Breaking the Tariff and Non-Tariff Barriers in ASEAN: Taking That Quantum Leap

By Phar Kim Beng

The litmus test of free trade lies in the depth and sweep by which tariffs and non-tariff barriers (NTBs) are removed. On the former, the track record of ASEAN is nothing short of phenomenal. Close to 99 per cent of the products in ASEAN have had their tariffs reduced to a band of zero to five per cent. By 2015, Cambodia, Myanmar, Laos and Vietnam have to comply with the list to reduce the tariff to zero per cent to pave the way for the creation of an ASEAN Economic Community (AEC).

Yet, the AEC is a conglomeration of four economic initiatives. The ASEAN leaders, at their 13th Summit in Singapore in November 2007, committed themselves to achieving the four significant elements of the integrated market by 2015. The four elements are: the ASEAN Free Trade Area (AFTA); the ASEAN Investment Area; the ASEAN Framework Agreement on Services (AFAS); and the narrowing of the development gap among ASEAN members. The relevance of ASEAN lies in its ability to progressively realise all these four commitments.

Since the economic structure of ASEAN is generally complementary – this given its generic export model – the elimination of the tariff barriers alone has not seen a corresponding upshot in intra-regional trade yet. Intra-regional trade still hovers at 25 per cent with 80 per cent of it confined to key trading countries like Malaysia, Indonesia, Singapore and Thailand alone.

Similarly, with the exception of Singapore, the service component of the ASEAN member states ranges between only 40 per cent and 50 per cent of their GDP. The ratio is still very low. Thus if one were to look for a system-wide multiplier effect in the service industry that will come immediately from the end of the tariff structure, the signs of added commercial activities across the borders are not obvious. This, however, does not detract from ASEAN’s own awareness that it has to do more, not less, to create a dynamic free trade community. And, time is not on its side given the burgeoning growth of China and India. Hence, ASEAN is determined to increase its intra-regional trade by another ten per cent, affirmed the Secretary General of ASEAN, Dr Surin Pitsuwan. At this annualized growth rate, Dr Surin’s idea is based on upping the intra-regional trade to 35 per cent.

This seems impossible, given the current economic problems facing the United States and European Union, which collectively put a drag on the regional economy of ASEAN. The floods in Thailand, Cambodia, Laos, together with the natural disasters in the Philippines, especially Mindanao, further dent such hopes.

Yet, having hitherto concluded the China ASEAN Free Trade Agreement (CAFTA) on 1 January 2010 to establish the world’s largest consumer basin of 1.9 billion people, there is of course no turning back on regional free trade. Regardless of the difficulties faced by ASEAN, it has to push ahead.

But where would the added ten per cent come from? Certain trends even point to their reversals. When Malaysia withdrew from the liberalization of the automobile sector in 2005, it was seen as an attempt to stall the formation of an ASEAN free trade area. Indeed, the act of eliminating tariff only – without a clear schedule of ending the NTB – has had some political economists referring to it as ‘negative integration.’ Although the phraseology is not meant to be derisive, the moniker ‘negative’ raised several issues on the nature of ASEAN’s regional integration.

First of all, what is the level of attention on NTBs, especially in making it consistent with the General Agreement on Trade and Services (GATS)? Secondly, to the extent financial industry is the handmaiden of regional development, how does the removal of NTBs give this sector a much needed boost? A good case in point is the banking and insurance industry.

Although Indonesia, Malaysia, Singapore and Thailand have come up with various measures to allow cross border investment in each other’s financial services industry, their efforts are not bold and sweeping enough. In the ASEAN Framework Agreement on Services (AFAS), Indonesia agreed to allow foreign banks to operate in three more cities (viz. in Padang, Manado and Ambon) compared to those already allowed under the GATS (viz. in Jakarta, Surabaya, Semarang, Bandung, Medan, Ujung Pandang, Denpasar and Batam Island). That said, Indonesia has not made any moves to welcome foreign participation in the insurance industry. And, it has committed itself to removing all restrictions only by 2020.

In Malaysia, under the AFAS, treatment of foreign entities is restricted to their nationals. Foreign nationals are permitted to set up representative office for advisory, intermediation and auxiliary financial services, including credit reference and analysis, investment advice on acquisitions, corporate restructuring and strategy. Yet, the distinction between nationals and corporations is unhelpful to fostering more cross border investment, trade and services in the financial industry.

In turn, Singapore has allowed issuance of credit and charge cards with the Monetary Authority of Singapore’s approval. Credit companies that do not conduct activities that require central bank approval are allowed to operate. However, there are two limitations on national treatment imposed under such services. One, each offshore bank cannot lend more than SG$300 million in aggregate to residents. Two, its related merchant banks should not be used to circumvent this limit.

Under the AFAS, Thailand has made no commitments in banking and insurance services but it has made commitments in the area of securities brokerage, securities dealing, and underwriting services, as well as in collective investment schemes involving asset management companies. A maximum foreign equity participation of up to 100 % of paid-up capital is allowed in these areas. But they have to be achieved through the existing companies in Thailand.

In almost every ASEAN member state, caveats (i.e. NTBs) exist in one form or the other. Not surprisingly, the intra-regional foreign direct investment (FDIs) has not breached 12 % over the last decade. In turn, most of the FDIs in ASEAN have come from abroad – not within. If such trends persist, the AEC may be in a conundrum: It has more extra regional appeal, than intra-regional relevance.

To reverse the equation, massive political will is needed to keep petty protectionism in check, so that the efficiency gains of regionalism may be obtained through trade and services liberalization. This is the quantum leap needed, without which AEC may be a paper tiger.

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