Investment protection under the proposed ASEAN-United States free trade agreement.

• Author: Kahn, Jordan C.

1. INTRODUCTION

   In October 2009, U.S. Senator Richard Lugar (R-IN) introduced legislation to initiate free trade negotiations between the United States and the Association of Southeast Asian Nations (ASEAN). (1) This article examines the proposed ASEAN-U.S. free trade agreement, focusing on the central element of arbitration. Part II provides background on the ten-country ASEAN and its progress towards improving the regional economy. Part III provides background on free trade agreements (FTAs) and the recent proliferation of these agreements entered into by Asian governments, including the agreement between ASEAN, Australia and New Zealand which came into effect in 2010. This agreement gives foreign investors recourse through arbitration. Part IV explains that the proposed ASEAN-United States free trade agreement will undoubtedly include this feature. Lastly, Part V describes substantive protections that will maximize the efficacy of the ASEAN-United States agreement. By building upon their previous efforts, the United States and ASEAN can promote economic activity between them and across Southeast Asia.

2. BACKGROUND ON ASEAN, AFTA, AND AIA

   Southeast Asia was a political hotbed during the 1960s. Its governments agreed upon "a fundamental need to develop a regional forum to alleviate pressures within the region and to promote economic growth between the countries." (2) Thailand, Indonesia, Malaysia, the Philippines, and Singapore created ASEAN by executing the Bangkok Declaration on August 8, 1967. The initial ASEAN objectives were "to alleviate intra-ASEAN tensions, to reduce the regional influence of external actors, and to promote the socioeconomic development of its member states to further hedge against Communist insurgency." (3)

   ASEAN eventually expanded to include the five other Southeast Asian countries. Brunei joined in 1984, after receiving independence from the United Kingdom. (4) One decade later, four additional countries joined ASEAN: Vietnam in 1995, Laos and Myanmar in 1997, and Cambodia in 1999. (5) ASEAN regularly convenes at summits, and its decision-making is based on consensus. The "ASEAN way" involving diplomacy as opposed to confrontation is manifest in the "strong cohesion that now exists between the ASEAN member states." (6)

   Decades after its formation, ASEAN transitioned into an institution fostering regional economic integration. (7) Beginning at its January 1992 meeting in Singapore, ASEAN executed a series of agreements, collectively known as the ASEAN Free Trade Agreement (AFTA), which seek to liberalize economic activity within the region. (8) The primary mechanism that AFTA employs is the reduction of tariffs on goods originating within ASEAN; (9) members remain free to set their own tariffs for goods imported from outside ASEAN. Specifically, AFTA sets targets for the gradual reduction of these tariffs up to five percent. (10) This approach seeks to stimulate intra-ASEAN trade because, under the theory of comparative advantage, lowered tariffs will increase economic transactions amongst ASEAN members, thereby improving the regional economy. (11)

   In 1997, Southeast Asia experienced a severe economic crisis that originated in Thailand and spread to Indonesia, crippling that country. (12) Investment poured out of the region. (13) Each affected member had to chart its own path towards economic recovery because ASEAN was unable to coordinate a response. (14) This shortcoming prompted a two-pronged reaction by ASEAN at its December 1998 meeting in Hanoi, Vietnam, in an effort to alleviate the impact of the crisis and prevent reoccurrences. In its first response, ASEAN accelerated the AFTA tariff reduction schedule, (15) although the later-added ASEAN members were given additional time to comply. (16) As a result of this acceleration, intra-regional tariffs were reduced dramatically; now more than 99% of all goods are traded within a 0-5% tariff rate between the first six members, with the four newest members "not far behind" in implementing tariff reduction. (17) This accomplishment represents a significant economic achievement for ASEAN. With reduced tariffs, ASEAN members are well-positioned to maximize internal trade with a concomitant increase in regional wealth.

   The second response by ASEAN to the 1997 crisis was the enactment of a series of measures designed to entice foreign direct investment (FDI). (18) FDI provides a buffer against financial crises because foreign owners have an incentive to protect their projects through capital improvements as opposed to liquidating at the first sign of economic unease. By contrast, indirect investment is fluid, as evidenced by the Thai stock market collapse in 1997. (19) Although increasing FDI was an AFTA objective, its tariff reduction impetus did not stimulate FDI into Southeast Asia. (20) In 1998, ASEAN created the ASEAN Investment Area (AIA) to promote "direct investment from ASEAN and non-ASEAN sources by making the region a competitive, open and liberal investment area." (21) Although AIA seeks to increase both intra-ASEAN investment and FDI into Southeast Asia, it is the latter which presents the strongest barrier against a recurrence of the sudden economic turmoil experienced in 1997.

   AIA bestows upon investors from one ASEAN country two important protections when investing in a different ASEAN country.

   These guarantees, typical of those contained in FTAs, (21) are:

   National Treatment: 'each Member State shall ... accord immediately to ASEAN investors and their investments ... treatment no less favourable than that it accords to its own like investors and investments ...'; (22) and

   Most Favoured Nation (MFN) Treatment: 'each Member State shall accord immediately and unconditionally to investors and investments of another Member State, treatment no less favourable than it accords to investors and investments of any other Member State with respect to all measures affecting investment....' (23)

   Despite AIA, ASEAN has not yet realized its potential as an investment destination. (24) AIA entices intra-ASEAN investment by immediately guaranteeing national and MFN treatment upon ASEAN investors, but does not offer commensurate protection to other foreign investors. (25) Furthermore, the ASEAN dispute resolution mechanism is an obstacle to FDI. In 2004, ASEAN formalized the resolution of disputes amongst its members through a three-tiered process of mandatory consultation, issuance of panel reports, and appellate review. (26) This process is not binding on ASEAN members. (27) Furthermore, while third party participation is allowed, only ASEAN countries have recourse. (28) Foreign investors in Southeast Asia, whether from outside the region or an ASEAN country different than the host country, have no ability under AIA to resolve disputes directly against governments. This can correlate with less intra-ASEAN investment because investors may hesitate if they lack recourse to dispute resolution. (29) Without such a mechanism to lure FDI into Southeast Asia, AIA has not achieved the level of investment it envisioned.

3. BACKGROUND ON FTAs

   The first wave of FTAs occurred in the late 1980s and into the 1990s. (30) These agreements seek to liberalize economic activity between two or more countries and include regional arrangements such as AFTA and the 1994 North American Free Trade Agreement (NAFTA) between the United States, Mexico, and Canada. (31) NAFTA Chapter 11 affords foreign investors substantive rights and gives them recourse to pursue violations through arbitration directly against the host government. This feature of NAFTA, and other FTAs, is a fundamental purpose of Bilateral Investment Treaties (BITs) that came into being alongside FTAs and now number more than two thousand. (32) The BITs, as well as AIA, provide the substantive protections of national treatment and MFN treatment. (33) NAFTA Chapter 11 and BITs, however, enumerate many additional protections, including the guarantees of "fair and equitable treatment" and compensation for expropriation. (34) Procedurally, neither AFTA nor AIA provide investors with an ability to pursue recourse through arbitration.

   The initial surge of FTAs and BITs was championed by western countries. (35) The United States consistently and actively encourages its trading partners to enter into FTAs. (36) One of the many FTAs it has entered into is the United States-Singapore (US-SG) FTA that became effective in 2004. (37) The investment protection chapter of the US-SG FTA closely tracks the U.S. Model BIT that also became effective in 2004. (38) Both contain investment protection similar to NAFTA Chapter 11 by providing recourse through investor-state arbitration, (39) as well as numerous substantive protections including: national treatment; MFN treatment; "fair and equitable treatment"; and compensation for expropriation. (40) Singapore has distinguished itself as an Asian country eager to employ FTAs to solicit foreign investment by entering into the US-SG FTA and AIA. The US-SG FTA goes far beyond AIA; as Singapore and the other ASEAN members provided only the protection of national and MFN treatment under AIA, without recourse through investor-state arbitration.

   China, Japan, and Korea initially refrained from entering into FTAs. (41) These economically strong Asian countries began cautiously executing FTAs in the current millennium, as demonstrated by the China-ASEAN Free Trade Agreement (CAFTA), (42) the world's largest free trade area by population covering nearly 1.9 billion people. (43) A framework agreement in 2001 gave CAFTA "only the barest of skeletons.... CAFTA has come into existence gradually, annex-by-annex, as a chain of modest steps." (44) CAFTA follows the AFTA model of setting targets for phasing out tariffs within a geographic area. (45) Effective in 2010, China and the first six ASEAN countries "have to remove almost all tariffs"; (46) the later ASEAN members...