Regional integration and multilateral agreements to benefit the nation

With the sum total of nearly every national economy now irrevocably intertwined in a global marketplace, cooperation between different countries has become an imperative component of modern economics. Although countless trade barriers still exist in some form or another all around the world, longheld isolationist and protectionist measures which erect trade barriers at the expense of protecting oftentimes less efficient or fragile domestic industries are proving increasingly difficult to justify in a world now reliant of international trade.

This economic reality has spawned numerous multilateral free trade agreements (FTAs) around the world ranging from grand experiments including the EU to the North American Free Trade Agreement to ASEAN, of which the Sultanate is a member.

Blessed with a wealth of oil and natural gas reserves beneath its territory, Brunei Darussalam has been able to maintain a comfortable trade surplus and ranks among the top-five countries in the world in terms of GDP per capita in spite of producing little else domestically. Despite these inherent advantages, the Sultanate cannot afford to rely on these finite resources forever and must seek to foster closer economic ties both regionally and globally in order to ensure continued prosperity once the wells run dry. With Brunei Darussalam’s relatively small population of approximately 400,000 citizens and limited industrial and commercial bases, it behoves the Sultanate to partner with free trade alliances in order to gain a stronger position during international negotiations as well as less restrictive access to foreign markets. According to the treatise by famed economist Adam Smith penned more than two centuries ago, free trade will benefit not just the larger fish in this pond but will add to overall economic growth for all parties concerned.

ASEAN Integration

Undoubtedly the most influential of the FTAs Brunei Darussalam has signed on to is ASEAN. Formed in 1967 by charter members Indonesia, Malaysia, the Philippines, Singapore and Thailand, Brunei Darussalam later signed on in 1984 along with Myanmar (1997), Laos (1997), Cambodia (1999) and Vietnam (1995) to form a combined population block of some 600m, thereby making it the third largest in Asia behind only China and India.

According to the ASEAN charter, the regional partnership was formed to promote cooperation in the economic, social, cultural, technical, educational and other fields, as well as to promote regional peace and stability through an abiding respect for justice and the rule of law and adherence to the principles of the UN Charter.

Targets Set

In more tangible economic terms, this translates into increased liberalisation of trade and travel restrictions with the ultimate goal of unrestricted movement of goods, services and people including zero internal tariffs, the simplification and harmonisation of standards and Customs procedures, universal intellectual property rights protection and the removal all non-tariff barriers. Current priorities for ASEAN include the implementation in 2015 of the ASEAN Economic Community (AEC) which will strip away most of the remaining trade and commerce barriers within the block. Once implemented, these provisions are intended to bring about an unfettered flow of goods, services, investment, capital, skilled labour and the integration of 12 priority manufacturing and service sectors.

According to the scorecard tallied by ASEAN, close to 80% of the policy and institutional targets set in the AEC blueprint had been met as of the beginning of 2014. Conservative estimates by the World Bank indicate that creating the AEC could increase annual income growth by around 0.5-1% of GDP and increase foreign direct investment (FDI) stocks by 28-63% (or $117bn-264bn relative to 2006 inward FDI stocks). In addition to the broader AEC integration, Brunei Darussalam is also taking a lead role in the development of the smaller sub-region of Brunei Darussalam-Indonesia-Malaysia-Philippines East ASEAN Growth Area (BIMP-EAGA) established in 1994 (see analysis).

Economic Benefits

While individually none of the ASEAN signatory countries could hope to compete with regional behemoths such as China and India, when taken together the 10 members coalesce for substantial economic clout. The group’s total combined economic output was pegged at $2.31trn in 2013, according to data from US-based rating agency AM Best. Overall, ASEAN countries have raised their share of global GDP from 2% in 2005 to 2.5% by 2013, according to the World Bank.

As a group ASEAN fared better than the Asian region as a whole in 2012 when its GDP expanded by 5.8%, higher than the regional average of 5.3%, according to IMF data. This was also an improvement over 2012 growth of 4.7%, although this trend was reversed in 2013 with GDP slowing to 5.1%.

The 2013 downturn was due in large part to the economic slowdown in the two larger economies of Thailand (for which GDP growth declined from 6.5% to 2.9% due to political unrest) and Indonesia, which continued its decline from 6.3% to 5.8% as a result of broader economic challenges. Brunei Darussalam likewise saw its GDP contract from 0.9% to negative 1.2% from 2012 to 2013 due to a decline in oil and gas export revenues. Where Brunei Darussalam truly excelled was in its current account balance, where the country posted a mark of 48.5% of GDP in 2012 and is projected to average 46.1% from 2014 to 2018, according to data from the OECD. The next highest mark was Singapore with a 2012 current account balance of 18.6% of GDP and a projected average of 17.9% from 2014 to 2018.

Integration has also had the desired effect of boosting trade within the region as intra-ASEAN trade doubled from 2003 to 2013 to nearly $500bn as tariffs were slashed to nearly zero in ASEAN middle-income countries and to below 2% on average in lower-income economies, according to the ASEAN Integration Monitoring Report 2013.

Improvements in connectivity and trade facilitation also brought about greater trade and efficiency gains, prompting overall trade costs to decline by 15% measured in aggregate terms in the ASEAN region over the past decade.

The New Deal

As the ASEAN block continues to pick up stream, another more ambitious multilateral agreement is being hashed out that would extend to every continent on the shores of the Pacific Ocean in the form of the Trans-Pacific Partnership (TPP). The TPP is a proposed trade agreement seeking to establish a comprehensive, next-generation regional agreement to liberalise trade and investment currently under negotiation among a dozen countries: Australia, Brunei Darussalam, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam. In addition to including ambitious commitment targets for traditional liberalisation on the trade of goods and services and other investment provisions, the TPP also aims to address a wide range of subjects previously left out of similar FTAs such as trade and investment in innovative products and commitments to help companies operate more effectively in regional markets.

First hashed out in 2005 by founding nations Brunei Darussalam, Chile, New Zealand and Singapore, momentum for the free trade agreement has picked up in spite of a number of contentious points. Chief among these issues are the lowering of trade barriers on agricultural goods, which numerous participant governments are steadfastly resisting. How and when these and other subjects will be resolved remains unclear as convincing signatories to sign over any measure of sovereignty to a third party has proven daunting in the past.

Already complex negotiations for the TPP were further complicated for Brunei Darussalam after human rights groups and government bodies of some nations including the US, Australia, Canada and New Zealand called for the withdrawal of Brunei Darussalam from the talks due to the implementation of sharia law in 2014. The crux of the arguments was that human rights could be violated due to provisions for capital and corporal punishment, although the law is expected to be phased in over three years and the degree of implementation is still somewhat vague. Brunei Darussalam is not the only TPP signatory to draw the attention of activist groups either, with countries including Vietnam and Singapore previously rebuked for their allegedly anti-democratic approach to free speech including censorship and intimidation tactics.

Mega Pact

In addition to the ASEAN and TPP deals, another potential mega deal is being negotiated in the Regional Comprehensive Economic Partnership which includes all members of ASEAN in addition to its six primary regional free trading partners of India, China, Japan, Korea, Australia and New Zealand. Initiated in Brunei Darussalam in 2013 with the goal of forming a regional economic pact covering trade in goods, services, investment, economic and technical cooperation, competition and intellectual property, negotiations entered into their fifth round in June 2014 in Singapore. If successful, the agreement would rival that of the TPP and would lead to the creation of the largest regional trading bloc in the world, accounting for almost 45% of the world population with a combined GDP of $21.4trn.

Security

Throughout South-east Asia’s expansive territory of dense jungles, bustling cities and remote islands separated by vast bodies of water, all nations must remain vigilant in an effort to protect themselves from a myriad of threats. While sometimes at odds in terms of individual strategic priorities, overarching security and safety dangers affecting the region as a whole have given rise to regional and global partnerships to protect the greater good.

Modern-day threats range from organised crime, piracy and smuggling to larger, more complicated multinational issues including border disputes and skirmishes, illegal poaching or other resource theft and terrorism, among others.

To protect Asia’s sometimes fragile stability and economic growth from danger emanating from both within the region and from farther afield, the Sultanate has also entered into a number of bilateral and multilateral security partnerships. For Brunei Darussalam, and its comparatively small armed forces, these alliances are crucial in being able to stand up to larger threats. These ties are partly being created through ASEAN membership, which includes among its components for the AEC a set of political-security community targets.

Another of these partnerships is the Sultanate’s participation in the Rim of the Pacific Exercise, known for its acronym RIMPAC, joint naval exercises which US Pacific Fleet hosts every two years in Hawaii. The Royal Brunei Navy sent vessels to participate in operations for the first time during the June 2014 session and was one of 22 nations to participate, including China, another first-time participant.

China’s presence came in spite of ongoing disputes between a number of nations including Brunei Darussalam regarding conflicting sovereignty claims in the South China Sea. The primary point of contention is China’s claim over a vast swath of the body of water, which is thought to contain significant oil and gas reserves as well as containing numerous strategically important shipping lanes. In contrast to many rivalling claims from Japan, the Philippines, Malaysia, Vietnam, South Korea and Taiwan, which generally mirror international maritime claims outlined in the UN Convention on the Law of the Sea which designates an exclusive economic zone extending 370 km off a country’s coast, China’s so-called nine-dash policy covers virtually the entire South China Sea and comes with tens of miles of a number of other nation’s coastlines.

The Philippines and Vietnam, both ASEAN members, have been the most vocal in their disputes with China in recent years. Tensions with the Philippines have escalated substantially since 2011 over ownership of the Reed Bank located 144 km off the Filipino island of Palawan as well as the Scarborough Shoal in what Filipinos call the West Philippine Sea. The Reed Bank lies just to the east of the Spratly Islands, which are claimed by Brunei Darussalam as well as China, Malaysia, the Philippines, Taiwan and Vietnam. Also, nearby the Parcel Islands (also claimed by Taiwan), Vietnamese-flagged exploration vessels clash regularly with Chinese military patrol boats.

As a result of these disagreements, tensions have flared in recent years, giving rise to what is rapidly becoming one of the region’s pre-eminent threats to stability with multiple standoffs occurring between rival vessels. In accordance with their respective ASEAN commitments, government representatives from the Philippines and Brunei Darussalam met in July 2014 to discuss ASEAN cooperation on the issue and to pursue a peaceful, multilateral solution. Presenting a united front to China will likely grant ASEAN member nations a stronger bargaining position when facing the divide-and-conquer bilateral strategy pursued by China thus far.

Apart from the territorial dispute, Brunei Darussalam has also been active in other security matters within the region. These include participating in an international effort to disarm and decommission members of the Moro Islamic Liberation Front (MILF) following a peace agreement reached in 2014 between MILF and the Philippine government with which it was battling on the island of Mindanao. In addition, a proposal to construct a new regional training centre in Brunei Darussalam for investigation procedures as part of efforts to combat crossborder crime was also announced in June 2014 at the 14th ASEAN Senior Officials Meeting on Transnational Crime in Bandar Seri Begawan.

Outlook

Beyond the advantages of stronger economic, strategic and logistical ties within the region, Brunei Darussalam will need to increase its own manufacturing base substantially in order to fully capitalise on the advantages afforded by ASEAN membership and other future multilateral FTAs. This could prove challenging outside of niche areas, however, as these same agreements also allow larger countries with dramatically greater economies of scale entrance in the Sultanate’s domestic markets as well.