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The Investment Regime in ASEAN Countries
Dr. Lawan Thanadsillapakul
Almost all ASEAN countries apply performance requirements to foreign investment but many requirements are equally applied to local industries as well. Only Singapore does not have any performance requirements imposed on any investments.
The main purpose of the imposition of performance requirements is to gear industries toward national economic development schemes or plans. For instance, local content requirements are needed to promote domestic industries and to ensure that foreign firms do not just operate a 'screwdriver' plant by importing all parts and intermediates or inputs from abroad. Therefore a certain level of local content is generally required. Export performance requirements are also used to promote the export-oriented policies of ASEAN countries and to ensure equilibrium in the balance of payments. Thus governments require a balanced proportion of exports to imports or a higher proportion of exports to maintain the countries' international reserves.
The Malaysian government has applied a local content programme for motor vehicles which is encouraged through administrative measures. The objective of this local content stipulation is to develop industrial projects including supporting industries to strengthen the industrial structure and enhance linkages between Small-and Medium-scale Industries (SMI) and larger firms. The programme was introduced for passenger and light commercial vehicles in 1991. So the rationale for the programme is to achieve an upgrading of engineering and technical skills in the infant component-parts industry.
The other three main economies: Indonesia, the Philippines and Thailand have used performance requirements as follows:
In Indonesia, there are three outstanding decrees(81) in effect which stipulate local content requirements for motor vehicles industries. The reason for this measure is to support and encourage the development of the automotive industry in Indonesia by regulating the local content rates of domestic motor vehicles or components with the incentive of differentiated import duty rates. The decrees are also designed to strengthen domestic industrial development by fostering technological advancement as well as the enhancement of industrial design and engineering ability in this sector.
The Indonesian government also stipulates local content requirements in certain industries, such as the utility boiler industry(82), soyabean cake manufacturing(83), and the milk processing industry(84). Compliance with these measures is mandatory for all enterprises, including those domestically-owned, and is enforceable under domestic law. Even though there was no formal provision for phasing out these requirements in the decrees, the government of Indonesia declared its intention to progressively eliminate the local content requirements in motor vehicles and components, utility boilers, soyabean cake and fresh milk over five years from 1993, consistent with Art. 5.2 of the Agreement on TRIMs.
In the Philippines, Local Content and Foreign Exchange Requirements have been applied under the Car Development Programme (CDP), Commercial Vehicle Development Programme (CVDP), and the Motorcycle Development Programme (MDP) , which aim to develop a viable automotive parts and components manufacturing sector. Participants in the CDP, CVDP and MDP are required to comply with the local content requirement in order for them to remain in the programme. From a list of locally produced automotive parts and components, the automotive assemblers can select which automotive parts they wish to manufacture for themselves or source locally in order to meet the local content requirement.
Automotive assemblers are also required to earn foreign exchange through exports of automotive parts and components to finance a proportion of their imports of completely knocked down (CKD) and semi-knocked down automotive parts and components for the assembly of motor vehicles(86).
Thailand has applied local content requirements to both local and foreign investment in certain industries. These performance requirements are provided in the Factory Act (B.E.2535) and the Investment Promotion Act (B.E.2520). Section 32 of the Factory Act (B.E.2535) empowers the Minister of Industry to determine, upon the approval of the Cabinet of Ministers, product items, quality, ratio of raw materials, sources of raw materials, and factors and/or the kinds of energy to be used in the production of certain finished goods. To date, administrative rulings in the form of Ministry Announcements have been issued under this authority imposing only a local content requirement for domestically assembled motor vehicles, with the objective of establishing and developing the domestic automotive parts industry in Thailand.
Even though Thailand maintains the application of these performance requirements for the existing promoted projects which operated before the issuing of the new law, Thailand has abolished local content requirements from 1st April, 1993 for new projects after the five-year transitional period provided in Art. 5.2 of the Agreement on TRIMs.
Section 20 of the Investment Promotion Act (B.E.2520) authorises the Board of Investment to grant special investment incentives to industries and firms that agree to comply with certain production conditions. One of those conditions is that the firms use pre-determined proportions of locally produced raw materials in the production of certain product items. The types of raw materials or inputs and the percentages of local content requirement are fixed for each industry, and may be changed from time to time, to encourage the establishment of different industries for economic development purposes.
Local content requirements are currently applied to 13 products: passenger cars, vans and other types of passenger cars, small vans and trucks, motorcycles, milk and dairy products, coated aluminium sheets for printing, television picture tubes, transformers, gas pressure thermostats, polystyrene sheet and film, transmission assembly, compressors for air-conditioners and passenger cars and pick-up trucks with chassis and windshield, which are subject to excise tax exemption.
So we can see that all ASEAN countries have the same main investment policies: to promote export-oriented industries by using export-performance requirements; to promote and upgrade specific local industries by imposing local content requirement; and to maintain a trade balance by restraining investors from importing more than an equivalent amount or some proportion of exports.
As discussed earlier the TRIMs agreement as part of Uruguay Round package establishing the WTO required member states to phase out certain trade-related performance requirements. TRIMs agreement requires the elimination of any TRIM which is inconsistent with article III or XI of the GATT, and the Annex to the agreement provides an "illustrative list" of such measures. It cover both mandatory measures and those "necessary to obtain an advantage", and includes
local sourcing; trade balancing; import restrictions; foreign exchange balancing; export restrictions.
Developing country members were given a 5-year transitional period to comply. As mentioned above, ASEAN countries declared their intention of complying with TRIMs within this timescale. However, in August 1999 some ASEAN countries, i.e. Malaysia, expressed the necessity to extend the deadline, and this is still under consultation(87).
(81) Presidential Decree No. 54 dated 10th June 1993 regarding the list of sectors that are closed for capital investment, which requires that all new investments in the motor vehicles sector comply with the local content rates in effect as implemented by existing manufacturing; Decree of the Minister of Industry No. 114/M/SK/1993 date 9th June 1993 regarding the determination of local content rates of domestically made motor vehicles or components; and Decree of the Minister of Finance No. 645/KMK.01/1993 dated 10th June 1993 regarding the relief of import duty on import of certain parts and accessories of motor vehicles for the purpose of assembling and/or manufacture of motor vehicles.
(82) The utility boiler industry is normally closed to foreign investment, except those that comply with the local content requirement as implemented by existing manufacturing. This is stipulated in the President Decree No. 54 dated 10th June 1993.
(83) A ratio of domestically produced soybean cake to imported cake is specified to 3 weight units to 7 units, and applied to all cattle feed processing industries recognised as imported producers who are allowed to import and produce soybean cake. Decree of the Minister of Trade No. 126/KP/VI/1994 dated 27th June 1994 regarding the ratio between imported soybean cake and absorption of domestically produced soybean cake.
(84) In order to ensure the availability of raw material supply for this sector and to ensure the absorption of the domestic fresh milk production, the Indonesian government has applied mixing ratio between imported raw material of milk and the production of domestic fresh milk. The ratio of domestic fresh milk is applied for the processing milk industries and state-trading companies were appointed to import of milk raw material. Decree of the Minister of Trade No. 58/KP/IV/1995 regarding the ratio between imported fresh milk and absorption of domestically produced fresh milk.
(85) The measures are covered by the following Executive Order (EO) and Presidential Memorandum Order (MOS) and are applied to new entrants and all existing participants in the CDP, CVDP and MDP that are registered with the BOI.
(86) The local content requirement extends participation in CDP to ASEAN Industrial Joint Venture (AIJV) project proponents, for projects endorsed by the Government. The Memorandum Order 242 further requires participants under the AIJV scheme to earn 100% of their foreign exchange requirements for imports of CKD units for assembly.
(87) Under Art. 5.3 the Council for Trade in Goods may, on request, extend the transition period for the elimination of TRIMs in the case of a developing country which demonstrates particular difficulties in implementing the provisions of the Agreement.