Duterte’s RCEP push at ASEAN, implications on PH economy & development (Part 2)

August 13, 2017

by IBON Foundation

By Arnold Padilla

Part 2 –  The more far-reaching implication of the RCEP is on the country’s sovereignty in regulating foreign investments and in designing and implementing development plans that would serve the national interest and public welfare. FTAs like the RCEP want to further erode the mandate of governments and other state institutions. This is in order to create the most unrestricted setting for foreign capital to operate.

Weakening state regulation

One of the contentious issues that have emerged in the RCEP negotiations is the issue of the investor-state dispute settlement (ISDS) that will make the investment chapter of the proposed agreement enforceable.

Through ISDS, foreign corporations from RCEP countries could legally oblige RCEP governments to implement the deal’s provisions on investment protection and file charges before an international tribunal in case the latter fails to fulfill such obligation. Note that the ISDS as a means to settle disputes is a one-way mechanism, i.e., only investors could avail it and not the states.

Governments often lose cases in ISDS, with one report claiming that foreign investors win in seven out of 10 cases against RCEP governments. Worse, even when they win, governments still have to shell out for legal fees 70% of the time.

For really poor countries, the legal fees alone are already daunting that they are willing to settle the dispute “amicably” (e.g., drop the law or regulation being disputed by the investor). Worse, these arbitration proceedings are shrouded in secrecy and do not recognize any form of public participation.

In the Philippines, international arbitration of investor-state disputes is often built in concession agreements under privatization or public-private partnership (PPP) contracts, or in bilateral investment treaties (BITs) that affected foreign investors could invoke.

An ISDS in RCEP further widens the coverage and institutionalizes the use of international arbitration carried out by unaccountable foreign tribunals. Investors exploit it to undermine government policies or regulatory decisions that aim to protect public interest.

The most recent case of ISDS in the country is the Php3.42-billion claim that a Singapore-based tribunal decided in favor of Maynilad Water Services Inc. The case stemmed from the refusal of regulators to implement the water firm’s rate hike as they questioned the legitimacy of charging the income tax and other expenses to the consumers. The amount being claimed represents Maynilad’s supposed revenue losses arising from unfavorable regulatory decisions and actions.

This shows how through the ISDS private and foreign investors could challenge the regulatory authority of the Philippine government, even bypass the local judicial system, and undermine public welfare to protect their commercial interests.

Undermining sovereignty in development planning

Among the most common reasons that triggers an ISDS is the so-called “fair and equitable treatment” of foreign investors, which reports indicate is one the rights that negotiators want to guarantee for RCEP investors.

Fair and equitable treatment is interpreted by international tribunals as including a “standstill” on laws and regulations, according to critics of the RCEP. It means that RCEP governments are not allowed to revise or amend their existing laws if it would harm the interest of RCEP investors.

The standstill principle is problematic especially for underdeveloped countries like the Philippines. As pointed out by RCEP critics, governments need flexibility in crafting laws to better respond to changes in external conditions such as financial crisis, climate change, etc.

Many poor countries do not have the needed laws yet or a sufficient regulatory capacity to deal with emerging economic, environmental, and other issues, of which they are more vulnerable to, that may impact on their development and people.

Another implication is that it would further tie the hands of government in reversing neoliberal policies and programs that have been causing massive economic and social harm. For the Philippines, which has deeply liberalized in the past four decades, RCEP will make it even more difficult, for instance, to institute policy reforms to deal with the impact and correct the unbridled entry of imported goods that has hampered local industries and livelihood.

Investment regulation to address policy and development issues would also be greatly compromised. With the standstill principle, government could only increase (liberalize more) but not reduce foreign equity already allowed under existing laws in order to protect national interest and public welfare.

At present, key economic sectors and activities are already allowed to as much as 40% foreign equity that could no longer be reversed (without the risk of costly litigation in an international tribunal) under the standstill principle.

While RCEP investors gain more rights and power, the sovereignty of the state to determine and implement policies for economic development is further being curtailed under the RCEP. According to leaked documents, RCEP’s investment chapter includes proposals to restrict the ability of RCEP governments to require investors from any country to undertake activities that benefit the country they are investing in or the so-called “performance requirements”.

Performance requirements are one of the policy tools that governments, especially of underdeveloped countries, use to ensure that foreign investments benefit the local economy and people by among others linking to local suppliers (e.g., of services such as banking, accounting, advertising etc.), using local workers, and transferring technology.

In the Philippines, there are still some performance requirements that could be targeted for phasing out under RCEP such as the 2003 Government Procurement Reform Act (GPRA) that requires the public sector to procure goods, supplies, and consulting services from enterprises at least 60% Filipino-owned and infrastructure services from enterprises with at least a 75% Filipino interest.

Research and development is also somehow restricted from foreign participation in relation to restrictions on licensed professions such as engineering and teaching. In addition, the Board of Investments (BOI) also requires a higher export performance requirement on foreign-owned enterprises (70% of production) than on Filipino-owned companies (50% of production) when providing incentives under the Investment Priorities Plan.

Another possible impact of restricting performance requirements is on the use of export taxes. This is particularly crucial for poor countries to encourage local value addition and in establishing domestic linkages in the export sector for more beneficial impact on the local economy.

This would further undercut the Philippines’ industrialization efforts. It limits the potential use of export taxes to promote greater domestic processing of raw materials such as minerals, agricultural products, etc. instead of simply exporting them as such for processing outside the country.

Peddling the falsehood

Proponents of RCEP and greater liberalization peddle the falsehood that the unbridled flow of foreign goods and capital, and abandonment of state role and regulation in favor of market forces and profit-seeking corporations would bring about long-term economic development.

But decades of liberalization have only resulted in the underdevelopment of the Philippine industrial sector and the devastation of agriculture. While the harsh impacts on domestic industries are significantly felt, the promised benefits to poor countries are negligible at best.

Foreign trade and investment policies must be supportive of national industrialization and rural development. However, FTAs like the RCEP deprive the Philippines of the flexibility and space to design and use appropriate policy tools to make this happen. –IBON FEATURES