ASEAN Integration Through Law

Reader - Teaching Material

The ASEAN Economic Community -

TRADE in GOODS

Stefano Inama

Senior Expert, UNCTAD

Edmund Sim

Partner, Appleton Luff and

Adjunct Associate Professor,

National University of Singapore Law School

© Stefano Inama and Edmund Sim

These materials are offered as a public service by CIL, National University of Singapore. They may be used for educational purposes

only and cannot be commercialized in any manner. Their origin should be acknowledged in any use made of them

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Table of Contents

Notes ……………………………………………………………………………………….…………….p.3

Further readings …………………………………………………………………………….……..p.4

ASEAN Documents ………………………….…………………………………………………..p.4

1 – Primary Sources ………………………………………………………………………………p.6

1.1 Previous ASEAN Economic Integration Programs ……………………p.6

1.2 Precursors to the ASEAN Trade in Goods Agreement ………………p.6

1.3 ASEAN Trade in Goods Agreement ………………………………….………..p.6

2 Excerpts from ASEAN Integration Through Law – The ASEAN

Market in Goods: An Institutional and Legal Profile ………………………..p.7 2.1 The ASEAN Charter and ASEAN Institutions …………………….…….p.7 2.2 ASEAN Economic Community Blueprint and Scorecard …………..p.7

2.3 ASEAN Trade in Goods Agreement ………………………………….………..p.9

a. Elimination of Customs Tariffs …………………………………………..p.9

b. Rules of Origin ……………………………………………………………..……p.10

c. SPS and TBT and Non-tariff Measures (NTMs) ……………….p.12

3 – Topics for Debate .....................................................................................................................p.14

4 – Case Study………………………………………………………………………………………...p.14

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Notes

Course description ASEAN leaders agreed to create a single market - the ASEAN Economic Community - by 2015. Due to sovereignty concerns, ASEAN leaders did not create a single supranational authority to regulate this market. This course examines how ASEAN member states and institutions are filling in the vacuum through formal and informal means. Students will understand how regional policymaking affects domestic laws and policies within ASEAN, with emphasis on trade in goods. Course objective The course is designed to serve as the basis for a specialization on trade in goods in the ASEAN thanks to a contextual approach to policy, economic and legal considerations. It should provide course participants with an understanding of the historical context of regional integration in trade in goods, starting with the ASEAN Preferential Trading Arrangement (APTA), then to the ASEAN Free Trade Agreement (AFTA), and finally to the current ASEAN Trade in Goods Agreement (ATIGA) and beyond. Upon completion of the course, participants will have a greater understanding of issues related to trade in goods. Course requirements The course is based on lectures to familiarize course participants with the sources and literature in the field. Course discussions (based on the assigned readings and questions included in the TM) and group presentations (debates, moot exercises) are used to illustrate the key concepts and expand upon several case studies. Therefore, for interaction and pro-active learning, the assigned readings and exercises are imperative. Each course session begins with lectures and then move to discussion and group presentations. The main objective of the discussions and group exercises are to move beyond pure description and to demonstrate what we can learn from a case that adds up to more in depth knowledge of the course topic.

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Further readings

1. Peter J. Lloyd, “What is a Single Market? An Application to the Case of ASEAN” in

Denis Hew Wei, ed., Brick by Brick – the Building of an ASEAN Economic Community

(ISEAS Publishing, 2007)

2. David Parsons, “Challenges to Achieving the ASEAN Economic Community” in S.

Tiwari, ed., ASEAN: Life after the Charter (ISEAS Publishing, 2010)

3. Michael G. Plummer and Chia Siow Yee, eds., Realizing the ASEAN Economic

Community: A Comprehensive Assessment (ISEAS Publishing, 2009)

4. K S Sandhu, Sharon Siddique, Chandran Jeshurun, Ananda Rajah, Joseph L H Tan,

and Pushpa Thambipillai, complied, The ASEAN Reader (ISEAS Publishing,

reprinted 2003)

5. Kanya Satyani Sasradipoera , “ASEAN Trade in Goods Agreement (ATIGA)” in S.

Tiwari, ed., ASEAN: Life after the Charter (ISEAS Publishing, 2010)

6. Rodolfo C. Severino, ASEAN, Southeast Asia Background Series No. 10 (ISEAS

Publications, 2008)

7. Rodolfo C. Severino, Southeast Asia in Search of an ASEAN Community: Insights

from the Former ASEAN Secretary-general (ISEAS Publishing, 2006)

ASEAN Documents

8. The ASEAN Declaration (Bangkok Declaration), http://www.aseansec.org/1212.htm

9. http://www.asean.org/communities/asean-economic-community

10. http://fr.scribd.com/doc/111763432/ASEAN-Economic-Community-Scorecard-2012

11. 1987 Basic Agreement on ASEAN Industrial Projects,

http://www.aseansec.org/6373.htm

12. 1987 Basic Agreement on ASEAN Industrial Joint Ventures,

http://www.aseansec.org/1366.htm

13. 1996 Basic Agreement on ASEAN Industry Joint Ventures ,

http://www.asean.org/6385.htm

14. Basic Agreement on ASEAN Industrial Complementation,

http://www.aseansec.org/6377.htm

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15. Memorandum of Understanding Brand-to-Brand Complementation on the

Automotive Industry under the Basic Agreement on ASEAN Industrial

Complementation, http://www.aseansec.org/6382.htm

16. Basic Agreement on the ASEAN Industrial Cooperation Scheme, Apr. 26, 1996,

http://www.aseansec.org/6400.htm.

17. Protocol to Amend the Basic Agreement on the ASEAN Industrial Cooperation

Scheme, http://www.asean.org/16333.htm

18. Agreement On The Common Effective Preferential Tariff (CEPT) Scheme For The

ASEAN Free Trade Area, http://www.aseansec.org/1164.htm

19. Framework Agreements on Enhancing ASEAN Economic Cooperation,

http://www.aseansec.org/12374.htm

20. Protocol for the Accession of the Socialist Republic of Vietnam to the Framework

Agreements on Enhancing ASEAN Economic Cooperation,

http://www.aseansec.org/12372.htm

21. Protocol to Amend the Framework Agreements on Enhancing ASEAN Economic

Cooperation, http://www.aseansec.org/12369.htm.

22. Protocol on Notification Procedures, http://www.aseansec.org/12367.htm

23. ASEAN Trade in Goods Agreement http://www.aseansec.org/22223.pdf

24. “Rules of Origin,” AFTA Reader, Vol. 1, Nov. 1993,

http://www.aseansec.org/10149.htm.

25. Operational Certification Procedures for the Rules of Origin of the ASEAN Common

Effective Preferential Tariff Scheme for ASEAN Free Trade Area,” AFTA Reader.

Vol. 1, Nov. 1993, http://www.aseansec.org/10148.htm

26. Agreement to Establish and Implement the ASEAN Single Window,

http://www.aseansec.org/18005.htm.

27. Protocol to Establish and Implement the ASEAN Single Window,

28. http://www.aseansec.org/23084.pdf

29. ASEAN Framework Agreement on Mutual Recognition Agreements

http://www.aseansec.org/6674.htm

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1 – Primary Sources

1.1 Previous ASEAN Economic Integration Programs

Note: Please see the Power Point presentation for illustrative materials

Questions:

1. What factors motivated ASEAN to pursue economic cooperation? Are these factors still

relevant today?

2. Which industries benefitted from initial efforts at ASEAN economic cooperation and why?

3. What is the significance of the AICO scheme?

1.2 Precursors to the ASEAN Trade in Goods Agreement

Note: Please see the Power Point presentation for illustrative materials

Questions:

1. What is a customs union? What is a preferential trade agreement? Why are the ASEAN

agreements the latter and not the former?

2. How did the ASEAN Preferential Trading Arrangement work? What were its deficiencies

and how did ASEAN attempt to remedy them?

3. What is the Common Effective Preferential Tariff (CEPT)? Why is this the foundation of the

ASEAN Free Trade Agreement?

1.3 ASEAN Trade in Goods Agreement

Note: Please see the Power Point presentation for illustrative materials

Questions:

1. What is covered by the ATIGA?

2. What are the general exceptions from the ATIGA?

3. How do goods qualify for ATIGA treatment? What are the rules of origin and how do

companies use these rules?

a. What are wholly-originating goods?

b. What is a value-based rule of origin?

c. What is a tariff-classification based rule of origin?

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2 – Excerpts from ASEAN Integration Through Law – The ASEAN

Market in Goods: An Institutional and Legal Profile

Note: The following excerpts are from The ASEAN Market in Goods: An

Institutional and Legal Profile, by Stefano Inama and Edmund Sim,

forthcoming mid-2014 from Cambridge University Press, as part of the

ASEAN Integration Through Law series. Please do not use without proper

attribution (suggested citation: Inama, Stefano and Edmund Sim, The

ASEAN Market in Goods: An Institutional and Legal Profile (Cambridge

University Press, Forthcoming 2014)).

2.1 The ASEAN Charter and ASEAN Institutions

The first mention of the objectives of economic integration in the ASEAN Charter is found

in paragraph 5 of article 1:

Purposes of chapter 1 of the Charter:

5. To create a single market and production base which is stable, prosperous, highly

competitive and economically integrated with effective facilitation for trade and

investment in which there is free flow of goods, services and investment; facilitated

movement of business persons, professionals, talents and labour; and freer flow of

capital

The dual objectives of the ASEAN Charter to create “a single market” and “a single

production base” are compatible yet distinct objectives. Yet due to historical, cultural and

other factors, ASEAN is attempting to achieve both objectives with neither the well-

developed legal and political infrastructures on the national level among all of its members

as in NAFTA nor the strong regional institutions as in the EU.

Questions:

1. What is the priority of ASEAN in developing the ASEAN Economic Community?

2. What should be the priorities?

2.2 ASEAN Economic Community Blueprint and Scorecard

The AEC Blueprint sets forth the long-term and short-term goals of the AEC process,

along with specific actions indicated on a timeline to the 2015 initial goal. In this way the

AEC Blueprint can be compared with the European Commission’s 1985 White Paper on

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completing the internal market. Endorsed by the ASEAN leaders in 2007, the AEC

Blueprint is a political document, not a legally binding document. Nevertheless, as the

articulation of ASEAN’s goals and tasks in the AEC integration process, and a program

that predates the ASEAN Charter, the AEC Blueprint does provide insights on the aims of

the drafters of the charter, as indicated in Article 6:

The AEC will establish ASEAN as a single market and production

base making ASEAN more dynamic and competitive with new

mechanisms and measures to strengthen the implementation of its

existing economic initiatives; accelerating regional integration in the

priority sectors; facilitating movement of business persons, skilled

labour and talents; and strengthening the institutional mechanisms of

ASEAN.

Hence the AEC Blueprint provides a series of goals, actions and a timeline matrix for those

actions, with regard to these five core elements, as well as with regard to competition

policy, consumer protection, intellectual property, infrastructure development, taxation, e-

commerce, SME development, the Initiative for ASEAN Integration and external economic

relations.

The most notable aspect of the AEC Blueprint is the monitoring and enforcement

mechanisms incorporated therein. Article 70 of the AEC Blueprint provides that the

ASEAN Economic Ministers are accountable for the overall implementation of the

Blueprint. Furthermore, the ASEAN Secretary General “shall report the progress of AEC

to relevant ministerial meetings and the Summit.” To this end, the AEC Blueprint goes on

in Article 73 to state that ASEAN will:

Develop and maintain a set of statistical indicators, including an

integrated tariff and trade data database system, address

harmonisation of statistics and data quality issues, and the AEC

scorecards, to monitor and assess the progress of implementation of

each element of the AEC.

Thusly the AEC Scorecard was born, becoming the only tool for the ASEAN institutions to

monitor AEC developments and compliance with AEC initiatives. Unfortunately, it is also

the only tool available to the ASEAN institutions to attempt to impose compliance with

AEC initiatives, through the force of peer pressure and, potentially, negative publicity.

The AEC Blueprint provides no other means, such as dispute resolution or sanctions

(positive or negative) to impose compliance. This contrasts with both the EU, which uses

both sanctions administered by the European Commission and dispute resolution through

the European Court of Justice, and NAFTA, which relies more on dispute resolution and

the greater coordination among the three NAFTA members to achieve their economic

integration goals. The AEC Blueprint may resemble the 1985 European Commission

White Paper in terms of setting forth goals for an integrated market, but unlike the EU, the

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ASEAN institutions have much less authority to achieve those goals.

Peer pressure and negative publicity are not necessarily weak policy tools. For example,

the WTO routinely conducts trade policy reviews of its members, with wide ranging

inquiries into the governmental policies. ASEAN members routinely subject themselves to

WTO trade policy reviews, and often react to the recommendations and findings

contained in the final reports. In the EU, the European Commission routinely examines

the policies and laws of EU member states, whereas the NAFTA countries also routinely

cross-check their policies to ensure that policies and laws do not conflict. Furthermore, in

both the EU and NAFTA, failure to comply with regional imperatives can result in dispute

proceedings.

Nevertheless, what would be acceptable in the WTO process for ASEAN member states

appears not to be acceptable in the ASEAN context. Although many of the topics covered,

including relatively sensitive ones, are examined by the WTO on a public, country-specific

basis, that same type of analysis when conducted by ASEAN in the AEC Scorecard is

considered to be very politically sensitive. The common sentiment within ASEAN is that

“keeping score and naming names,” at least with regard to failures, would result in a loss

of face and could actually negatively impact on the information-gathering process.

Questions:

1. What is the nature of the AEC Blueprint?

2. How does the AEC Scorecard work? What are its deficiencies? How can they be remedied

within the current limitations? What additional tools could be used?

2.3 ASEAN Trade in Goods Agreement

a. Elimination of Customs Tariffs

A cursory glance through the ATIGA text is sufficient to detect the following:

1) ATIGA addresses the unfinished business of tariff liberalization but it again provides

further deadlines and possibilities for extending them;

2) ATIGA does not contain any provision for actually implementing the free flow of goods

commitments in the area of technical barriers to trade (TBT) and sanitary and phyto

sanitary (SPS) measures;

3) ATIGA does not provide for a new dispute settlement mechanism.

Most importantly ATIGA does not provide any supranational system to address the well-

known shortcomings of ASEAN regional integration and a record of slow implementation.

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ATIGA maintains in its updated form the reciprocity clauses that have been crippling more

than three decades of tariff liberalization in the ASEAN context. The original 1977 APTA

on tariff reductions contained a rather unprecedented feature in such kind of agreements

where it instituted a reciprocity clause. Thirty years later Article 22 of ATIGA reproduced

below includes the same reciprocity clause contained in the original APTA agreement. The

progressive phase out of duties under CEPT and progressive Most-Favoured Nation (MFN)

reductions may have largely made this article redundant in terms of impact on the relevant

tariff concessions. Nevertheless, the ASEAN member states felt it necessary to retain the

reciprocity clause as insurance against future breaches of tariff liberalization commitments

by other ASEAN member states. In any case the survival of this reciprocity clause, a

peculiar feature of ASEAN regional integration, goes a long way in reaffirming the nature

of commitments in ATIGA.

ATIGA also contains language mandating MFN treatment among the ASEAN member

states.A general MFN obligation was necessary because most ASEAN member states also

have free trade agreements with non-ASEAN members, such as the US-Singapore Free

Trade Agreement. This MFN clause thus reassures the ASEAN member states that their

ATIGA benefits will not be adversely impacted should another ASEAN member state give

better treatment under another free trade agreement. This may not be a major issue for

tariffs, but it is a major issue for other trade issues, such as non-tariff barriers. In fact the

FTAs that ASEAN member states have signed with other partners such Japan, Australia

and New Zealand contains disciplines on NTMs, SPS and TBT going beyond that which is

contained in ATIGA. This is a tendency of ASEAN member states of reverse

discrimination: they are inclined to commit more and liberalize more with non ASEAN

partners than within ASEAN. In any event, the MFN obligation in the ATIGA is relatively

weak because it only calls for consultations if requested, and not for automatic treatment.

The aforementioned reciprocity principle also limits the impact of the ATIGA’s MFN

clause.

Finally ATIGA even anticipates that ASEAN member states may wish to take unilateral

actions that may affect their ATIGA obligations. These actions go beyond the standard

safeguard provisions contained in most free trade agreements (which normally incorporate

the WTO safeguards commitments). Indeed, safeguard measures are specifically provided

under Article 23 of ATIGA (not to be confused with global safeguards as a trade remedy

measure). The existence of these additional provisions and the safeguard provisions would

appear to be akin to one’s wearing a belt and suspenders at the same time to hold up one’s

pants, e.g., that they are unnecessarily duplicative, particularly when compared with the

EU and NAFTA. Again this is a relic of the ASEAN PTA and AFTA system, in particular

the reciprocity obligation that those agreements imposed.

Questions:

1. How can an ASEAN member state withdraw concessions from ATIGA?

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2. Why should ATIGA allow for this?

b. Rules of Origin

All of ASEAN’s preferential trade agreements – the APTA, AFTA and ATIGA –

incorporated rules of origin to limit the applicability of preferential trade only for goods of

“ASEAN” origin. This limitation is fundamental to the establishment of both a single

production base and a single market that is ASEAN-specific, based on free movement of

ASEAN-origin goods within the bloc. The first rules of origin contained in the 1977 APTA

required that goods either be wholly-originating in ASEAN or have at least 50 percent of

FOB value from ASEAN-origin content (regional value content, or RVC). This threshold

was later reduced to 40 percent of FOB value in the AFTA in 1992, a standard that has been

continued in ATIGA in 2010.

Despite having a relatively simple standard, the usage of the ASEAN preferential trade

agreements has been relatively low, as described above. The (mainly Japanese-owned)

electronics and automotive industries have used the trade preferences, but other industries

have not used them as intensively. To improve their usage, ASEAN added product-specific

rules of origin that could be used in the alternative. First, textiles and apparel received their

own rules in 1995 based on substantial transformation. Later, ASEAN introduced more

product-specific alternative rules of origin for aluminum products of HS chapter 76 (change

in tariff heading with or without exceptions) steel products of HS chapter 72 (change in

tariff heading with exceptions, change of chapter) wheat flour (change of chapter), wood

products of HS Chapter 44; HS 94.01–94.03, and 94.06 (Change of tariff subheading at six

digit level). Finally, in 2007, ASEAN adopted additional product-specific alternative rules

of origin for products in nine priority sectors designated by the ASEAN Framework

Agreement for the Integration of Priority Sectors, namely: (i) agro-based products; (ii)

automotive products; (iii) e-ASEAN; (iv) electronics; (v) fisheries; (vi) healthcare; (vii)

rubber-based products; (viii) textiles and apparels; and (ix) wood-based products.

The motivation behind the additional product-specific rules of origin was that the

calculation of ASEAN content in the 40 percent rule was too difficult for SMEs, as well as

other industries which found it too difficult to maintain the accounting records necessary to

prove value. Hence the product-specific rules were primarily based on the physical

transformation of goods from one HS heading or subheading into another HS heading (the

CTC methodology). In theory, establishing the physical transformation of goods would not

require proof of costs or other documentation.

Nevertheless, as usage of the ASEAN preferential trade agreements remained relatively

low, pressure intensified to make the rules of origin even “easier” to implement for ASEAN

companies. This resulted in the general rule of the ATIGA which provides that an exporter

can use either the 40 percent ASEAN value rule or a change in the HS heading at the 4 digit

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level to qualify its goods for ATIGA. Furthermore, the product-specific rules remain,

particularly for textiles and apparel.

Questions:

These questions should be read in conjunction with the Power Point slides.

1. What are the ATIGA rules of origin?

2. What are the processes for obtaining ASEAN-origin?

c. SPS and TBT and Non-tariff Measures (NTMs)

It may be argued that the establishment of single market should not be the immediate goal

of the AEC. Instead the primary objective of the AEC is the establishment of a single

production base. Be this as it may the free flows of goods that is the conditio sine qua of the

establishment of a single production base is not going to be there unless SPS, TBT and NTM

measures are addressed in intra-regional ASEAN trade.

Upon reading the ATIGA text on SPS,TBT and NTMs one quickly realizes that the

drafters of the ATIGA were just continuing the “ASEAN Way” in setting ambitious

objectives of economic integration without providing the tools. Non-tariff Measures

(NTMs), including SPS and TBT, represent some of the more difficult areas for the AEC.

Unlike tariff measures, which are applied by definition only at the border, NTMs can be

applied after the goods have crossed the border. The potential for discrimination against

imported goods through NTMs that are actually non-tariff barriers (NTBs) is thusly

persistent, and can involve all aspects of government policy, not just border measures.

As a matter of administration, NTMs present three fundamental problems:

Identifying the NTMs that are actually NTBs. This includes both existing NTBs and

NTBs that have been newly created.

Rectifying the NTBs so that the barriers to trade are eliminated.

Sanctioning in cases where the rectification efforts have not been satisfactorily

undertaken.

Hence the ASEAN experience with regard to NTBs has been somewhat mixed, particularly

with regard to the three issues raised earlier.

First, the identification of existing NTBs has been an extended process in ASEAN, involving

both self-reporting by ASEAN member states and original inquiries by the ASEAN

Secretariat. Without coercive authority, the ASEAN Secretariat has had difficulties in its

investigations. Although there exists a mechanism for the private sector to complain about

alleged NTBs, the process is slow and the mechanism hampered by the ASEAN

Secretariat’s relative lack of authority. As a result, NTBs which were supposed to have

been already eliminated by 2010 for most of the ASEAN-6 (2012 for the Philippines) and by

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2015 for the CLMV countries still exist, and new NTBs are being created and conceived.

For example, Thailand implemented the Thai Industrial Standard (TIS) for products such as

steel. Although the standard itself does not differ so much from other standards commonly

used in the steel industry such as the Japan Industrial Standard, the testing and approval

process to ensure compliance with TIS standards can be quite lengthy and expensive,

discouraging steel imports into Thailand. In another example, in 2012 the Indonesian

agriculture minister publicly advocated using NTBs and SPS measures to limit agricultural

imports after full implementation of the ASEAN-Australia-New Zealand FTA (he justified

this by stating that Australia also used NTBs and SPS measures to limit imports from

ASEAN, but two wrongs do not make a right). Other ASEAN member states will not be so

public in their use of NTBs.

Second, the process of eliminating NTBs through harmonized standards can be very

lengthy. The ACAM was issued in 2002, itself the result of years of cosmetic industry

lobbying of the ASEAN member states and the ASEAN Secretariat. Yet without any legal

authority to force the ASEAN member states to adopt the directive in their national

regulations, it took almost a decade for region-wide implementation of the directive. In the

EU, by comparison, European Commission directives on standards are implemented

relatively quickly, as the Commission’s directives have much greater force of law.

Third, ensuring compliance with ASEAN standards or that national standards are not used

to block the flow of goods is difficult. The AEC Scorecard has the limited force of negative

publicity and peer pressure. Dispute resolution under the EDSM is not available to private

actors and ASEAN member states are reluctant to invoke it. As a result, implementation at

the national level in ASEAN is relatively haphazard. For example, a company faced with an

ASEAN member state’s deviation from the ASEAN cosmetics directive has no legal

recourse to seek relief.

The complexity of NTBs thus presents ASEAN with major challenges. NTBs go beyond

national borders, making investigation and monitoring of ASEAN member states’ internal

policies and regulations vital. Furthermore, ensuring compliance and rectifying NTBs also

requires ensuring that various levels of ASEAN member states’ government authorities

actually understand and follow ASEAN-wide measures. Yet the limited powers of the

ASEAN Secretariat, along with ASEAN’s long tradition of non-interference in the internal

matters of its members, make the challenges of dealing with NTBs that much more difficult.

If the AEC is to achieve the single production base, NTBS must be addressed on a

continuing, effective basis, and by ASEAN institutions with the proper authority and tools

to deal with these issues.

Questions:

1. What mechanisms are available for dealing with NTMs?

2. What mechanisms should be available for dealing with NTMs?

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3 – Topics for debate:

What should the priority be for trade in goods in ASEAN? The single market or the

single production base?

What is the relevant role model for ASEAN? The EU? NAFTA? Neither? Both?

How can ASEAN deal with market access issues that go beyond the border? Does

ASEAN have sufficient mechanisms to do this? Why or why not?

Can a single market and single production base be effectively run without a single

regulator or effective dispute resolution process? Why or why not?

Note:

Split the group of participants in two or four groups and each is assigned a position pro or con. The

groups should prepare its position on the basis of the enclosed assigned readings (see note 2) and of

any other sources.

During the course, the topics can be addressed in the style of a debating exercise where each group

presents its arguments, try to oppose the arguments of the other group and defend its position.

4 - Case Study

Note: The following excerpts are from The ASEAN Market in Goods: An

Institutional and Legal Profile, by Stefano Inama and Edmund Sim,

forthcoming mid-2014 from Cambridge University Press, as part of the

ASEAN Integration Through Law series. Please do not use without proper

attribution.

The Philippines-Thailand WTO Dispute on Cigarettes1

Over a two year period during 2006-2008, Thai Customs had systematically rejected the

transaction values declared by Philip Morris (Thailand) Limited (PMTL) for cigarettes

imported from an affiliated manufacturer in the Philippines, Philip Morris Philippines

(PM Philippines). Pending the final assessment of the customs value, Thai Customs also

required that PMTL post guarantees to secure clearance of its imports. Under Thai law,

PMTL was unable to seek judicial review of either the decision to collect guarantees or the

level of the guarantee. When the customs values of the entries were finally assessed, Thai

1 Thailand – Customs and Fiscal Measures on Cigarettes from the Philippines, WT/DS371/R.

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Customs rejected the transaction values and used a deductive method to determine a

higher customs value for the goods.

Rather than invoke EDSM or other ASEAN-based legal institutions, the Philippines

requested consultations and invoked the WTO dispute resolution procedure. This was

done on 7 February 2008, less than three months after the signing of the ASEAN Charter in

Singapore. After failing to reach a satisfactory resolution with Thailand, the Philippines

requested the establishment of an arbitration panel on 29 September 2008, just before the

Charter was fully ratified later that year. The WTO panel issued a ruling on the

Philippines’ claims on 15 November 2010. Thailand appealed the Panel decision to the

Appellate Body, and the Appellate Body upheld virtually the entirety of the Panel decision

in its own report.

In its WTO complaint, the Philippines claimed that Thai Customs improperly rejected the

transaction values of the cigarette entries in violation of Articles 1.1 and 1.2(a) of the WTO

Customs Valuation Agreement. Under the WTO Customs Valuation Agreement, the main

basis for the valuation of imported goods is the transaction value declared by the

importer. When the customs authority questions the declared transaction value, it must

follow the procedural rules set out in the WTO Customs Valuation Agreement in

examining the circumstances of the transaction between the importer and the exporter and

respect the sequential order of valuation methods in using another method to establish the

valuation.

Thailand replied that Thai Customs acted consistently with its obligations under the WTO

Customs Valuation Agreement in rejecting PMTL’s declared transaction value. Thailand

argued that since the importer and exporter were related, Thai Customs could examine the

circumstances of the sale to determine the acceptability of the declared transaction value

(i.e. that it was at arm’s length). In doing this under the WTO Customs Valuation

Agreement, however, the customs authority must follow certain procedural obligations set

out in Articles 1.1, 1.2(a) and 16, including the obligation to give the importer a reasonable

opportunity to respond to the customs authority’s preliminary consideration. Thailand

argued that the burden of establishing that the relationship did not influence the

transaction price was on the importer under the WTO Customs Valuation Agreement.

According to Thailand, therefore, the decision by Thai Customs to reject PMTL’s declared

transaction value was consistent with the obligations under the WTO Customs Valuation

Agreement because PMTL had failed to provide Thai Customs with sufficient information

to prove that its relationship with the PM Philippines had not influenced the transaction

price.

The WTO panel found that Thai Customs had acted inconsistently with Articles 1.1, 1.2(a)

and 16 of the Customs Valuation Agreement, as it had not provided adequate reasoning to

show that the affiliation between the importer and exporter affected the price.

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The Philippines further argued in its WTO complaint that the valuation methodology used

by Thai Customs as a result of rejecting the transaction value – the deductive valuation

method – was not applied consistently with Articles 5 and 7 of the WTO Customs

Valuation Agreement. The Philippines also argued that Thai Customs violated Article 16

of the WTO Customs Valuation Agreement by failing to provide PMTL with a proper

explanation of the customs value calculation, and violated Article 10 of the Agreement by

disclosing confidential information to the Thai media. The WTO panel agreed with both

additional points.

Thailand – Customs and Fiscal Measures on Cigarettes from the Philippines demonstrates that

despite commitments made under the AFTA and subsequently ATIGA, incorporating

commitments also made under the WTO Customs Valuation Agreement, Thailand

administered its customs laws and regulations in a discriminatory manner. It also

confirms the value of dispute resolution, as without having gone through dispute

resolution, the Philippines would not have been able to obtain relief from Thailand’s

discriminatory practices. That the Philippines had to resort to non-ASEAN legal

mechanisms to deal with customs issues reflects a lack of confidence in the ASEAN legal

and institutional process.