Global Policy Forum

By Sandra Polaski

OVERVIEW

A little noticed provision in the proposed U.S.-Singapore Free Trade Agreement (FTA) constitutes a problem serious enough to torpedo the entire agreement. The agreement's "Integrated Sourcing Initiative" (ISI) allows products produced in the Indonesian islands of Bintan and Batam to be treated as if they were of Singaporean origin for benefits under the agreement. However, neither Indonesia nor Singapore would be required to assume any of the obligations of the agreement with respect to production in those islands. Adherence to labor laws, environmental protections, and any other provisions of the trade agreement requiring effective law enforcement simply would not apply in the Indonesian territory. A U.S. congressional mandate that all U.S. trade agreements include such protections will be flouted, and a dangerous precedent will be set. This provision is particularly unfortunate because U.S. negotiators did take a number of positive steps elsewhere in the agreement to address congressional concerns about labor and the environment in Singapore. But the ISI creates other, second-class areas where labor and environmental objectives can be ignored. This critical loophole should be addressed before President Bush signs the FTA, now scheduled to take place in early May.

BACKGROUND

The Integrated Sourcing Initiative in the U.S.-Singapore FTA allows the parties to treat certain products produced outside of Singapore as if they were Singaporean in origin for preferential access to the United States under the agreement [1]. The extensive list of products includes electronics, semiconductors, computers, telecommunications equipment, cell phones, optical fiber cables, photocopying equipment, medical instruments and appliances, and a range of other high tech products. Within six months after the agreement goes into effect, the United States and Singapore will explore expanding the range of products covered and thereafter will "regularly consider the addition" of other products (Article 3.2 (2)) [2]. Currently, the ISI is understood to apply primarily to such products from the Indonesian islands of Bintan and Batam, although there is no limitation in the agreement to prevent the initiative from being expanded to other territories. Singaporean Trade Minister George Yeo said that the agreement could be extended to other countries as well as other sectors [3]. Meanwhile, U.S. Ambassador to Singapore Frank Lavin said recently that in the long run, the IISI could be the "most significant economic aspect of this FTA [4]."

SIGNIFICANCE

The approach taken under the ISI would in effect extend the benefits of a free trade agreement with the United States to a third country without that country undertaking the key obligations that the U.S. Congress has insisted should be included in every such agreement. These obligations include protection for fundamental worker rights and the environment, as well as protection for intellectual property rights (IPR) and other basic rules. The approach taken by Congress in the Trade Act of 2002 assumes that these public policy goals can and should be complementary with freer trade. Indeed, the Trade Act sets as chief negotiating objectives for the United States that it obtain binding commitments from trading partners to effectively enforce laws on basic labor rights, the environment and IPR. Elsewhere in the Singapore agreement, U.S. trade negotiators sought and won several positive obligations in response to those congressional concerns.

However the ISI creates a very large loophole to the terms included in other parts of the FTA. Singapore does not assume any obligation to ensure that workers' rights are protected in the Indonesian islands or other territories that may be included in the agreement, nor that environmental or IPR laws will be enforced there. Indonesia is not a party to the agreement, and therefore it takes on no obligations at all. As a result, goods produced in Bintan and Batam may be made in violation of basic rights and laws without in any way jeopardizing benefits under the agreement. This violates the fundamental reciprocity that Congress envisioned in extending trade-negotiating authority to the president, whereby access to the U.S. market would require disciplines on other matters important to the United States.

How real a concern is this? Consider the protection of labor rights in Indonesia. The U.S. Department of State reports that "enforcement of minimum wage and other labor regulations remains inadequate, and sanctions are light" in Indonesia [5]. The State Department report continues, "Allegations of corruption on the part of [labor] inspectors are common." The report notes that "government enforcement of child labor laws is weak or nonexistent. There are children working in large factories; however, the number is unknown, largely because documents verifying age are falsified easily." The report cites "credible" evidence of employer retribution against union organizers, including firing workers, "that is not prevented effectively or remedied in practice" by the Indonesian government. Ominously, the State Department reports that "police and the army continue to be involved in labor matters" through a "longstanding pattern of collusion between police and military personnel and employers, which usually takes the form of intimidation of workers by security personnel in civilian dress, or by youth gangs." A regulation requires that police be notified of all union meetings. The State Department notes that "observers believe that in practice enforcement of laws in exporting processing zones (EPZs) is weaker than in other areas" and that Batam Island, near Singapore, is the largest EPZ. The State Department is not alone in its conclusions. A recent International Labor Organization survey of workers' rights in Indonesia shows that workers there "endure harsh treatment when fighting for their rights [6]."

Enforcement of laws in areas other than labor rights is also problematic. The State Department report notes that in Indonesia, "institutions required for a democratic system either do not exist or are at an early stage of development. Existing institutions, including the government bureaucracy and security establishment, often were obstacles to democratic development." The report also finds that "there is pervasive corruption" in the judiciary.

The strategy of including binding obligations on labor rights and other matters in trade agreements assumes that market access can provide a powerful incentive for governments to find the political will to effectively enforce their laws. At the same time, increased trade opportunities motivate the private sector to voluntarily comply with such laws or risk the loss of markets. By excepting Indonesia from these requirements, the United States and Singapore miss a unique opportunity to help that government achieve improvements that are long overdue.

FINDING A SOLUTION

This deep flaw in the U.S.-Singapore FTA can be corrected. There are several ways to resolve the deficiency. First, Indonesia could become a party to the agreement with respect to Bintan and Batam islands (and any other Indonesian territories that might be included). A "docking" agreement could be negotiated whereby the benefits of the ISI would be conditioned on Indonesian acceptance of the disciplines to effectively enforce labor, environmental, and other laws that the United States and Singapore have assumed, subject to the same dispute settlement mechanisms. Second, the ISI could be eliminated from the FTA and left for future trade negotiations between the United States and Indonesia. A third option would be for the United States and Singapore to guarantee jointly that Indonesian labor law is effectively enforced in Bintan and Batam, perhaps through a monitoring arrangement such as that established by the United States and Cambodia under the U.S.-Cambodia textile agreement. A similar approach would be required in any other country or territory incorporated into the ISI. Regardless of which approach is employed, the expansion of the ISI to other countries, sectors, or products should also be made subject explicitly to congressional approval.

Closing this gaping loophole should be accomplished before the U.S.-Singapore FTA is signed and certainly must be achieved before Congress approves the agreement. Otherwise, the carefully negotiated compromise that allowed Congress to narrowly enact the Trade Act of 2002 will have been subverted in letter and spirit. Perhaps as important, a unique opportunity for Indonesia to come into compliance with basic rights and rule of law will have been missed.

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[1] Draft U.S.-Singapore Free Trade Agreement, Chapter 3: Rules of Origin, Article 3.2: Treatment of Certain Products and Annex II (also referred to as Annex B and Draft ISI Annex), available at www.ustr.gov.

[2] It appears that many of the products currently listed in Annex II enter the United States duty-free under provisions of the Information Technology Agreement. The ISI provisions of the U.S.-Singapore FTA, however, would allow products added later to benefit from tariff reductions by virtue of being deemed to have originated in Singapore.

[3] "Yeo Lays Out FTA Rules of Origin," Inside US Trade, March 22, 2002.

[4] "Officials Tout Manufacturing, Services Benefits from US-Singapore FTA," Inside US Trade, January 31, 2003.

[5] U.S. Department of State, Country Reports on Human Rights for 2001-Indonesia, March 4, 2002, available at www.state.gov. This is the most current report of this series and is the source of information on labor rights in this paper, including direct citations in quotation marks in this section.

[6] As reported in M. Taufiqurrahman, "Uphill Battle to Uphold Workers Rights to Association," Jakarta Post, February 21, 2003.

Sandra Polaski is a senior associate with the Trade, Equity, and Development Project at the Carnegie Endowment for International Peace. She served from 1999-2002 as the Special Representative for International Labor Affairs at the U.S. Department of State, the senior official handling labor matters in U.S. foreign policy.

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