The Timor-Leste government does not yet have a realistic vision for a sustainable economy and how best to achieve this. Without this vision and policy we cannot know how ASEAN will support or undermine our plans to build the local economy.

Since UNTAET donors and international agencies have pressured Timor-Leste to follow neoliberal policies. The World Bank says that Timor-Leste has one of the “most liberal” trade policies in the world. These policies contribute to a high rate of imports and high dependency on oil money because of low tax revenues.

Free trade or is it?

Experts often explain “free trade” as the movement of goods, services, investment and capital without restrictions. In reality, neoliberal “free” trade policies increase the power of international companies. These policies reduce big company’s costs and taxes, and strengthen protections when they benefit big companies (such as government subsidies to agribusiness). “Free Trade Agreements” (FTAs) often prevent governments from making policies that promote or protect local business, investment and employment. FTAs can include policies that affect health, education, finances and banking. These policies limit government’s power to make decisions and sidestep democratic processes. Governments often agree FTAs in secret, without public knowledge or input.

FTAs are between two or more nations. These agreements oblige governments to follow certain rules on their economic and social policies and laws. Agreements can include rules on investment, taxes, subsidies, financial systems, agriculture and support to the private and public sectors. Each government will try to negotiate benefits from these agreements, and reduce the negative impacts. Governments with a large dependency on powerful nations to buy their products or give aid rarely achieve fair agreements.

If a government breaks the rules of a FTA, another government in the FTA can take it to a mediation process or an international panel like the World Trade Organization (WTO). Some agreements also let private companies do this. Often the government that broke the agreement will need to pay a fine, or other nations can ban or limit its exports. This also occurs when a government breaks an agreement because of human rights needs – such as a food crisis. Free Trade Agreements don’t include human rights standards. Often small and poor countries do not initiate this process against other countries because it is expensive and requires a high technical standard.

Free Trade Agreements must meet the WTO agreements as a minimum standard. Often FTAs are more neoliberal than the WTO agreement. These agreements are called “WTO plus”. The WTO established national trade agreements between its member-nations (about 170). In many countries local business, government, unions and NGOs protest against WTO agreements because they have destroyed many people’s daily lives, and benefited only a small group. International companies have a large role in writing these agreements.

Free trade and poor, small islands

Poor, small island states are highly disadvantaged in free trade markets. Their distance from world markets means that it costs more to import and export. Their small size makes it hard to make, grow or process cheap goods in bulk (economies of scale). Because of this, islands find it hard to compete internationally. Almost all small islands are net food importers. Reducing dependency on imports is an important strategy to develop the national economy. International free trade rules prevent them from doing this. Even the World Bank and WTO recognize the problems small, developing island states face from free trade. However, they propose technical assistance via ‘Aid for Trade’ programs rather than fairer trade rules.

Some small islands are less negatively impacted overall – this is usually because their economy was well developed before neoliberal policies. Some developed using free slave plantation labour and preferential trade agreements with Europe that are now banned. The most successful have invested heavily in education - their skilled workforce is a renewable resource.

Today Timor-Leste has little capacity to produce goods to sell in its formal economy. This is partly due to the legacy of war, poverty and colonialism. Its also because of existing free trade policies. ASEAN agreements will prevent the economy from developing properly: in future, Timorese people will continue to have little role in providing services and production, and import dependency will increase. These agreements will prevent government from using some policies that are needed in a small and poor country.

National Treatment

The principle of “national treatment” is that a country must treat foreign and local companies the same. The government cannot oblige companies to use local workers or products. It cannot limit which sectors a foreign company can operate or require them to share knowledge and skills with local people.

Many countries have regulated foreign investment to secure their local economy and protect important sectors – such as food. Under the ASEAN Investment Area Timor-Leste will have to open its agriculture, fisheries, forestry, manufacturing and mining and quarrying sectors to all investors. (Not just investors from ASEAN or FTA member countries). Often it is hard for nations to know what all the activities are that can be considered a “sector”. If Timor-Leste wants a longer timeline to open investment in specific activities it must list these exceptions when it enters ASEAN.

Agreements about “services” focus on: business, transport, construction, environment, education, finances and health. Each nation lists the services it will give national treatment and market access to foreign companies. Some activities listed include: accounting, secondary education, private hospitals, sanitation services, engineering, banking, transport and legal services. After opening these services, the government cannot limit the number of foreign companies operating in this sector, require them to use Timorese workers or materials, or pay a fair wage.

The Petroleum Act and Local Content

Using local people and goods (local content) is the basis of the local economy. Local content regulation is an important strategy to develop the local economy, and to share experience and profits from foreign investment.

Article 13 of the 2005 Petroleum Act requires companies to include their plans to hire local workers and use local content (for example, cater using locally produced fruits and vegetables) in their contract proposals to ANP or government. The government then awards contracts on the basis of these proposals. La’o Hamutuk’s Sunrise LNG report recommended that government require companies to use local content, and that over time almost 85% of goods, services and materials could be provided locally.

Under FTA rules the Timor-Leste government would need an exception from ‘national treatment’ to require oil companies to use local workers. Timor-Leste would need to negotiate and register this exception when it joins ASEAN, otherwise it would have to pay compensation to any company that believes it might be unfairly treated because of local content rules. It would be hard to register other local content exceptions as it is not clear what services and goods Timor-Leste can produce in future. ‘Rule of origin’ in FTAs define the percentage of labour and materials that qualify a product as Timorese (often 50%).

“Intellectual property” applies to ideas and knowledge. A person or group can own their idea, and decide if others can use it or not. Examples of intellectual property ownership can apply to includes: songs, company names, the formula for medicines, photos, new technologies or improving old technologies. People can register their intellectual property to privatize their idea or to ensure that everybody can use it (through creative commons). Many nations applied limitations on intellectual property rights – such as time limits or to protect the public interest. Some cultures do not agree with giving private ownership to ideas and knowledge.

The ASEAN Economic Blueprint requires Timor-Leste to develop a intellectual property regime that meets the standards of the WTO’s Agreement on Trade-Related Intellectual Property agreement. Intellectual property rules could affect government’s use of cheap generic medicines and how aggressively companies promote patented seeds to poor farmers.

In 2008 Timor-Leste slashed its import/export taxes. It now has the lowest taxes in the world. Lower taxes did not mean lower prices for consumers. However it did reduce government revenues. This increased dependency on oil and gas revenues. ASEAN FTAs require members to eliminate their taxes on thousands of goods. This prevents Timor-Leste from using taxes to protect its infant industries – a policy many countries have used. Timor-Leste has not faced high taxes on its exports to ASEAN countries.

Poor Decision Making

Small and poor nations often do not have people with sufficient skills and experience in analyzing trade, trade law and negotiating trade agreements. Because of this, they do not understand the commitments they are making. ASEAN agreements could prevent Timor-Leste from using many strategies that rich countries initially used. ASEAN obligations could direct Timor-Leste’s policies, laws, economies and development priorities.