APEC Currents December 2014
View this email in your browser
           AASC    APEC     RMIT    STAR Database 

Welcome to the December edition of APEC Currents for 2014

Errol Muir

Welcome to the final edition of APEC Currents for 2014.  This edition contains some truly interesting holiday reading.  

In the opening article, Margot Kilgour from the APEC Study Centre at RMIT University reviews the work of the study Centre in recent months. The article highlights the extensive work done underway on trade and investment issues, and the work of the Centre in providing capacity building workshops for the region.

Improving education outcomes in the APEC region has been on the APEC agenda almost since its inception. An educated population is a key determinant of economic growth and in this issue, Dr Emmanuel Jimenez, who recently retired as Director, Public Sector Evaluations at the Independent Evaluation Group, World Bank, and Dr Elizabeth King, formerly the Director of Education, World Bank (2009-2014) review educational development in the ‘Asian Tigers’ group of developing economies and distil policy recommendations from the experience of those countries.

In his article, Alan Oxley, Chair of the APEC Study Centre at RMIT University, looks at the competing and complementary moves in international trade negotiations, particularly relating to the negotiations on the Free Trade Area of Asia and the Pacific, the Trans Pacific Partnership and the Regional Comprehensive Economic Partnership (RCEP).

Improving the investment environment in the APEC region has been a long-standing objective of APEC member economies. Bilateral investment agreements have been an important mechanism to achieve this and have been adopted by many countries. Within these agreements, investor state dispute settlement provisions have long been contentious. In this issue, Professor of Law at the University of New South Wales, Leon Trakman and Kunal Sharma, Rhodes Scholar and research associate at the University, discuss Indonesia’s recent decision to terminate its bilateral investment treaty with the Netherlands and its apparent intention to renegotiate all 67 bilateral investment treaties.

The last Economy Leaders meeting in Beijing was widely recognized as a major success.  In his article, Australian APEC Study Centre Director Ken waller reviews the meeting and canvasses some of the reasons for the success of this meeting. 

I hope you find the material in this edition enjoyable reading. All of us at the study Centre look forward to engaging with you through the Newsletter in 2015, and as the 2014 draws to a close, we all wish you a very happy holiday season.

Australian APEC Study Centre Update

Margot Kilgour
Senior Manager
the Australian APEC Study Centre, RMIT University


As we near the end of year, the Australian APEC Study Centre has had a very busy 2014. We have run 6 capacity building programs with participants from over 17 economies, and contributed significantly to the ABAC and APEC regional agendas.

Our DFAT funded Government Partnership for Development (GPFD) program began with the First Biennial Forum of the Urban Infrastructure Network held on 1 – 2 September. This forum discussed the formation of an Urban Infrastructure Network (UIN) to develop a holistic policy framework for meeting the infrastructure development challenges arising from the rapid urbanisation in the Asia Pacific region. The Forum facilitated discussions of highest quality between experts from various disciplines involved in urban infrastructure, development, planning and financing and it involved specialists from government agencies, researchers, businesses, think tanks, financing groups. Discussions reflected a central objective of private and public partnerships that need to be involved in promoting thinking on holistic approaches to urban development, planning and financing.

The forum was followed by a 4-day capacity building training program, Delivering Successful Public Private Partnerships: Transaction Skills and Capabilities for Public Officials and Agencies in Asia-Pacific Economies  from 2 – 5 September. This program was developed for public officials in developing APEC economies and focused on developing transactional skills in executing a PPP project. 

The centre continues it role as the Secretariat for Australian members of the APEC Business Advisory Council. The end of the year culminated with the 21st APEC Finance Ministers’ Meeting which was attended by all 21 APEC economy Finance Ministers on 22 October, and by ABAC member John W.H. Denton and Director Ken Waller.  On the agenda was sustainable and balanced regional growth, fiscal policies that accelerate growth and job creation. Ministers were interested in regional infrastructure investment needs and in sharing ideas for structural reform. Discussed was the completion of the two-year G-20/OECD Base Erosion and Profit Shifting (BEPS) Action Plan that was prepared for G20 meetings, with a goal of supporting fair and transparent tax systems in APEC economies. 

The Centre also continued a major piece of work aimed at enhancing the investment environment in the region.  In June, it conducted a capacity building training program which brought together investment policy makers from the region and experts from the World Bank, IFC, the  APEC Policy Support Unit, the ASEAN Secretariat, the Asian Development Bank Institute, the OECD, the ADB and academics and business representatives. This work has led to the creation of the Regional APEC Analytical Group which will advise APEC for a and ABAC on the formation and use of quantitative indicators to assess investment policies in the region. The report of the program discussed critical investment issues relating to Investment State Dispute Settlement processes and ways in which the role of State Owned Enterprises and Sovereign Wealth Funds may be reconciled with the policies of capital importing economies.  

An Outreach Roundtable Discussion for the Australian APEC Business Advisory Council (ABAC) was held on 29 October, hosted by JP Morgan in Melbourne, in preparation for the final ABAC Meeting of 2014. This discussion allowed Australian business leaders the opportunity to raise issues with ABAC Members that they were facing in the community and working throughout the APEC Region. ABAC Members in turn provided a briefing on the work of ABAC over 2014 and plans for 2015. 

The three ABAC Members Anna Buduls, John W.H. Denton and new member Sir Rod Eddington AO, attended the 4th ABAC Meeting held in Beijing, 5-7 November. As Chair of the Finance and Economic Working Group (FEWG) Mr Denton updated the group on initiatives that FEWG had been working on during the year. Anna Buduls gave a presentation on the Blue Economy which has become a priority for the 2015 APEC Philippines year. Sir Rod was appointed as the Chair of the Regional and Economic Integration Working Group (REIWG) for 2015. The working group has indicated that it will address anti protectionism, the Free Trade Area Asia Pacific (FTAAP), trade and investment liberalisation and facilitation, services and global value chains in 2015.  

The 2014 APEC CEO Summit followed the 4th ABAC Meeting, which saw 1500 APEC Economic Leaders, CEOs and leading thinkers attend the Beijing meetings to hear and discuss the key issues facing development and growth in the Asia-Pacific region. Promoting regional trade, investment and cooperation were all priorities of the discussion. 

Ken Waller and Elissa Macleod attended the 3rd Asia Pacific Infrastructure Partnership (APIP) Dialogue with the Government of Indonesia, 24 November. In attendance at this regional platform were the private sector, international institutions and Governments with a very strong presence from the Indonesian Ministry of Finance. The meeting provided an update on the Indonesian PPP Centre, Indonesian key transportation infrastructure issues and discussed next steps for APIP to continue to work to identify and address practical solutions around infrastructure PPP obstacles. 

The last major program for 2014 was held in conjunction with Australian Department of Foreign Affairs and Trade APEC Branch. The program “Towards good practice policies and regulations to facilitate trade and investment in telecommunications and ICT services” was held in Manila, 9 - 10 December 2014. Officials from developing APEC economies met to discuss practical future reforms in telecommunications and ICT services. Trade officials, regulators, academics and industry specialists met in Manila to discuss market access, key impediments to further trade in these services, and reform priorities. Participants also explored the impact of policies and regulations in the sector on women’s economic participation in the sectors. 

Testing the Skills of Tigers - The Education Challenge for Emerging East Asian Economies

By Emmanuel Y. Jimenez 
recently retired as Director, Public Sector Evaluations, Independent Evaluation Group, World Bank
and Elizabeth M. King
formerly Director of Education, World Bank

Forty years ago, large populations were predicted to pose profound threats for many Asian countries.  According to analysts like Paul Ehrlich who wrote about the “population bomb,” “Whatever problem you’re interested in, you’re not going to solve it unless you also solve the population problem. Whatever your cause, it’s a lost cause without population control.”  Contrary to such dire expectations, East Asian countries used demographics as a springboard to growth. From a very large population base, they not only reduced infant mortality but fertility as well. As a result, the number of people per household who worked increased relative to those depending on them; put another way, the dependency ratio fell.  

This “demographic dividend” proved to be an impetus for growth in those countries; indeed as much as a third of the economic growth rate experienced by the East Asian Tigers has been attributed to this simple fact (Bloom et al. 2000).

But the growth benefits from the demographic dividend are not automatic. Some Latin American countries, including Chile and Argentina, also experienced fertility decline but did not reap this growth dividend. The policies and institutions that accompany fertility decline matter. These include long-term structural policies; economic openness; productive investments in infrastructure; and good governance. And perhaps the single, most significant aspect of the policy environment may be how well the youth population is equipped to contribute to the economy as productive workers. To ensure this, the performance of education systems is critical.

The East Asian Tigers have achieved impressive increases in school enrolments. In 1950, about one-half of the population in these countries had no education; by 2010, this fraction had shrunk to less than one-tenth. In 1950, one-tenth had secondary education; by 2010 this had increased to nearly one-half. Focusing on the past 20 years, the average years of schooling of the population aged 15 and over increased by about 2 years, faster than the increase in Latin America and the Caribbean or Eastern Europe (Barro and Lee 2010; 

Even the Tigers’ record on education quality has been impressive. Based on international tests such as the Programme for International Student Assessment (PISA) and Trends in Mathematics and Science Study (TIMSS), students in the Asian Tigers, on average, outperform students in other countries, including the OECD countries. Singapore, Hong Kong (China), South Korea, Japan, Taiwan (China), and two cities of China (Shanghai and Macao) ranked in the top ten in the 2012 PISA tests (OECD 2012) in mathematics.[i]  Shanghai, Singapore, Hong Kong, Japan and South Korea also ranked as the top five in reading comprehension.  Note that five East Asian Tigers topped also the 2011 TIMSS math and science tests for eighth graders (IEA 2011).

The emerging East Asian economies – the region’s Tiger Cubs -- have greatly expanded their school enrolments too, not only at the primary level but also at the secondary and tertiary levels. The net enrolment rates for Malaysia, for example, rose from 84% in 1970 to 98% in 2000 at the primary level and from 33% to 66% at the secondary level during the same period. Although time-series data are spotty for the other countries, the available numbers suggest a similar trend (World Bank 2014).

But the performance of the Tiger Cubs on the quality of education, as measured by international tests fall far below that of the Asian Tigers.  The test scores of 15-year-old Thai, Malaysian and Indonesian students are between 68% and 77% of the average PISA math score of Korean students and between 74% and 82% of the average reading comprehension score of Korean students.  The hopeful news on this score is the performance of Vietnamese students who achieved 92% and 95% of the average math and reading comprehension scores of Korean students, outperforming even the average OECD student.

The low level of cognitive skills in the Tiger Cubs, despite increases in average years of schooling, may be one reason why wage gaps (or wage premia) persist between those with and without secondary or tertiary education across a number of countries. In 2007–08, the wage premium for workers with upper secondary education and employed in primary (natural resources and agriculture) and secondary (manufacturing) industries ranged from 0.2 to 0.4 in diverse countries like Cambodia, China, the Philippines and Vietnam. In services, the premium exceeded 0.5 in all four countries, double what it was a decade before (World Bank 2011c). Another possible explanation is that technologies have been shifting in favour of higher skills, essentially increasing the demand for and relative productivity of higher-skilled workers.

Due to technological and market changes, the skills demanded by employers have shifted in developed countries, including in the Tiger economies—from skills for manual, routine work to skills for manual, non-routine tasks and even more analytical, non-routine work.  These shifts raise the expectations for education systems. Increases in average years of schooling are no longer enough. They must be accompanied by robust improvements in students' cognitive and technical skills. In addition, students are increasingly expected to demonstrate capacities for critical thinking, problem-solving, communication, and creativity.  

The performance of Vietnam on the 2012 PISA indicates that it is possible for a low-income, emerging economy country to push and support its education system towards academic excellence. Vietnam recorded the best test scores for its level of income and higher than the OECD average.
What can be done?  In an earlier article we pointed to five policy directions:
  • Matching skills to the needs of tomorrow’s global economy
A mapping of the demand for skills in the U.S. is interesting and could provide some hints as to what kind of research may be useful for East Asian tiger cubs. Figure 1 shows that the skills in greater demand are those that require non-routine analytic and interpersonal skills, which seem to be in short supply in East Asian skill-formation systems. Unfortunately, as far as we know, there is relatively little research mapping how these skills have been evolving in East Asia, how they may change in the future and how they can be formed.

One indication of the speed with which the technological environment is changing is the rapid expansion in the use of the Internet. In the Tiger economies, the use of the Internet reached three-fourths to four-fifths of the population in 2013, more than doubling or tripling this percentage since 2000.  Utilization rates have risen even faster in the Tiger Cubs, but in 2013, with the exception of Malaysia, they are still at about the initial levels of the Tiger economies in 2000, indicating a huge promise for growth.  Indeed, the penetration of the new information technology will continue to deepen in homes and the workplace in the emerging economies, with implications for the cognitive skills needed for this greater adoption.  
  • Ensuring second-chance skill formation for workers
As noted above, due to low quality more schooling does not necessarily yield more knowledge or skills, including the skill to solve problems, think critically and relate effectively with others. Moreover, many young people leave school too early, entering the workforce with less than the knowledge or competencies needed in a competitive, increasingly globalized economy. These youth are more vulnerable not only to unemployment and poverty, but also to teen marriage, pregnancy and delinquency. They will need a combination of modes of learning that address the reasons for the gaps, including remedial, second-chance and job training programs that consolidate basic knowledge and competencies learned in school (or make up for those not learned) and add technical or vocational skills that promote employment and entrepreneurship.
  • Stimulating demand for human capital formation among excluded groups
A key threat to future growth in the East Asian tiger cubs is growing inequality.[ii] One of the ways to avoid inequality-inducing growth is to ensure that all groups have access to the opportunity to invest in human capital. Most analysis has focused on the supply side because the assumption is that East Asian societies have always expressed strong demand. Indeed there is some fear of over-education (see, for example, Oliver and Kang (2010)). In short, average educational outcomes are higher in East Asia than in other regions, driven by strong demand among middle- and high-income classes.
  • Reforming higher education
Higher education will be a key provider of skills in the future – including technological and managerial knowledge that could spur innovation-driven growth. But a recent report (World Bank 2011c) shows that systems in the East Asian tiger cubs may be far from ready. East Asia’s tertiary education enrolment rate is low relative to OECD countries. Skill gaps point to shortfalls in the quality of what is being provided. And universities are not providing the innovative research needed to power the transition to higher income status.
  • Facilitating labour mobility
Matching skills to jobs may require labour to move across borders that are not fully porous. Some East Asian countries depend heavily on the remittances of their international migrants. As much as one-quarter of the GDP of Samoa and Tonga comes from remittances, while the figure for the Philippines is 10 per cent. Even in large economies like China and Indonesia where the share of migrant remittances is less than a few percentage points of GDP, the share of such remittances is a significant percentage of their current account balances (World Bank 2011b).
In sum, the East Asian tiger cubs are well placed to emulate the Tigers but are challenged by the need to ensure that their own efforts impart skills that boost productivity and are relevant to meeting the needs of a rapidly changing global economy. Further research can help, especially in offering solutions for such challenges as providing high-quality basic education to hard-to-reach or disadvantaged groups, expanding post-basic education to meet greater demand for employable skills, providing second-chance learning opportunities to those who are out of school, and facilitating labour mobility.

Acemoglu, Daron and David Autor. 2011. “Chapter 12 – Skills Tasks and Technologies: Implications for Employment and Earnings,” Handbook of Labour Economics 4(Part B): 1043-1171
Barro, Robert and Jong-Wha Lee (2010) ‘A new dataset of educational attainment in the world, 1950–2010’, NBER Working Paper, No. 15902, Cambridge, MA: National Bureau of Economic Research.
Bloom, David, David Canning, and Pia Malaney.  2000. “Demographic Change and Economic Growth in Asia”, Population and Development Review, Vol. 26, 257290
Ehrlich, Paul R. (1968). The Population Bomb. Ballantine Books
International Association for the Evaluation of Education Achievement (IEA).  2011. Trends in International Mathematics and Science Study.
International Telecommunication Union (ITU). 2014.  ICT Database.
Oliver, Christian and Buseong Kang, 2010, “South Korea faces problem of overeducation,” Financial Times.
Organization for Economic Cooperation and Development (OECD). 2012. Programme for International Student Assessment (PISA).
Wang Feng. 2011a. “The end of growth with equity? Economic growth and income inequality in East Asia,”
World Bank, 2011b. East Asia and Pacific Economic Update Available
World Bank, 2011c. Putting higher education to work: skills and research for growth in East Asia, Washington, DC.
World Bank, 2014.
[i] Although technically not a ‘tiger economy’ because it is a city within a country, Shanghai (China) also kept pace with the other Asian countries.
[ii] There are several good pieces on the link between inequality and growth. A comprehensive study is World Bank (2005). See also Wang (2011) on China. 

Emergence of a new era of liberalization?

By Alan Oxley
Australian APEC Study Centre at RMIT University

A largely unreported development at the annual APEC Leaders in Beijing this month was a distinct uptick of support for a Free Trade Agreement for Asia and the Pacific (FTAAP). This would be an FTA among all APEC members. A major analysis of how such an agreement might look is to be completed by the end of 2016.  It was a Chinese initiative to raise the profile.  This, and the surprising terms of China’s new FTA with Australia, shows momentum for trade liberalization among APEC economies is on the rise.   
There were reports that the US was cool towards China’s initiative. It is clear the Obama Administration wants the Trans Pacific Partnership (TPP) Agreement completed first. It has been negotiating this for three years with 11 other Asian Pacific economies[1]. When Japan elected to participate, that gave TPP economic authority, boosting the share of global GDP of the group to around 30 percent.
The TPP is an important prospective legacy of the Obama Administration. It returned Asia Pacific to US global priorities after Middle Eastern developments dominated US international diplomacy for nearly two decades. As well, it builds important economic infrastructure in the world’s fastest growing economic region.
Beijing signalled interest in participating in the TPP to Washington. The Xi leadership has indicated several times the need to embark on a new round of economic reform.  The process of joining the WTO a little over a decade ago illustrated how more engagement in the global economy can drive domestic economic reform.
The formal position in Washington is that China is not ready to participate in such agreements. The Administration can point to established US policy. Administrations like to negotiate bilateral investment agreements (BITs) before negotiating a Free Trade Agreement, particularly with communist party governments. It took this path with Vietnam. It is negotiating a BIT with China.
The Obama Administration also blocked China’s aspirations to join the negotiations on the fringes of the WTO in Geneva to open up services markets, probably on the same grounds.

A bigger imperative for the Obama Administration is clear water to complete the negotiations and win Congressional approval for the Agreement. China’s joining the negotiations at this late stage could muddy the water and require a recasting of procedures and reopen of many settled positions.  It could complicate securing Congressional approval and delay completion of the Agreement.
It is obvious however that if there were a prospect of securing engagement of all APEC members (noting this includes Japan, China and the US) in a single free market, it should be pursued.
Since the Xi leadership assumed power in Beijing, there have been consistent indications it understands the need to continue to reform China’s economy; and that it recognizes that doing this through international trade liberalization agreements is an effective tool. 
China has been a very responsible member of the World Trade Organization. It is now starting to accept trade agreements must also open up investment and services markets. As well it has begun the experiment in Shanghai of allowing foreign enterprises greater freedom to do business in China.
This needs to be seen against the background of China’s slipping growth rate. It is common knowledge China will face the challenge of an aging economy. 2030 was the accepted date for the aging of the workforce. Analysts have recently reported the aging has already begun and assess it will cut 3 percent off China’s annual GDP.  Maintaining higher growth rates is now a major challenge.
The terms of a new FTA with Australia, announced by President Xi during the G20 summit in Australia are another indicator of preparedness to liberalize. They have surprised observers.  Much more liberalization of the agriculture market was granted than expected. As well, more opportunities for Australian businesses in services – finance, health, education and tourism - were provided than expected. It is clear Beijing understands its services industries need to be more competitive and productive.

It all makes sense. The task of economic reform in China remains unfinished. China cannot produce enough food for its people including the middle class which is burgeoning by hundreds of millions.  Using FTA’s to increase availability of food through imports is logical.

The spate of FTAs recently among leading economies in the region, in particular Japan, the US, China, Korea and Australia gives momentum to idea of a free trade area among all 20 members of APEC. 
The foundations for an APEC-wide FTA are already laid in two negotiations underway with subsets of APEC members. As well as the Trans Pacific Partnership there are negotiations for a Regional Comprehensive Economic Partnership (RCEP) among ASEAN with other economies with which it has negotiated FTAs. This includes major economies including China, Japan and Korea, as well as Australia, New Zealand and India, but not the US.
A challenge in the RCEP negotiations will be to advance liberalization of investment and services. Commitments in these areas have been weak.
This seems a very clunky way to get from A (TTP and/or RECP) to B (an APEC-wide FTA). It has to be clunky. China and the US are not yet ready face each other across a table in an FTA negotiation, although things are moving in that direction. As well, China, Japan and Korea are finding it difficult to remain focussed on economic and trade issues in their negotiations over an FTA because territorial boundary disputes and second world history continues to aggravate relations. 
Taiwan also needs to be engaged in these processes. It is a major trading partner of leading APEC economies and an important cog in the Asian Pacific manufacturing supply chains.
A wider forum where major economic reform of trade and investment policies can be discussed in a framework where only economic issues are considered is the only effective venue to negotiate agreements to liberalize trade and investment. Experience in the GATT, the WTO major regional and bilateral FTAs has consistently demonstrated this.
If all goes well within two years the TPP will be completed, the RCEP negotiations will be well advanced. APEC will have completed a comprehensive review of the what and the how of a Free Trade Area of Asia and the Pacific (FTAAP). The advanced economies and China will have demonstrated the benefits of liberalizing services and investment. 
The liberalization of trade in agriculture will also be shown (initially in FTAs negotiated by Japan, Korea and China) as a feature of growth among Asian and Pacific economies, leading to increased production and lower prices.
[1] Australia, Brunei, Canada, Chile , Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. 

BITs and Pieces: Regional Developments in Investor-State Dispute Settlement

By Leon E Trakman and
(LLM, SJD (Harvard)), Professor of Law and former dean of law at the University of New South Wales
Kunal Sharma 
(BA, LLB (UNSW)), research associate at the University of New South Wales, Rhodes Scholar and candidate for the Bachelor of Civil Law at the University of Oxford.

If you wanted to summarise the Australian Prime Minister’s focus at this year’s G20 summit in Brisbane, you would be justified in saying that better economic and trade relations were towards the top of his priority. Since forming government, the Coalition has concluded trade and investment agreements with Korea, Japan and recently China. One of the more controversial aspects of these agreements has been the inclusion of an investor-state dispute settlement (ISDS) provision, contained in the recent agreements with Korea and China, which will allow foreign companies to “sue” host governments by instituting arbitration proceedings directly against them.   
ISDS has been a topic of some contest in recent years, notably in the Asia Pacific region. In 2011, the Gillard Government released a Trade Policy Statement, asserting that Australia would not agree to ISDS in its treaties. Australia’s policy was at least in part motivated by the ISDS claim instituted by the tobacco manufacturer Philip Morris in response to legislation requiring the plain packaging of cigarettes. This was under the Australia–Hong Kong BIT.
The 2011 Policy attracted both support and criticism. Various public policy experts, academics and jurists supported the Government’s decision, arguing that ISDS stifles public interest legislation, particularly in areas of health and the environment. Others commented that the decision would have detrimental effects on Australia’s trade relations, abandoning vulnerable outbound investors to pursue claims in potentially unstable legal systems, and inhibiting Australia’s ability to enter into investment treaties with major economic powers in the region.
In 2013, a change of government meant that Australia was poised to reconsider its position. The Coalition Government led by Tony Abbott has retracted considerably from the strict position adopted by the Gillard Government. The current Government has stated that it will consider the inclusion of ISDS on a case-by-case basis. While the Government agreed to the inclusion of ISDS in the FTA with Korea, no such regime was included in the agreement with Japan (JAEPA). It has since agreed to the inclusion of ISDS in the recently concluded agreement with China. There is conjecture that the ISDS clause in the China agreement may cause Japan to react, as Japan had apparently stipulated that the ISDS position in the JAEPA would have to be revisited if such a clause were ultimately included the China–Australia FTA.
Against this backdrop of developments in the Asia Pacific, it is significant to note that, earlier in 2014, Indonesia indicated that it would seek to terminate its BIT with the Netherlands, from 1 July 2015, which is when the BIT expires. The Netherlands embassy in Jakarta noted that the Indonesian Government had further indicated that it intended to terminate all of its 67 BITs. There has not been an explicit statement from the Indonesian Government on the issue. Certainly, it appears that Indonesia is not satisfied with the current state of its investment agreements, and some in Indonesia have specifically expressed an aversion to the ISDS procedures contained in BITs.
There has been widespread discussion around the intentions of the Indonesian Government and what may have motivated its decision to cancel the Netherlands BIT. It has been proposed that, in part at least, the Churchill Mining PLC and Planet Mining Pty Ltd v Republic of Indonesia case may have caused the Indonesian Government to review its current treaty portfolio. The Churchill claim, which has caused concern in Indonesia, is for over $1 billion, not including interest. Indeed there have been emphatic calls for Indonesia to immediately withdraw from the ICSID and continue to treat BITs with caution. There have also been statements that, in light of the economic power it now has, Indonesia no longer needs to forsake its regulatory autonomy to attract foreign investment. There has, however, been a tendency to exaggerate. The criticisms have drawn responses in the Indonesian press, including in favour of the ICSID and ISDS more broadly.  
The recent debate has given rise to a premature view that Indonesia’s actions indicate a wholesale rejection of ISDS. There is, as yet, no basis for this. It is impossible to categorically state that Indonesia intends to withdraw from its regime of investment agreements entirely. The Indonesian Ambassador to Belgium has stated that Indonesia is seeking to “update, modernize and balance its BITs”. It is allowing its BITs to “discontinue” so that it can renegotiate them. Indonesia is now economically stable and powerful enough to assert its regulatory autonomy. It has been suggested that Indonesia intends to renegotiate its BITs to provide greater capacity to regulate in the “public interest for health, the environment or financial reasons”.
In any case, termination of its BITs by Indonesia would not mean a complete withdrawal from all investment protection obligations and mechanisms. Existing investors would continue to be protected by the “survival clauses” that have been included in many of the BITs. For example, under the Netherlands–Indonesia BIT, the investments under the BIT will be protected by a sunset period of 15 years after the BIT’s termination. Further, even if all of its BITs were terminated, Indonesia would still be subject to its obligations under the ASEAN Comprehensive Investment Agreement and the ASEAN-Australia-New Zealand Free Trade Agreement.
Further, it is important to remember that Indonesia has a newly elected President. Joko Widodo, leader of the third largest democracy in the world, is certainly likely to have a view on the issue. Overall, it appears that Widodo’s stance on trade is going to be a balanced one. Some have conjectured that he may need to take a nationalist and protectionist approach, in order to alleviate a gap in his policy mandate emphasised by the presidential rival Prabowo Subianto. Others, however, have indicated that Indonesia cannot afford to slow down its economic growth, with the World Bank stating that Indonesia will only grow if it opens up trade. In this context, adopting any drastic position that threatens foreign trade would be a dangerous move.
One can understand the reasons for the caution exhibited by Australia’s 2011 Policy and Indonesia’s desire to reassess its treaties. Countries legitimately want to treat foreign and domestic investors equally and to resist the constraints placed on their ability to legislate in the public interest as result of having international claims lodged against them.
To an extent, Indonesia’s motivations are somewhat analogous to Australia’s position enunciated in its 2011 Policy Statement. The Australian Government at the time made it clear that it did not intend to confer additional benefits on foreign investors, and would not limit its ability to legislate in the public interest. The current Australian Government has retracted considerably from the policy. Over the past year, it has included ISDS regimes in the free trade agreements with Korea and China. Both regimes purport to include carve-outs to allow state parties some freedom to regulate in the public interest.
These regional developments with respect to ISDS may lead one to believe that the future of ISDS as whole is uncertain. The critics of ISDS have a tendency to spell its doom in the hope that it will disappear without a trace. Irrespective of one’s views on the merits or dangers of ISDS, it is too well established to go away without a fight. There is every indication that ISDS will appear in the Trans Pacific Partnership Agreement, which represents countries cumulatively holding 38% of the world’s GDP. We hope the Asia Pacific region will continue to engage in discussions around reforming ISDS, including a reassessment of its overall value. Perhaps the conclusion of considered debate will be that ISDS is not the best mechanism for resolving disputes. Until then, we should all try to avoid dangerous hyperbole and unsubstantiated rhetoric.
The authors thank the Australian Research Council for its support in undertaking research on investor-state arbitration. 

China Answers the Question - Why APEC Matters

Ken Waller
the Australian APEC Study Centre, RMIT University

As chair of APEC in 2014, China has driven a strong and forceful agenda. Key APEC  objectives have been refocussed and thoughtful programs have been identified setting the course for work to achieve real economic and social outcomes for the region have been identified. The outcomes for achieving economic growth and social development have revealed the essential quality and strength of APEC that is found in its consensus approach and one which recognises the great diversity of economies that comprise APEC. 

The 21 Leaders of this region committed to work together to shape the future through the Asia-Pacific partnership, building an open economy and featuring innovative development, interconnected growth, shared interests and consolidating the leading role of the Asia Pacific in the world economy. Declarations of regional and international  groupings are often too easily dismissed as the results of short and sometimes colourful talk-fests. And sometimes in the past, that criticism could have been fairly levelled APEC Leaders’ Declarations. So why are recent Declarations and in particular the one from Beijing in November 2014 different?

The first reason is the supporting content of work that has been undertaken under China’s leadership and which will continue with serious intent over the year ahead as the Philippines assumes the APEC chair. The second is the fact that the Asia Pacific region has got the runs on the board through progress achieved in trade and economic growth over recent years, compared with the rest of the world. The third is that individual member economies of APEC are able and willing to take bold steps to push the liberalisation agenda that reflects the essence of the Bogor goals identified as the central pillars of APEC more than a quarter of a century ago. The fourth reason is that as a consequence of all of these achievements, there is now a strong confidence and belief in APEC that it matters as the most influential forum in regional and probably global international affairs.   

As the Declaration notes “..the Asia Pacific has become the most dynamic region in the world and has never been as important as it is today in the global landscape….and…..we are at an important historical moment of building on past achievements and striving for new progress”

China identified and APEC economies agreed that pursuit of free and open trade and investment and the importance of the multilateral trading system is the way forward to create jobs, economic growth and to promote sustainable development. When 21 Leaders made their November Declaration they reiterated the centrality and primacy of the multilateral trading system. They expressed concerns about the impasse in the implementation of the Trade Facilitation Agreement agreed in Bali only a year earlier and its deleterious impact on the WTO Doha Round.  In doing that, they also agreed that bilateral, regional and pluryilateral  trade agreements can contribute to global trade liberalisation.  Implicit in the Declaration is an understanding that cross border trade and investment growth must be pursued and also that protectionism must be eschewed if the world is to move toward a higher level of economic growth and job creation.  

APEC has created a range of intensive programs and groups to work on options to get clarity into ways to achieve the central objective of open trade and investment.   They include work on ways to realise the Free Trade Area of Asia and the Pacific (FTAAP).

The Declaration in agreeing to advance work on the FTAAP did so by recognising the importance of building on ongoing regional undertakings, which will contribute significantly to regional economic integration and growth.  The Declaration will be interpreted to mean that a  TPP agreement when concluded  and the recent bilateral arrangements between Australia with China, Japan and Korea will be reflected ultimately in a FTAAP.  

The value of the 2014 APEC Leaders’ Declaration arises from the reaffirmation of the need to progress toward open trade and investment liberalisation and the pragmatism displayed by economies in recognising the various paths by which they will be achieved.

In this era of an uncertain recovery from the global financial crisis, particularly in Europe, it is critically important that Asia Pacific provides serious inputs into measures to resuscitate sustainable growth prospects.

The work plans  clearly identified by APEC Leaders include reducing applied tariffs to five percent or less by end 2015 on the list of environmental goods,  further work on renewable and clean energy trade and investment, work on inclusive growth and the promotion of  infrastructure investment though Public Private Partnerships, work on e-commerce, intellectual property rights and actions to promote the use of electric vehicles.  

Detailed research will be undertaken on global value chains and supply chain connectivity, technical cooperation will be enhanced and measures to encourage structural reforms to facilitate the  transition to new economic functions  will be pursued.  Importantly, work being undertaken by this Centre at RMIT University in respect to the challenges of urbanisation and in the promotion  of infrastructure in the region and the need to enhance the capacities of officials in regional agencies responsible for designing and implementing the policy frameworks and the financing of investment will be encouraged. 

In the 2014 Declaration, APEC Leaders commended the constructive role of the APEC Business Advisory Council in strengthening public-private partnership and promoting APEC cooperation in various fields. Important in the work of ABAC (and this Centre) is the role of the Asia Pacific Financial Forum which is now heavily involved in promoting ways to enhance the harmonisation of standards in financial markets in the region and regional financial market integration. Included in this work are measures to develop the Asia Regional Funds Passport – a major Australian initiative – to facilitate the issuance of collective investment funds in various regional markets which, if adopted, will enhance choice of both savers and investors in the region. This would represent a first and significant step toward regional financial integration. Other work, and this is being pursued in association with  a Melbourne University research group, is a review of  the impact on financial regulatory structures in the region of recommendations for the reform of financial prudential standards by international standard setting bodies.  

In assuming the chair of APEC for 2015, the Philippines’ has adopted the theme “Building Inclusive Economies, Building a Better World”. The priorities include enhancing the regional economic integration agenda, fostering SME participation in regional and global markets, investing in human capital and building sustainable and resilient communities. Importantly, work will be carried forward on the FTAAP, connectivity, global value chains, structural reforms – particularly in regard to services.  Emphasis on the role of SMEs will be particularly important as will support for human resource development and capacity building. There will be enhanced focus on the role of women in development and in business and on infrastructure and in building resilience in physical and human resources to deal more effectively with the impact of natural disasters. Some of this work will seek to give an APEC region-wide response to the issues that confront the Philippines and other member economies. The response will reflect the strength, the concern and the capacity of the region to demonstrate the value of APEC, both in regional and global terms. 

Copyright © 2014 The Australian APEC Study Centre, All rights reserved.