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Open Regionalism and Deeper Integration: The Implementation of ASEAN Investment Area (AIA) and ASEAN Free Trade Area (AFTA)

Part 17

ASEAN Service Providers

A key question is who can be entitled to the offers under AFAS. AFAS is a regional economic integration agreement implemented under Art. V of GATS, and therefore preferential treatment under AFAS would in principle be given to service providers of the ASEAN member countries or "ASEAN service providers". Although AFAS did not define "ASEAN service providers", it did provide for the denial of benefits in Art. VI of AFAS:

The benefits of this Framework Agreement shall be denied to a service supplier who is a natural person of a non-Member State or a juridical person owned or controlled by person of a non-Member State constituted under the law of A Member State, but not engaged in substantive business operations in the territory of Member State(s).

Even though Art. VI of AFAS is a denial of benefits clause and not a definition clause, the statement in Art. VI of AFAS was partially taken from the definition clause of Art. XXVIII of GATS, so it may be said that Art. VI of AFAS implies a definition of legitimate service providers who are the ones not denied by Art. VI. This presumption is reinforced by the fact that AFAS reiterated ASEAN countries' commitments to the rules and principles of GATS and the provisions of GATS are enshrined in AFAS, particularly as mentioned above.

Art. VI denies benefits or privileges to a juridical person owned or controlled by non-ASEAN persons only if such a juridical person is not "engaged in substantive business operations" in an ASEAN country. Therefore, a company duly constituted under the laws of an ASEAN country (which is, in principle, an ASEAN juridical person) if it engages in "substantive business operations" in an ASEAN country is thus entitled to the benefits and privileges offered under AFAS as an ASEAN service provider. Consequently, non-ASEAN nationals who establish a company in an ASEAN country, which genuinely engages in substantive business in that country, are able to enjoy benefits under AFAS. Since there are no other limitations or specific conditions under AFAS, such a foreign-owned company can gain advantages from the more liberal establishment rule to benefit from the liberalisation in intra-ASEAN services trade, subject only to limitations or conditions made by each individual ASEAN country under GATS-Plus, which are also generally applied to all ASEAN service providers alike.

Thus, as with the AIA, the AFAS offers opportunities for non-ASEAN-owned entities to benefit from the more rapid liberalisation of the intra-ASEAN market. Like the AIA also, it will put pressure on each ASEAN country to liberalise its national entry requirements, since a foreign-owned service provider once admitted to an ASEAN country may thereby gain access to the whole ASEAN market. Indeed, AFAS potentially goes further than the AIA, since it has no cumulative equity requirements (although each country may still retain some foreign shareholding limitation).

The key issue is the meaning of "substantive business" which must be engaged in by the foreign-owned company. The meaning of substantive and the meaning of business should be considered together. Substantive means real or genuine thus substantive business should mean a real or genuine business engaged by a company. The company can be entitled to privileges under AFAS only if it has already engaged in such real or genuine business operations in one ASEAN country (the one where it is established) before it can provide such services in other ASEAN countries. A further issue is whether such business can be any kind of business, or needs to be an actual services business which will be provided in the other ASEAN countries. This has to be interpreted in conjunction with the earlier interpretation of substantive business, which means a real business. If a company engages in one business operation but seeks to provide another business service elsewhere, the company obviously is not already engaged in such substantive or real business service. So substantive business should mean a real or genuine business, which it seeks to provide throughout the ASEAN region. For instance, a foreign-owned company established in Singapore engaged in the construction service business would be entitled to the rights and benefits offered under AFAS by other ASEAN countries to gain market access in the countries which have offered such rights in the construction service sector. But if this company engages in insurance business in Singapore and seeks to provide construction services in other countries, it could not do so since it is not engaged, at that time, in a real or genuine business in construction services, even though it has a real business in insurance. Since the liberalisation of services intra-ASEAN aims to strengthen and enhance trade in services in the region in order to improve the efficiency and competitiveness of their service industries, ASEAN countries would allow non-ASEAN owned providers only if they are part of the ASEAN economy and really contribute economic value to the ASEAN economy. Therefore, ASEAN countries welcome non-ASEAN nationals to establish a company and operate substantive service businesses in ASEAN countries and enjoy the rights and privileges offered by ASEAN countries under GATS-Plus. In this way, ASEAN fulfils the dual objectives of intra-ASEAN liberalisation in services and encouraging market access by service providers from outside the region through the establishment of foreign-owned companies in ASEAN countries. This means further enhancing FDI flows into the region.

Tables 6 and 7 show that the ASEAN countries' offers in GATS-Plus go beyond those committed under GATS in various sectors and sub-sectors, particularly in telecommunications, construction, financial and business service sectors. Tourism is booming in the ASEAN region because all ASEAN countries are liberalising regional tourism services. Maritime transport, which is generally closed under GATS, is more liberalised under GATS-Plus. Laos opened her maritime transport to all modes of supply and granted both market access and national treatment. Even though Laos is a land-locked country, her liberalisation of maritime transport in ASEAN is useful at the regional level because any country, whether or not it has a coastline, has the right to have ships navigating on the high seas. For instance, Austria and Switzerland are land-locked countries but they have shipping interests (UNCTAD, 1989: 152). Therefore, if Laos established a shipping registry and introduced a Laos flag it would be open to all ASEAN ship-owners. On the other hand, such a registry could permit ship-owners anywhere in the world to register their vessels in Laos hence undertaking transportation FDI in the country and in the region. This is another example of complementary regional and international liberalisation.

Vietnam granted national treatment and market access to service providers under business service sectors for both commercial presence and presence of natural person, in the sub-sectors of engineering services, in accounting and auditing services, and in legal taxation services. This is due to Vietnam's new emerging market and the lack of such specialists and professionals caused by the prolonged Vietnam War. The inflows of trade and investment to Vietnam came mainly from Asian and ASEAN countries, and have been accompanied by service providers in business service sectors. For instance, there are many Thai law firms(120) and lawyers who provide legal services in Vietnam because Thai investors(121) in Vietnam need legal services from their national lawyers who are trained in both Thai and Vietnamese law. Also accountants, auditors, and engineers are needed by Thai investors in Vietnam. The cases are the same for Singaporean or Malaysian investors. Therefore, Vietnam welcomes these business service providers. Since Vietnam endeavours to attract FDI and trade into the country, the opening of related service sectors may help facilitate business operations and promote FDI through the service providers who give advice and professional services to their customers.

Part 18


(120) For example Tilleke & Gibbins R.O.P. established in Thailand in 1893 by Pha Yod Muang Kwang, a Thai governor and Mr. William Alfred Tilleke, a ceylonese, and later joined the company by Mr. Raph Gibbins. It is now the oldest and largest independent law firm in Southest Asia composed of more than 70% Thai lawyers of the total lawyers in this law firm providing legal services in Vietnam and other Southest Asian countries. Boobchoo Blumenthal & Richter Ltd, an international law firm based in Bangkok composed of 35 % Thai lawyers providing legal services in Vietnam and also other countries in the region, and Baker & Mckenzie (Thailand), the biggest network law firm, also well established its branch law firm in Vietnam providing legal services by Thai lawyers in this country.

(121) Investors from Thailand have engaged in services trade and investment in Vietnam since the very beginning when Vietnam was transformed from the "battle field" to "trading field" initiated business relation between the two countries by the Thai Prime Minister Chatchai Choonhawan in 1989. Since then Thai investors have continued investing in this country mainly in manufacturing industries but also in service investment such as hotel, restaurant and legal professional (Ministry of Commerce, Bangkok, Thailand : Thai Investment in Vietnam, mimeograph).