James A. Kelly, Assistant Secretary of State for East Asian and Pacific Affairs v5n24ni
Testimony before the House International Relations Committee
Washington, DC
June 25, 2003
Mr. Chairman, I would like to take this opportunity to thank you and the members of the Subcommittee on East Asia and the Pacific, for inviting me to discuss trade and commercial policy priorities in Southeast Asia and Oceania.
Looking back, this region has seen a remarkable transformation. Just a few decades ago, it suffered from cross-border conflicts and struggled with domestic instability and poverty. Today, the region has virtually no cross-border conflicts, has more open societies and democratic institutions, and boasts some of the most dynamic economies in the world. Thirty years ago, Malaysia's per capita GDP exceeded Korea's, and today Korea's per capita GDP is more than double Malaysia's. Hong Kong and Singapore, which earned a little more than $1,000 per capita in 1971, today exceed $21,000 in per capita GDP. Over the past 30 years, these economies have made great strides in overcoming income inequality and developing a solid middle class. Even amid the deep poverty I observed on my recent trip to Cambodia, I saw the beginnings of a middle class taking shape.
However, these economies are still struggling to overcome the setbacks of the Asian financial crisis of 1997-1998 and, more recently, economic fallout from the SARS epidemic. The Asian Financial crisis revealed structural weaknesses in the region's financial and corporate sectors. Some Asian countries, such as Korea, have taken important steps to resolve the twin problems of non-performing loans and non-performing assets, and have been amply rewarded through increased growth rates. Most countries in the region have moved beyond the pegged exchange rates that exacerbated the crisis, and have seen an improvement in their investment environment. But many economies of Southeast Asia continue to wrestle with bank and corporate reform, leaving structural problems that are seriously impeding growth.
The economic impact of SARS on Southeast Asian countries remains unclear, but it is likely to shave at least some growth from the most affected economies this year. Countries like Singapore and Vietnam moved quickly and decisively to contain the disease and, by taking a transparent approach to the problem, succeeded in restoring the confidence that is key to continuing to attract investment. The APEC SARS Action Plan, recently endorsed by APEC's Trade Ministers, emphasizes APEC's strengths in cross-sectoral outreach to rebuild business confidence and mobility of persons through cooperation and information sharing. The Plan includes convening the first APEC Health Ministers meeting at the end of this month, and responding to the impact on tourism, transportation, industry, and social welfare.
The focus you have put on Southeast Asia is well placed, for this region is important to the United States, politically and economically. The region is home to some of the world's fastest-growing economies and a number of significant trading partners of the United States. Last year, the U.S. sold to this market of a half-billion people $57 billion in goods and services, almost twice as much as to China and Hong Kong combined. Large U.S. investment, totaling $53 billion in the ASEAN countries, has both strengthened our economies ties with the region and expanded opportunities for American business.
These economic ties are part of deep and longstanding alliances and friendships in the region that are as critical to our security as they are to our prosperity. Virtually every country in the region has stood beside us in the war on terrorism. The Bali bombing last October drove home to all of Asia that combating terrorism is a global challenge for local, regional, and worldwide security. Steadfast friends such as Singapore, Indonesia, and the Philippines are helping in the fight against terrorism in many ways. Australia, Japan, Korea, and others stood by us on Afghanistan and Iraq. Australia contributed forces on the ground and in the air, Japan pledged $200 million toward Iraq reconstruction, and Korea sent medical and engineering personnel.
U.S. Trade Policy Goals for the Region
The United States' number one economic objective in Southeast Asia is to promote growth through expanded trade and investment and accelerated structural reform. The region has seen significant progress in lowering tariffs over the past decade and a half -- all but one of our trading partners in the region currently have average tariff rates of below 10%.
We are continuing to push for even greater liberalization through:
· The cutting edge FTAs we concluded with Singapore and are negotiating with Australia.
· Trade and Investment Framework Agreements, or TIFAs, with Indonesia, the Philippines, Thailand, and Brunei.
· The Enterprise for ASEAN Initiative (EAI), announced by President Bush last October, which offers the prospect of bilateral FTAs with individual ASEAN countries that are committed to the economic reforms and openness inherent in an FTA with the United States. The ultimate goal of the EAI is a network of bilateral ASEAN FTAs.
· Bilateral Trade Agreements, with Vietnam and Laos. The BTA with Vietnam has been particularly successful, with trade with that country doubling since the BTA entered into force in December 2001. Our $8 million technical assistance program played an important role in that success. The BTA with Laos will not go into effect until we have NTR with the country, and we are discussing NTR with Congress. The human rights situation in Laos remains poor, and we hope that NTR will improve the atmosphere for progress in human rights as well.
· Close consultations with the region to help ensure a successful conclusion of the Doha Development Agenda -- Southeast Asia will be a major beneficiary of a successful global trade round.
· Continued engagement at the multilateral level through APEC and ASEAN. APEC remains a powerful vehicle for liberalization, as its members have committed themselves to free and open trade and investment in the Asia-Pacific no later than the year 2010 for industrialized economies and 2020 for developing economies.
At the APEC Leaders' meeting coming up in October in Bangkok, we expect President Bush to introduce new initiatives related to countering terrorism while facilitating trade and investment. We are also pursuing agreements in APEC designed to further liberalize air transportation, protect copyrights, and help APEC members implement the structural reform that will be key to continued economic growth.
As tariffs have fallen, we have focused increasing attention on non-tariff barriers faced by American business, such as weak judiciaries, inefficient customs procedures, divergent standards, and poor IPR enforcement. We are currently working through both bilateral and multilateral channels to solve these issues. For example, the State Department, working closely with the U.S. and China Customs and the private sector in the APEC forum, launched an express package customs initiative in Shanghai that led to significant improvement in the speed and cost of customs processing.
We are working on an ASEAN Cooperation Arrangement on Automotive Standards to create consistent safety and environmental standards throughout ASEAN, and to further ASEAN economic integration. We are pushing in both ASEAN and APEC initiatives to increase investment in the life sciences sector through regulatory harmonization. We have launched an ambitious initiative in APEC to fight digital piracy. In programs in both APEC and ASEAN, we are also encouraging countries in the region to adopt agricultural biotechnology products and to build regulatory capacity to permit the sale and use of those products in the region.
In the area of investment, even amidst an uneven recovery from the Asian financial crisis, we have watched this part of the world attract significant amounts of foreign capital. However, recent years have seen a significant fall in foreign investment to the region, in part due to problems related to weak legal institutions. Between 1997 and 2001, annual flows of foreign direct investment in ASEAN fell by more than half, from investment of $30 billion in 1997 to only $13 billion in 2001.
The Asia Pulp and Paper (APP) case is a good example of why FDI is declining. APP is a firm based in Indonesia and Singapore that has defaulted on $14 billion worth of debt, almost half of it owed by its four Indonesian units. Foreign firms are owed $960 million, a significant portion held by American creditors. On behalf of the American creditors of the APP, the State Department and the U.S. Export-Import Bank have worked bilaterally with Indonesia and multilaterally with a coalition of Ex-Im Bank and 10 other Export Credit Agencies that hold APP debt. Improved corporate transparency and judicial accountability in Indonesia -- sorely lacking in the APP case -- would help attract foreign investment.
Indonesia is not alone in the need to improve governance. A recent survey by the Department of State found that, despite a reasonably strong matrix of laws and regulations governing public disclosure of most regional governments' budget and privatization tendencies, such laws and regulations are unevenly enforced and moderately transparent at best. In APEC, we have launched the "Transparency by 2005 Strategy" to implement APEC's transparency standards, which will enhance good governance, increase regulatory certainty, and attract investment in APEC economies.
We are working to encourage all countries in the region to improve the investment climate with legal institutions and reforms that protect people and their property, allow peaceful resolution of disputes, facilitate economic exchange, and hold their governments accountable. On a multilateral basis, the United States is leading efforts in APEC to promote best practices in the area of corporate restructuring.
Intra-regional Cooperation: China's New Role
In recent years there has been a plethora of trade and investment arrangements both among Southeast Asian economies and with countries outside that region. Long-delayed integration of ASEAN economies through the ASEAN Free Trade Agreement is making some important progress with most elements of the Accord to be in place by 2005. Meanwhile, a group of countries including ASEAN members plus China, Japan, and Korea (the so-called "ASEAN plus three") have concluded accords on foreign currency swaps and hold annual meetings to talk about how to advance integration.
China's rising economic power in particular has made it a new presence in Southeast Asia. In sharp contrast to its trade with the U.S., China runs a significant trade deficit with Asian emerging economies, reflecting in large part its role as processor of materials and parts imported from Southeast Asia for sale in the U.S. For example, China is the number three export market for Malaysia and the fifth-largest for Malaysia and Thailand. China has become Korea's second most important export destination. As China continues to import more, it is becoming one of the region's most important engines of growth. In that role, China's ongoing economic transformation can significantly enhance Asian and global economic growth and stability.

Source: IMF
China is seeking to further cement those ties through an FTA with ASEAN. It is also nearing conclusion of a Closer Economic Partnership Agreement with Hong Kong and is exploring FTAs with Korea and Japan.
We view China's integration into regional and global organizations and arrangements as a positive development. Not only is China committing itself to playing by the rules of some trade-related international fora, but it also has an increasing stake in seeing that others do the same. And as its economy and prosperity become linked more closely to relationships with trading partners, it has a greater stake in peace and stability in the Asia-Pacific region and the world. China made significant progress in fulfilling its WTO commitments during its first year as a member. Serious shortcomings, however, in agriculture, services, IPR enforcement, and transparency need to be addressed, and are being addressed.
Nonetheless, we cannot ignore the fact that China's growing economic power has created a competition for influence in the region, which makes it all the more important for the United States to remain actively engaged with our Asian allies. While China has not moved aggressively to garner political capital from its growing economic strength, there is no denying its prominence on the Asian political stage. We need only to look as far as Taiwan -- where firms are queuing up to move operations to China and whose executives lobby for freer access to the Chinese market -- to see how quickly economics can change a political dynamic. Neither can we ignore the fact that the Chinese military is a beneficiary of the country's rapid economic growth, which underscores the necessity of sustaining a modest military-to-military relationship with the People's Liberation Army within the guidelines established by Congress.
Burma
I cannot close this testimony without discussing the deplorable situation in Burma, and our administration's response. We are appalled at the crackdown engineered by the ruling junta, the State Peace and Development Council (SPDC), on those who stand for freedom. On May 30, government-affiliated thugs launched a premeditated attack on the caravan of Daw Aung San Suu Kyi and her supporters. The attack left many injured and some dead. The SPDC claim that the caravan provoked the incident is nonsense.
We strongly condemn the continued detention of Aung San Suu Kyi, in supposed "protective custody," and we are especially appalled at reports that she has been detained in the notorious Insein prison without access to visitors. We again call for her immediate release and that of the leadership of her party, the National League for Democracy. We call for the formulation of a concrete plan to restore democracy in Burma.
As Secretary Powell announced previously, we are increasing the pressure on the SPDC in response to their rejection of reform. We support the goals and intent of the bills introduced here and in the Senate and are working on an appropriate set of new steps.
We support efforts to restrict imports from Burma, as long as the President is given an appropriately flexible waiver authority. Meanwhile, the State Department has acted to expand our visa restrictions on Burmese officials. We are preparing an executive order for the President to freeze the assets of SPDC members, and ban remittances to Burma from the United States. We are supportive of legislation that would place restrictions on travel-related transactions.
We continue to coordinate with counterparts in the international community. Member states of the European Union have already agreed to toughen their common position against the SPDC. Canada is looking at visa restrictions. When Secretary Powell was in Phnom Penh, he pressed the member states of ASEAN to reject the unacceptable behavior of their neighbor, and we welcome their statement calling for the release of Aung San Suu Kyi. We support their plans to send a troika delegation to Rangoon. Thank you.