Background
As a country expected to become the world’s fifth-largest economy, Indonesia has been an attractive trading partner for many developed countries. The fact that Indonesia is a democracy further helps to establish these relationships, albeit reports that 311 people have died in its recent elections are deeply concerning. Nonetheless, Indonesia has recently concluded trade and investment agreements with EFTA states, Australia and has been negotiating with the EU.
This post evaluates the Indonesia-Australia Comprehensive Economic Partnership Agreement (hereafter IA-CEPA), which was signed on 4 March 2019 and will enter into force after national ratification procedures have been completed. The IA-CEPA builds on the existing relationship between the countries and the previously concluded ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA). It provides a legal framework for deepening of the cooperation between the two regional partners through achieving greater market liberalisation in a number of sectors and bringing improvements to business conditions for investors.
Inspired by the recent announcement of the IPBES Global Assessment Report, in which 145 experts from 50 countries confirmed that biodiversity has been declining globally at rates unprecedented in human history, I have decided to focus my analysis of the IA-CEPA on trade and sustainability. The aim of my analysis, summary of which you can read below, was to check whether and how the IA-CEPA responds to increasing calls that a transformative change to the way in which we do business is necessary to curtail the fast-progressing degradation of the environment.
As a country expected to become the world’s fifth-largest economy, Indonesia has been an attractive trading partner for many developed countries. The fact that Indonesia is a democracy further helps to establish these relationships, albeit reports that 311 people have died in its recent elections are deeply concerning. Nonetheless, Indonesia has recently concluded trade and investment agreements with EFTA states, Australia and has been negotiating with the EU.
This post evaluates the Indonesia-Australia Comprehensive Economic Partnership Agreement (hereafter IA-CEPA), which was signed on 4 March 2019 and will enter into force after national ratification procedures have been completed. The IA-CEPA builds on the existing relationship between the countries and the previously concluded ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA). It provides a legal framework for deepening of the cooperation between the two regional partners through achieving greater market liberalisation in a number of sectors and bringing improvements to business conditions for investors.
Inspired by the recent announcement of the IPBES Global Assessment Report, in which 145 experts from 50 countries confirmed that biodiversity has been declining globally at rates unprecedented in human history, I have decided to focus my analysis of the IA-CEPA on trade and sustainability. The aim of my analysis, summary of which you can read below, was to check whether and how the IA-CEPA responds to increasing calls that a transformative change to the way in which we do business is necessary to curtail the fast-progressing degradation of the environment.
Sustainability Commitments in the IA-CEPA
Against this background, I find that the IA-CEPA contains weak sustainability commitments and does not provide a legal framework that could incentivise protection of the environment whilst pursuing trade and investment liberalisation. Firstly, unlike similar treaties concluded by the EU with other ASEAN countries (with Vietnam or Singapore), the IA-CEPA does not include a comprehensive chapter on trade and sustainability. Secondly, the pledge to contribute towards sustainable development in all dimensions contained in the preamble has not been reinforced in the agreement’s objectives (IA-CEPA, Art 1.2). Chapters on trade in goods, services and investment enable parties to achieve their sustainability goals through safeguarding states’ right to regulate, but do not contain deeper commitments (e.g. IA-CEPA, Arts 14.19, 14.21 and 17.2). In the overall assessment, the agreement subscribes to the old philosophy of embedded liberalism, which has not been able to provide transformative solutions to environmental challenges that we face today.
Against this background, I find that the IA-CEPA contains weak sustainability commitments and does not provide a legal framework that could incentivise protection of the environment whilst pursuing trade and investment liberalisation. Firstly, unlike similar treaties concluded by the EU with other ASEAN countries (with Vietnam or Singapore), the IA-CEPA does not include a comprehensive chapter on trade and sustainability. Secondly, the pledge to contribute towards sustainable development in all dimensions contained in the preamble has not been reinforced in the agreement’s objectives (IA-CEPA, Art 1.2). Chapters on trade in goods, services and investment enable parties to achieve their sustainability goals through safeguarding states’ right to regulate, but do not contain deeper commitments (e.g. IA-CEPA, Arts 14.19, 14.21 and 17.2). In the overall assessment, the agreement subscribes to the old philosophy of embedded liberalism, which has not been able to provide transformative solutions to environmental challenges that we face today.
Trade in Goods
In trade in goods, the IA-CEPA builds on the existing agreement between Indonesia and Australia (AANZFTA) further reducing tariffs between the two economies. The agreement subscribes to an asymmetric liberalisation, an idea utilised in the WTO agreements to assist the developing countries. Thus, upon its entry into force the IA-CEPA requires Australia to immediately eliminate all tariffs on imports of goods, whereas Indonesia is permitted to maintain some of them in order to safeguard certain markets (IA-CEPA, Art 2.2, Annex 2-A). As 98 per cent of Indonesian exports to Australia were already duty free, in practice the new arrangement removes tariffs on two per cent of Indonesian exports to Australia, in comparison with 30 per cent of Australian exports to Indonesia.
Worrying aspects are that the IA-CEPA enables coal to continue as one of Australia’s top exports to Indonesia, and mining equipment technology has been identified as a future opportunity. Any increase in flow of these commodities to Indonesia is alarming from a climate change perspective because Indonesia’s energy demand is expected to grow significantly in the medium-term and a recent report has already identified the country as the world’s 8th largest greenhouse gas emitter.
In trade in goods, the IA-CEPA builds on the existing agreement between Indonesia and Australia (AANZFTA) further reducing tariffs between the two economies. The agreement subscribes to an asymmetric liberalisation, an idea utilised in the WTO agreements to assist the developing countries. Thus, upon its entry into force the IA-CEPA requires Australia to immediately eliminate all tariffs on imports of goods, whereas Indonesia is permitted to maintain some of them in order to safeguard certain markets (IA-CEPA, Art 2.2, Annex 2-A). As 98 per cent of Indonesian exports to Australia were already duty free, in practice the new arrangement removes tariffs on two per cent of Indonesian exports to Australia, in comparison with 30 per cent of Australian exports to Indonesia.
Worrying aspects are that the IA-CEPA enables coal to continue as one of Australia’s top exports to Indonesia, and mining equipment technology has been identified as a future opportunity. Any increase in flow of these commodities to Indonesia is alarming from a climate change perspective because Indonesia’s energy demand is expected to grow significantly in the medium-term and a recent report has already identified the country as the world’s 8th largest greenhouse gas emitter.
Trade in Services
Similar concerns are raised by the services chapter in the IA-CEPA, which provides further opportunities for Australian mining companies, in particular those specialising in offshore oil and gas drilling, to expand their market share. On a positive note, Australians also intend to invest in geothermal energy in Indonesia. Nonetheless, more could have been done in the IA-CEPA to facilitate the expansion of Indonesia’s renewables capacity and minimise incentives to export polluting technologies and commodities.
But the agreement is not just about the energy market, as it provides a framework for cooperation in a range of other sectors. The IA-CEPA offers the most preferential market access and business conditions out of all FTAs concluded by Indonesia. A notable change is that in certain sectors majority Australian-owned joint ventures have been allowed to establish in Indonesia. These arrangements will be of interest to EU negotiators, who in their ongoing talks with Indonesia have been pursuing a removal of foreign equity caps and greater market liberalisation.
The key sectors in which Indonesia and Australia want to deepen their relationship include education, tourism, communication, health, architecture, engineering and construction. A closer cooperation in these areas creates opportunities for delivering sustainable growth in Indonesia, by opening possibilities for knowledge and technology transfers from Australian businesses. As investment in these sectors could contribute towards decoupling Indonesia’s economic growth from carbon emissions, it should be incentivised in the future implementation of the IA-CEPA. In this context, a pilot programme that allows 200 Indonesians per year to receive workplace-based training in Australia looks promising.
Furthermore, there are a number of provisions in services chapters promoting transparency and predictability in government regulations, which could have a positive impact on the development of the rule of law in Indonesia (see for example IA-CEPA, Arts 9.8, 9.11, 11.3, 11.16, 11,18, Chapter 19).
Similar concerns are raised by the services chapter in the IA-CEPA, which provides further opportunities for Australian mining companies, in particular those specialising in offshore oil and gas drilling, to expand their market share. On a positive note, Australians also intend to invest in geothermal energy in Indonesia. Nonetheless, more could have been done in the IA-CEPA to facilitate the expansion of Indonesia’s renewables capacity and minimise incentives to export polluting technologies and commodities.
But the agreement is not just about the energy market, as it provides a framework for cooperation in a range of other sectors. The IA-CEPA offers the most preferential market access and business conditions out of all FTAs concluded by Indonesia. A notable change is that in certain sectors majority Australian-owned joint ventures have been allowed to establish in Indonesia. These arrangements will be of interest to EU negotiators, who in their ongoing talks with Indonesia have been pursuing a removal of foreign equity caps and greater market liberalisation.
The key sectors in which Indonesia and Australia want to deepen their relationship include education, tourism, communication, health, architecture, engineering and construction. A closer cooperation in these areas creates opportunities for delivering sustainable growth in Indonesia, by opening possibilities for knowledge and technology transfers from Australian businesses. As investment in these sectors could contribute towards decoupling Indonesia’s economic growth from carbon emissions, it should be incentivised in the future implementation of the IA-CEPA. In this context, a pilot programme that allows 200 Indonesians per year to receive workplace-based training in Australia looks promising.
Furthermore, there are a number of provisions in services chapters promoting transparency and predictability in government regulations, which could have a positive impact on the development of the rule of law in Indonesia (see for example IA-CEPA, Arts 9.8, 9.11, 11.3, 11.16, 11,18, Chapter 19).
Investment
In addition to trade in goods and services, the IA-CEPA also covers investment protection (IA-CEPA, Chapter 14). These provisions are intended to provide further incentives for Australian businesses to invest in Indonesia, where uncertain regulatory climate and economic nationalism persist. The IA-CEPA mitigates these risks by offering investors fair and equitable treatment guarantees, as well as protection from discrimination and expropriation. Moreover, the chapter allows foreign investors access to an investor-state dispute resolution mechanism.
On the one hand, the investment chapter in the IA-CEPA adopts current trends in the treaty-drafting practice that seek to protect states’ right to regulate but, on the other hand, it ignores the recent efforts to bring more legitimacy into the investor-state dispute resolution system. Furthermore, I consider commitments to transparency in investment arbitration in the IA-CEPA to be relatively weak. In another part of the world, the EU negotiators have experienced some difficulties in this area, with open hearings being a particularly contentious issue. In the interest of the development of the rule of law and to promote sustainable development in Indonesia the highest levels of transparency in investor-state arbitration should be preferred.
In addition to trade in goods and services, the IA-CEPA also covers investment protection (IA-CEPA, Chapter 14). These provisions are intended to provide further incentives for Australian businesses to invest in Indonesia, where uncertain regulatory climate and economic nationalism persist. The IA-CEPA mitigates these risks by offering investors fair and equitable treatment guarantees, as well as protection from discrimination and expropriation. Moreover, the chapter allows foreign investors access to an investor-state dispute resolution mechanism.
On the one hand, the investment chapter in the IA-CEPA adopts current trends in the treaty-drafting practice that seek to protect states’ right to regulate but, on the other hand, it ignores the recent efforts to bring more legitimacy into the investor-state dispute resolution system. Furthermore, I consider commitments to transparency in investment arbitration in the IA-CEPA to be relatively weak. In another part of the world, the EU negotiators have experienced some difficulties in this area, with open hearings being a particularly contentious issue. In the interest of the development of the rule of law and to promote sustainable development in Indonesia the highest levels of transparency in investor-state arbitration should be preferred.
Conclusion
The IA-CEPA highlights that there is a lot of market potential to unlock in developing countries. However, as highlighted by the IPBES report, we can no longer permit cross border trade and investment to be happening in an unprincipled manner. Economic Partnership Agreements can provide a great framework for developing countries to build their capacity in key economic sectors having a positive impact on welfare of their citizens, but it is essential that we provide incentives for the right type of trade and investment to flourish. In assuming their responsibility for the environment, one of the things that the developed countries can do is to ensure that international economic agreements do not lock their partners into a high carbon future. This can be achieved through opening clean energy opportunities for their businesses abroad and disincentivising exports of polluting commodities and technologies. A right legal framework is necessary to achieve this.
The IA-CEPA highlights that there is a lot of market potential to unlock in developing countries. However, as highlighted by the IPBES report, we can no longer permit cross border trade and investment to be happening in an unprincipled manner. Economic Partnership Agreements can provide a great framework for developing countries to build their capacity in key economic sectors having a positive impact on welfare of their citizens, but it is essential that we provide incentives for the right type of trade and investment to flourish. In assuming their responsibility for the environment, one of the things that the developed countries can do is to ensure that international economic agreements do not lock their partners into a high carbon future. This can be achieved through opening clean energy opportunities for their businesses abroad and disincentivising exports of polluting commodities and technologies. A right legal framework is necessary to achieve this.
Regrettably, the
IA-CEPA is a missed opportunity for delivering a transformative change at a
global level in order to protect the environment. The agreement subscribes to
the old idea that international trade action should be just about trade and
that sustainability can eventually be achieved through economic growth alone.
The recent IPBES report clearly highlights that such a thinking is not good
enough. It finds that ‘a key element of more sustainable future policies is the
evolution of global financial and economic systems to build a global
sustainable economy, steering away from the current limited paradigm of
economic growth.’ The IA-CEPA is not a step
forward in this much needed evolution.
Author - Dr
Ewa Żelazna is a lecturer at the University of Leicester, where she teaches EU
Law and International Investment Law. Ewa’s research interests are in areas of
International Economic Law, EU External Relations Law and Governance. She
currently works on the EU’s reform of investor-sate dispute resolution system
and issues of governance in the Common Commercial Policy.
Author wishes to thank all friends who were kind enough to read this post before its
publication for their comments and expertise that they generously shared.
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