The
Investment Regime in ASEAN Countries
Dr.
Lawan Thanadsillapakul
Performance
Requirements
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; |
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trade balancing; |
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import
restrictions; |
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foreign
exchange balancing; |
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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).
Part
9
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(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. |