Free trade. Sustainable trade. February EU-Myanmar Trade Relations

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1 Position Paper Free trade. Sustainable trade. February 2014 EU-Myanmar Trade Relations Executive Summary Opportunities Myanmar is becoming one of the most exciting growth prospects for European trade as a sourcing country in the Asian region. The European distribution sector has accelerated initiatives to open up trade with this country. The EU decision to reinstate the Generalised System of Preferences for Myanmar was a major step forward as a prerequisite to improve bilateral trade. Challenges Barriers Sustainability Actions Myanmar is a least developed country (LDC) according to the United Nations, with an outdated infrastructure, a low level of education and a meagre share in the world economy. Moreover, caution and prudence are recommended, given serious concerns over human rights and labour conditions. Considerable trade and investment obstacles in Myanmar still prevent a higher degree of economic integration this is particularly true for the retail, wholesale and import sectors as well as brand companies. Key issues should be addressed, such as: - Investment climate - Legal protection - Corruption - Infrastructure - Finance system - Land rents Serious concerns still exist with regard to human rights and social conditions. All involved public and private stakeholders need to work in close cooperation to tackle these shortcomings and to achieve tangible progress. In this respect, the business-driven platform Business Social Compliance Initiative (BSCI) is one successful tool for improving labour practices. Given the strong interest of the European trade sector in expanding business relations with Myanmar, the Foreign Trade Association (FTA) calls for: - Launch of talks for a Bilateral Investment Agreement - Further political and economic reforms in Myanmar - Support from the international community - Active social commitment by business stakeholders

2 FTA Position on EU-Myanmar Trade Negotiations A) Myanmar: New Opportunities and Old Challenges Since the late 2000 s, following several decades of self-imposed isolation and marginalisation by the international community, the Myanmese government initiated a process of political and economic liberalisation. The economy of this resource-rich country is growing at a high rate with exports, imports and investment all on the rise. Against this background, the number of foreign investments is growing rapidly. Reflecting the same dynamics, European distribution and brand companies are rediscovering Myanmar as a sourcing country for textiles, clothing, shoes, furniture, and food products after a long period of economic disengagement. Interest is considerable in launching new business activities and increasing investment in this country. FTA strongly advocated the reintegration of Myanmar into the EU s Generalised System of Preferences (GSP) and welcomed the EU decision to reinstate preferences retroactively as from 13 June The duty- and quota-free access for Myanmese products to the Single Market under the Everything But Arms (EBA) scheme is a crucial means of improving economic development and living conditions for people in Myanmar. However, whilst potential benefits are substantial for Western retailers and importers operating in Myanmar, the Myanmese economy still faces a range of challenges. Myanmar remains an LDC with an outdated infrastructure and only ranks 137 among EU trade partners. Moreover, the poor labour and social conditions urge caution when doing business in the country. B) Trade Barriers in Myanmar: A Difficult Investment Environment Despite improved business conditions and support from the international community Myanmar remains a difficult place to produce, import, export, run business and invest. With the objective of creating a company-friendly environment and of supporting investment activities in Myanmar, the FTA is supportive of the launch of talks for a Bilateral Investment Agreement which should encompass both investment protection and market access rules. Below several key issues are listed which the European distribution sector would like to see addressed in EU s economic and political dialogue with Myanmar and in EU- Myanmar investment negotiations: INVESTMENT CLIMATE: Nowadays, setting up a business in Myanmar is not only possible but encouraged by the government. A new Myanmar Foreign Investment Law (MFIL) entered into force in November 2012, lifting many restrictions and limiting cases in which joint ventures are imposed. A proposition for further modernisation of the MFIL is envisaged for 2014, which should open up more sectors and improve investment conditions. However, the reality of business is still different for many companies. A number of foreign investors experienced that without support and protection from a local FTA Foreign Trade Association 1

3 partner, there is a real risk of being treated less favourably by administrations and courts than locally-invested enterprises. Obviously, having to rely on a local partner to ensure smooth business relations with authorities bears the risk of becoming overly dependent and losing autonomy. In addition, in some cases foreign investors have been deceived by local partners leading to financial loss and economic setback without the possibility for effective legal action. LEGAL PROTECTION: In July 2013, Myanmar formally acceded to the New York Convention on the Recognition of Enforcement of Foreign Arbitral Awards 1958 which provides a framework for international dispute resolution by arbitration but uncertainties remain with regard to the implementation of the Convention. Today, most local laws are still outdated and do not yet correspond to international standards. Ordinary and investment legislation is characterised by structural shortcomings and contradictions creating a situation in which legal protection is weak. The current arbitration mechanisms have proven to be inefficient and time-consuming and should still be avoided in view of their limited prospects of success. In case of dispute between foreign companies and local partners, the current application of investment laws tends to favour the latter. CORRUPTION: Bribery is a common practice and remains a core obstacle for running business in Myanmar smoothly. Economic activities almost always depend on preferential access to administrative services. INFRASTRUCTURE: The poor level of infrastructure discourages investment and makes business planning difficult. Any kind of business activity is slowed down because of regular power cuts, inadequate transport and harbour capacities, crowded roads and an outdated IT infrastructure. FINANCE SYSTEM: The financial legislation of the country is still not fully compatible with modern standards, despite recent reforms in the years 2012 and 2013 on the exchange rate, payment operations, and the movement of funds. A restrictive lending policy and high interest rates are a serious stumbling block for launching economic activities and building-up production capacities. LAND RENTS: Land prices are excessive and prices for land and real estate property do not correspond to their realistic market value. Prime locations are controlled by a small number of entrepreneurs, a situation which leads to an opaque real estate market, speculative behaviour and a price level which exceeds most neighbouring countries. Furthermore, it is not possible to buy property direct from farmers, so that investors are always subject to imposed speculative and unjustified pricing. Such conditions do not allow for a healthy investment climate. C) Sustainability: Improvements Needed and Business Involvement Today, serious concerns remain over human rights and labour conditions. A business-friendly economic environment enabling sustainable growth will need effective capacity building and economic reform policies, coupled with socially responsible behaviour by investors. To achieve palpable progress, the Myanmese government will have to vote and effectively implement labour legislation, raise awareness of social and health issues, and develop a multipartite social dialogue. If the government and public stakeholders do FTA Foreign Trade Association 2

4 not take up this responsibility, the situation in Myanmar will remain difficult and of serious concern in the foreseeable future. Obviously Western businesses also have a role to play. To respond to labour challenges, 10 years ago the FTA founded the Business Social Compliance Initiative (BSCI), a business-driven platform for companies committed to improving working conditions in sourcing factories and farms worldwide ( It has now over 1,200 members. Myanmar is considered by BSCI as a risk country and on-the-ground experience shows that companies should remain cautious and vigilant because of its poor labour practices record. Companies investing in Myanmar are advised to take robust due diligence measures with regard to their responsibility in their supply chain. D) Recommendations: A Call for Action All in all, FTA members are positive about the medium term development of Myanmar but are concerned at the current investment and business conditions, inconsistent legislation and insufficient infrastructure. Furthermore, social and labour conditions need to be improved to ensure long-term growth. With regard to the key objective of facilitating business activities and strengthening social development, the Foreign Trade Association: Calls for the launch of negotiations for a Bilateral Investment Agreement. Such an agreement should enhance legal and economic certitude for investors and create a business environment in Myanmar which is oriented towards international standards and practices. It should also include a strong chapter on market access. Urges the Myanmese government to continue political and economic liberalisation and strengthening social participation. The overarching aim of shaping a framework conducive to attracting foreign investment and know-how necessitates economic openness, political reform, improved social standards, and better access to education for the population. This creates the conditions for a return to promising development, based on strong local entrepreneurship and foreign investment. Calls on the international community and economic operators to actively accompany the modernisation of the economy and infrastructure in Myanmar since this would underpin the country s development strategy and integration into the world market. Is committed to improve working conditions and sustainability in Myanmar through its Business Social Compliance Initiative (BSCI). Myanmar is only a minor sourcing country for BSCI participants but rapidly rising in importance. The main challenge is to successfully face social and environmental risk in this quickly growing economy. FTA Foreign Trade Association 3

5 * * * For further information about this Position Paper, please contact: Pierre Gröning Trade Policy Advisor pierre.groening@fta-intl.org Direct tel.: About the FTA FTA is Europe s premier association for trade policy and global supply chains. FTA represents more than 1,300 retailers, importers, brand manufacturers and national associations in the political arena and in public to promote and defend free trade and sustainable supply chains. Through its Trade Policy services, FTA works with key interlocutors in Brussels, Geneva, member states and supplier countries to represent its members interests, provide them with the latest information and offer expert legal advice on international trade issues. Through the Business Social Compliance Initiative (BSCI) and the Business Environmental Performance Initiative (BEPI), the association supports its members to improve social compliance and environmental production conditions in the international supply chain. FTA Foreign Trade Association 4