of money in this because of the presence of silk route fund, the New Development Bank, Asian Infrastructure and Investment Bank etc. A lot of European financial houses are also interested in investing in this project due to the huge investment opportunity in the silk route, maritime silk route, digital, and cultural silk route. So in most countries, this project is not seen as a threat. China, through BRI, is literally changing the landscape through creating islands, causing demographic imbalance etc. In Malaysia, the people of the country can’t afford to buy a flat in the housing complex. The government is requesting Chinese citizens to come and invest in the homes. This is happening in a number of places across the region. This brings me to point earlier made: what was the purpose of all this and someone surely made money. All this has led to the birth of conflicts from Pakistan to Central Asia, that is where the oil is. This gives credence to the theories that Belt and Road Initiative is also a military strategy. What China is doing is securing resources like oil, land, mineral etc. It already has the labour and capital. After the analysis of China’s investments in the deep sea ports, strategic analysts are emphasising that BRI is a revival of the String of Pearl theory. But then, if you are a superpower, of course, you will have a military strategy. No superpower will just sit and do meditation. This is not a surprising thing for me. However, what happens is that these kinds of initiative sets of a race among other countries, for instance, Japan is not interested in SEZ. But Japan is interested, at all costs, in preventing China from acquiring deep sea ports around it. Same as in the case of India, which will not allow China to get a deep sea port in the Indian Ocean, without staking its claim.
Eventually, people suffer from this escalation.
Shalmali Guttal is the Executive Director of the Focus on the Global South. This article is an edited version of the recent talk she gave at the CFA.