ASEAN’s new challenge: lower non-tariff barriers to trade
The Association of Southeast Asian finance ministers recently concluded their 22nd meeting in Singapore, as the 10-member ASEAN embarks on the second half of its journey toward its centennial. Having come this far to be the longest serving group in the developing world, it is timely to ask, how has it fared economically?
Assessments of ASEAN as a regional integration endeavour often fail to separate the organisation’s underlying objectives from those on the surface. Analysts assume, quite understandably, that the primary purpose of regional cooperation agreements is to increase integration.
If this were the case, traditional quantitative measures of integration – such as shares of intra-regional trade and investment – would be the right metrics for assessing performance, and ASEAN would be judged a failure.
Intra-regional trade has remained low and stagnant at 25 percent for almost two decades. Similarly, barely one-fifth of foreign direct investment (FDI) in ASEAN countries originates within the region. The regional share of other forms of capital flow has also stayed tepid.
What if there are broader objectives on which ASEAN should be judged? What if regionalism is only a means to a greater end?
ASEAN is indeed pursuing broader objectives. The implementation of the ASEAN Free Trade Area (AFTA) provides a clear example. ASEAN’s original members used this agreement as a stepping-stone to broader liberalisation, and, in turn, to promote globalisation.
Open to trade with all
The evidence lies in the deliberate decision by original members to offer preferential tariffs to non-members on a most-favoured nation (MFN) basis, meaning that to be part of ASEAN means to be open to trade not just with other members but with all countries.
More than 90pc of ASEAN countries’ tariff lines have a preference margin of zero, where preferential tariffs are no lower than the MFN rate. Over 70pc of intra-regional trade is conducted at MFN rates at zero. ASEAN rarely uses preferences.
Multilateralisation of preferences has minimised welfare-reducing trade diversion effects, and in part accounts for the stubbornly low intra-regional trade shares. These are a sign of success, not failure.
Most intra-regional trade is supply chain-related trade in parts and components. These parts mostly travel duty free because of product-specific arrangements such as the World Trade Organization’s information technology agreement, or general ones like duty drawback schemes, bonded warehouses, or special economic zone privileges.
Though multilateralisation has subdued intra-regional trade, it has promoted rapid growth overall. ASEAN is the fourth largest exporting region in the world, trailing only the European Union, North America, and the People’s Republic of China.
Although ASEAN accounts for just 3.3pc of global GDP, it produces more than 7pc of exports. If intra-regional trade is to increase in the future, it should be driven by factors other than preferences. Reducing non-tariff barriers (NTBs) in a non-discriminatory manner has the potential to increase trade in services. Reversing the rise in non-tariff impediments to trade – which increased from 1634 to 5975 during 2000-2015 – is the primary new challenge for ASEAN.
Harder to dismantle
NTBs are not only likely to be more restrictive than tariffs, but they are opaque and more difficult to dismantle. In addition, NTBs are moving targets because they can take on new forms as soon as they are targeted.
While NTBs may be more difficult to identify, track, and dismantle, this does not discount the effectiveness of the multilateralisation strategies. Unlike tariffs, it is either difficult or costly to exchange concessions in NTBs in a preferential manner, given the “public goods” nature of a lot of the reforms required and the consequent ease of free riding.
Multilateralisation remains ASEAN’s best way forward – for dealing with the problem, and for delivering the greatest benefits.
In the original design of the ASEAN Investment Area, the bloc flirted with the idea of providing preferential treatment to investors from member countries. However, it quickly abandoned the idea and reaffirmed its commitment to a non-discriminatory and open foreign investment climate, mirroring the regimes in individual member countries.
FDI inflows have flourished, even if intra-regional flows remain little changed. As with trade, it is not where FDI comes from that matters, but rather its volume and form. The massive economic transformation that the world has witnessed in ASEAN’s original members – and continues to see in the newer ones – would not have been possible if it had chosen the preferential route.
It is ASEAN’s defining achievement and is how it should be judged.
Source: Myanmar Times
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