Asean free trade still a distant notion
While the regional grouping touts a master plan to become the world's fourth largest integrated economy by 2050, rising non-tariff measures keep markets closed
Southeast Asia is edging toward a single processing window for cross-border trade, but it all may be a waste of time unless the more advanced nations in the region agree to allow more products over their borders.
Indonesia, Thailand, Singapore and Malaysia have already linked their trade operations to the ‘single window’, which is designed
to speed up cargo handling by using a common data platform.
Brunei, the Philippines and Vietnam are in the process of joining, leaving Cambodia, Laos and Myanmar as the only Association of Southeast Asian Nations (Asean) members still outside the program.
Crucial to the success of the Asean Economic Community (AEC), a single trade window is one of the signature integration policies behind the so-called ‘Connectivity Master Plan’, which if fully implemented could transform Asean into the fourth-biggest integrated economy worldwide by 2050 with a value of $9.2 trillion.
It won’t work unless the 10 member countries agree to remove thousands of non-tariff trade barriers that have partly nullified the benefits of broader reforms under the Asean Free Trade Area.
Since 2000, the average tariff in Asean has been lowered from 8.9% to about 4.5%. Yet in many cases these have simply been replaced by indirect measures that achieve the same purpose – ranging from export bans to price and quality controls, technical barriers, pre-shipment checks and sanitary/phytosanitary rules.
There are currently 5,919 non-tariff measures in place, according to the UN Conference on Trade and Development (UNCTAD) database, and more are added all the time: in 2000, there were only 1,634 measures, but by 2015 the tally had ballooned to 5,975.
Significantly, most are levied by Thailand, Indonesia, Malaysia and the Philippines, the countries that dominate the region’s US$270 billion trade sector and are driving various ‘connectivity’ schemes and objectives.
Thailand is the chief villain with 1,560 non-tariff measures. The Philippines has 854 rules, Malaysia 713 and Indonesia 635. Other culprits are Brunei with 516 and self-proclaimed free trade proponent Singapore with 514.
Developing nations that rely on access to these markets for their goods are far less restrictive: Myanmar has only 172 non-tariff measures, Laos 291, Vietnam 330, and Cambodia 334.
Almost half of the measures involve technical barriers to trade, an amorphous and constantly changing set of rules that is designed to protect vulnerable local industries. Most of the others are sanitary and phytosanitary rules, applied predominantly to foodstuffs.
Often there are solid policy reasons for blocking or limiting market access, including anti-dumping measures to counter unfair trade practices, hygiene rules to prevent the spread of diseases, and labeling requirements aimed at protecting sensitive ecosystems.
Embargos on products like tobacco, weapons and ammunition, cultural icons and artworks are easy to justify, but key industries like footwear, paper and motor vehicles often get the same protective treatment.
Chemicals are the most protected product range, with 798 rules. Prepared foodstuffs, beverages and spirits attract 663 technical measures and 851 sanitary/phytosanitary rules. Vegetable products encounter 414 rules, while machinery and electrical goods face 392 barriers. Some Asean countries even block the shipment of clocks.
A 2015 study by the Asian Development Bank on progress with Asean integration found that the automotive, consumer goods and electronics sectors, some of the region’s biggest export-earners, were most affected by non-tariff barriers.
Standards and regulations affect the shipment of an average 20% of products, and 30% face other non-tariff barriers, adding tens of millions of dollars to the cost of trade transactions every year.
“Many regulations are poorly designed, failing to protect the public while unnecessarily complicating business,” UNCTAD noted in a report last year. “For instance, many countries have complicated rules for pharmaceutical imports that nevertheless fail to prevent widespread traffic of counterfeits.”
It added that governments generally “know little about incentives and even less about how to design market-based regulations, confusing effective with cumbersome.”
Asean has calculated that it needs to reduce fixed trade costs by 20% to reach its 2050 income target of $9.2 trillion. This, it says, could be achieved by eliminating 50% of the non-trade measures now in place.
Small businesses, especially those in Myanmar, Cambodia and Laos, bear the brunt of non-tariff barriers because they operate on limited economies of scale and rely heavily on market access. In most regional countries they account for more than 90% of businesses.
The bloc’s leaders agreed at their summit in April to tackle the thorny issue as part of an accelerated schedule for implementing Asean’s single window and the 2025 connectivity plans, which aim to develop digital commerce, small business sectors, trade innovation and investment in research and development.
But they face a barrier of their own in finding common ground within Asean’s badly fragmented regulatory systems. There are no harmonized customs rules and Mutual Recognition Agreements – designed to prevent product standards and technical rules from becoming barriers to trade – are still being established.
Until 2014, the region did not even have a recognized database of non-tariff measures that conformed to global standards. Rules of origin for goods shipped within Asean are also incomplete. And while the window for further trade reform remains open, few expect an early resolution to Asean’s biggest protectionist issue.