Barriers to Asean promise

8 April 2017
As appeared in The Star Online

IT is true that with a total gross domestic product (GDP) of US$2.7 trillion, Asean is the seventh largest economy in the world – if it were one economy.

It is also true that if the Asean GDP reached US$9.2 trillion by 2050, it would be the world’s fourth largest economy.

To become that fourth largest economy, however, Asean’s own projections into 2025 recognise a number of conditions have to be fulfilled.

First, the remaining intra-regional tariffs must be removed. This might seem easy enough as Asean has made excellent progress in tariff reduction, being zero in many instances even if the CLMV countries (Cambodia, Laos, Myanmar and Vietnam) have been given a dispensation to bring all tariffs down until 2018. Vietnam, in fact, is well in advance of the others.

While much progress has been made (in 2000 it was 8.9%), average tariffs in Asean in 2015 were sticky at 4.5%. This compares favourably with the European Union at 5.3%, China at a high 9.6% (which would infuriate President Donald Trump), and the United States the lowest at 3.5% (which would make him angrier).

What this shows – the EU number, despite its close integration, being a good example – is that tariffs have a tendency of sticking around. Asean therefore has to work hard to bring its levels down to achieve its GDP growth promise.

Secondly, another necessary condition to achieve that growth promise is a reduction in fixed trade costs by 20%. Asean is working on this by reviving the Asean Trade Facilitation Joint Consultative Committee (ATF-JCC) last year. This committee has only recently got down to work and, disappointingly, will only meet twice a year.

Still, the ATF-JCC is working on reducing trade costs by addressing long outstanding issues like customs procedures and implementation Asean-wide of the national single windows for trade facilitation linked to the Asean Single Window.

Perhaps the greatest challenge facing the ATF-JCC is the removal of non-tariff barriers (NTBs). Indeed, the third necessary condition to realise the combined Asean GDP growth promise is the removal of 50% of NTBs.

The problem of NTBs and NTMs (non-tariff measures) is a global phenomenon. In Asean, NTBs and NTMs have actually INCREASED from 1634 measures in 2000 to 5975 in 2015, the year of pronouncement of the Asean Economic Community (AEC). To reduce them is going against the tide. But not to do so means Asean will not achieve its economic size promise.

That is why, when I was chair of the Asean Business Advisory Council, we pushed very hard for the NTB and NTM problem to be assiduously addressed with private sector expert participation to crack the stubborn issues that refused to go away.

A measure of success was achieved when Asean economic ministers accepted in 2015 our proposal to set up joint official-private sector working groups in four prioritised sectors: healthcare; agri-food; retail, including e-commerce; and logistics. It took until this year for this to actually happen. The ATF-JCC consulted the private sector on how to go forward in Bangkok two weekends ago.

There is a long way to go. Tourism has been added as a prioritised sector. There is so much depth of work to be done.

There will be fierce resistance from costly misconceptions of national interests. Even after there is progress at the working group level, any proposal will have to be accepted by the ATF-JCC before being put up to the senior economic officials meeting – where it will receive another battering – and thence to the economic ministers.

It is painstaking. Without leadership and clear instruction from the top, with timelines, it could all turn into a merry-go-round. Failure to reduce NTBs and NTMs by 50% by 2025 would mean the Asean promise on size of economy would fail to materialise.

If, on the contrary, the trend of increase in NTBs and NTMs – as from 2000 to 2015 – becomes the order of the day, it will become clear that an Asean GDP US$ 9.2 trillion by 2050 is a pipe dream.

All this does not even begin to take into account that all these essential conditions are contained within a real economic box. Asean economic ministers and officials are fully disconnected from Asean finance ministers, officials and central banks. The essential financial lubrication for all that desired economic activity is lagging.

The finance ministers, officials and central bank discuss integration quite separately and distinctly from the economic ministers, who gingerly do not want to step on their turf.

The official finance sector is not focused on meeting the private sector except for previous privileged access accorded to the Europeans and Americans. All this has to be corrected if the Asean promise of economic size is not to mislead. In financial documents, such as prospectuses, such misrepresentation carries dire consequences.

We must all pull together: the official and private sectors. The different ministers of Asean, particularly economic and finance. Most of all Asean leaders must take an interest, including on the details, and provide leadership. This has been absent for too long. If it continues, Asean will not make much progress.

Bearing in mind the challenging environment external to Asean, intra-Asean disablement is not helpful. With the Trump administration’s protectionist tendencies, growth driven by exports to America will fade. There has to be some compensation from growth generated by regional economic integration, by more effective realisation of the AEC.

With the benefits of the TPP also gone for a number of Asean countries, efforts to establish the Regional Comprehensive Economic Partnership (RCEP) must also be redoubled. There are serious issues here, especially coming from India.

Hopefully, interventions such as by Malaysian Prime Minister Datuk Seri Najib Tun Razak during his recent visit there would help India see the bigger picture and not let any problems it has with China get in the way.

We talk about the rise of Asia. Now we have to depend more on ourselves. There is no reason why we must succeed unless we understand the challenge and can work together.

Tan Sri Dr Munir Majid, chairman of Bank Muamalat and visiting senior fellow at LSE Ideas (Centre for International Affairs, Diplomacy and Strategy), is also chairman of CIMB Asean Research Institute.