Global Trends by Martin Khor

Monday 21 November 2005

Asean countries fight to defend local firms

Malaysia and other Asean countries last Friday fought a diplomatic battle in the WTO to defend their right to regulate foreign firms in the services sector.  They opposed a draft of the WTO’s Hong Kong Ministerial declaration that would erode the present right of countries to choose in which sector to liberalise, to what extent and when.


Negotiators of several Asean countries are fighting a joint battle to beat back a strong bid  by the developed countries to open up their services markets through a range of new mechanisms in the World Trade Organisation.

Malaysia, Indonesia, the Philippines, Thailand and Brunei presented two joint statements that rejected the proposals at a crucial meeting on services at the WTO last Friday.

The proposals, contained in a draft of the WTO’s Ministerial declaration on services, would oblige Asean and other developing countries to:

  • Mandatorily commit to liberalise in a minimum number of services sub-sectors through “quantitative targets”;
  • Mandatorily take part in “plurilateral” negotiations, in which a country would have to face groups of other countries making liberalisation demands on behalf of their companies;
  • Mandatorily participate in “sectoral negotiations”, in which countries that want market openings in specific sectors such as finance or distribution will pressurise targeted countries to open up their markets.
  • Make best efforts to increase commitments in each mode or category of investment and trade in services (known as “qualitative targets”). 

At present, the WTO’s services agreement known as GATS allows a country to choose whether to commit to open up in particular sectors, or to impose conditions on foreign firms seeking to invest in or trade with it. 

A country can also decide to liberalise but choose not to enter a commitment in the WTO.  This allows it to “backtrack”.  For example, foreign banks may be allowed 70% equity ownership today but be restricted to 40% in future.  Once a WTO commitment is made, such backtracking is not allowed unless the country is willing to pay compensation for losses incurred.

The services portion of the draft declaration for the WTO’s Hong Kong Ministerial meeting next month is proposing to change the GATS so that choices or flexibilities available to countries are removed or eroded.   This would make it easier for large foreign firms and countries representing them to pressurise developing countries to remove restrictions on their entry and ownership.

Malaysia has played an active role together with the other Asean countries in fighting off the four new mechanisms contained in the draft Declaration.  They are joined by many other countries from Africa, Latin America and the Caribbean.

The Asean countries asked that the paragraphs that refer to the quantitative targets and the sectoral negotiations be deleted altogether.  They also proposed to water down the reference to “plurilateral negotiatons”, so that any country can choose whether to take part or not.  The present draft makes it compulsory for countries that are requested to take part.

They also proposed to remove the presently detailed text on “qualitative targets” and replace it with a shorter draft that does not require countries to increase their liberalisation in specific ways.

For example, the present draft requires countries to make commitments on “enhanced levels of foreign equity participation” and “allowing greater flexibility of types of legal entity allowed.”      This implies that countries have to allow foreign firms higher percentage shares in equity ownership, and to remove or relax conditions for legal entity.

Many countries, including Malaysia, have required that foreign firms in certain sectors be restricted in their share of equity, and that they either form joint ventures with locals, or locally incorporate the firm that is operating in the country (instead of being a subsidiary).  Such conditions may be more difficult to maintain, should the present draft for Hong Kong be retained.

The Asean countries proposed that such detailed policy prescriptions be replaced by language that only generally calls on countries to improve their offers.

At last Friday’s WTO meeting, the Indonesian Ambassador, speaking on behalf of Brunei, Indonesia, Malaysia, the Philippines and Thailand, said developing countries do not have the capacity to participate in an “inflexible formula approach” to the negotiations.

“Without a well developed regulatory regime and working with no single national authority to assess and monitor developments in all services sectors and sub-sectors, developing countries are entitled to as much flexibility as they require.”

The Asean countries said they definitely could not accept “numerical targets” or a dilution of developing country flexibilities under the GATS.  “In the spirit of the Round’s development dimensions we reject today any and all efforts to undermine the GATS structure that our predecessors have delicately negotiated in the Uruguay Round.”

The Asean response is well timed.  A recent European Commission paper listing the demands being made by European firms shows that Asean countries are among the main targets for the European Union’s drive to open up markets.

In financial services, countries that are targeted that have offered no commitments yet are listed as Malaysia, Philippines, Thailand and India.   In distribution services, Malaysia together with Indonesia, Philippines, India and Egypt are listed as making no commitments.

Malaysia is also listed as having not made commitments in environmental services.  It is listed as offering “only partial commitments” in other sectors, including telecommunications, construction, engineering, computer services, business services, and legal services.   Those countries with “partial commitments” are targeted to make fuller commitments.

The fear of the developing countries is that if the WTO’s Hong Kong Ministerial conference in December adopts the present draft, then they would come under very intense pressure to open up in all the important sub-sectors.  This would place local firms and businesses under severe foreign competition that they are unable to cope with.

Besides the Asean countries, many other WTO members are trying to withstand the pressures, but they all face an uphill battle. The Chairman of the services negotiations has ignored their views and refused to change his draft.

The battle is expected to be brought to Hong Kong.  It is a crucial fight which countries should be prepared to wage to the end, as the fate of local firms and businesses are at stake.