By Arran Boote.
I have spent most of the last six months working in the Philippines, Indonesia, Malaysia, Singapore and Thailand assisting New Zealand exporters to access these markets and to bring investment into New Zealand and Australia.
From such close range, the power plays underway in respect of Asia are palpable. China is exerting its increasing influence in both military and territorial matters. These political matters have begun, and will continue, to impact on business in the region:
1. The Philippines and Indonesia have been able to reach an agreement in respect of their overlapping territorial claims. However, at this stage China is unwilling to enter serious negotiations with Vietnam, the Philippines, Malaysia, Indonesia and Brunei in respect of overlapping territorial claims. Japan, Korea and China also have overlapping territorial claims that remain unresolved.
2. For the first time in 70 years, Japan has altered its constitution and is now permitted to undertake foreign military actions if it so decides. It is also for the first time, exporting military equipment and providing military support to the region, specifically recently to the Philippines with military vessels.
3. It is well known that Japan, Korea and the Philippines have the active support of the US. In addition, the US has openly declared it has transferred its focus from the Middle East to Asia Pacific. To demonstrate these are not merely words, the US has re-opened its military bases in the Philippines and committed resources to Darwin as part of its increasing presence in the Asian region.
As an aside, it is rumoured there are factions within the Vietnamese Government that support increased ties with the US and others that want to attempt to negotiate with China. This is a common theme amongst ASEAN nations apart from the Philippines, which must tread the fine line of retaining trade and cordial relations with both China and the US.
The political manoeuvrings have also overlapped into regional trade agreements. The TPP and ASEAN Economic Community(AEC) excludes China and Hong Kong. The TPP includes, amongst other nations, the US, Japan and Korea. In response, China has commenced the RCEP, which includes China, India and most of the ASEAN nations but excludes the US.
New Zealand is committed to all three (TPP, RCEP and ASEAN) and is active in both the TPP and RCEP negotiations. New Zealand already has a FTA with ASEAN as a block of nations and also has double tax agreements with the larger ASEAN nations. ASEAN, as a block, has concluded a FTA with the European Union and China and will shortly conclude similar arrangements with North America and Hong Kong.
The TPP’s expansion has been slower than desired. The inclusion of agriculture and issues over parallel imports and intellectual property have stalled progress. The inclusion of Japan and Korea in the TPP, whilst welcome, further increases the likelihood of delays. In fact there must now be real doubt as to whether the expansion of the TPP can be agreed upon by the participating countries. Certainly, it seems unlikely for a number of years.
The RCEP is progressing but also at a much slower pace than originally envisaged. We believe this is because China feels less threatened now that the TPP has stalled and therefore is putting less energy into the RCEP. After all, the RCEP was China’s response to being left out of the TPP talks. In fact,New Zealand is now one of the major parties in the RCEP negotiations as it sees significant benefit in having free trade access to India (which it has attempted to negotiate for some years now but has been unable to conclude).
The AEC was scheduled to be in place by the end of 2015; however, that also looks ambitious as there are a number of technical matters still to be finalised. Notwithstanding this, ASEAN has been able to conclude a number of trade deals. In addition, a number of professional bodies and trade councils have been established,or are in the process of being organised, on an ASEAN-wide basis.
In addition, there is progress in the ASEAN nations themselves to ensure they are professionally ready to meet the opportunities ASEAN presents. There is even now healthy competition between countries like Thailand and Singapore about tax and Government incentives for establishing regional headquarters in their respective countries.
With a stalled TPP there is less emphasis by China on progressing the RCEP, and so the AEC is the bright light on the trade horizon.
At some point, either China will have to agree to talks in the UN over its territorial claims with Vietnam, the Philippines, Malaysia, Brunei and Indonesia or, more likely, it will adopt a “Russia Crimea” approach – take what it claims and assume that there will be some verbal response but nothing of force. To some extent, that has already occurred – in Vietnam over oil exploration in the disputed sea close to the Vietnam coast, and in the Philippines where China has commenced the development of a military runway on a disputed island. (Shortly after this, the headline in the daily newspaper was ‘PREPARE FOR WAR’, so have no doubt these tensions are serious.)
Certainly one cannot see the US being prepared to take on China over some islands and seabed. And the US has the other problem, that it cannot, in reality, put trade embargos on China without consequences for its own economy and risking actions in the WTO. As well, China holds so much US treasury stock, that should the US apply trade embargoes, China has the ability to retaliate and damage the US financial sector and economy more than any US action could hurt the Chinese economy.
Neither China nor the US want these outcomes, as the world financial markets are not strong enough to withstand an economic stoush between Washington and Beijing, and there would also be severe impacts on their own domestic economies. So while it is going to be very important to keep a watching eye, we expect only a stern verbal response to any aggression by China in the region.
It will be more interesting to see how ASEAN responds, as its members will be the territorial (and sea bed resource) losers if China proceeds, as it seems likely to do.
ASEAN, like the US, largely depends upon China for its increasing wealth, albeit inter-ASEAN trade is growing significantly and its FTAs with Europe and Australia/NZ have reduced its dependence on China. An economic response is unlikely but not beyond possibility. It may take the form of quotas or customs duties, which will have some limited effect but will demonstrate unity. However, it will be in direct conflict with the ASEAN/China FTA and this will likely result in a WTO response by China. China can equally respond and that will likely impact on some of the smaller nations very severely (Myanmar and Laos for example), which have no direct interest in the territorial disputes and have less business links outside of ASEAN and China.
New Zealand companies either with operations, imports or exports from ASEAN countries need to keep a watching eye on these developments. We recommend they have specific plans to allow for business interruptions, including appropriate business interruption insurance and/or having the cash reserves to ride out incidences.They should expect what happened with the protests in the streets of Vietnam earlier this year to continue and potentially spill over into other ASEAN nations.
With instability also come opportunities. New Zealand companies with engineering or similar capacity linked to military applications are well advised to take advantage of the increased spending by the US in the Philippines and Australia, and by Japan domestically. We have also seen investment that was previously planned by US or European firms being delayed. That leaves the door open for others to step in and fill the void. New Zealand firms should take advantage of these opportunities whilst they last.
Arran Boote is a director of William Buck Christmas Gouwland, specialising in international tax and transfer pricing.