Asean – how free is free trade?

BY ELEANOR WRAGG, May 3, 2019

While Asean is lauded globally for its commitment to free trade, rising non-tariff measures have stymied intra-regional exports. Whether intended or unintended, these impediments are frustrating the region’s exporters; proof, if proof were needed, that tariffs are not the only way to hold back trade. Eleanor Wragg reports.

In recent years, the Association of Southeast Asian Nations (Asean) has emerged as a champion of trade liberalisation and multilateralism. While a growing number of countries around the world seem to be turning their backs on globalisation, the grouping of 10 nations – Indonesia, Thailand, Singapore, Malaysia, Philippines, Vietnam, Cambodia, Brunei, Myanmar and Laos – has brought tariffs down to practically zero for most trade within the bloc, while merrily signing free trade pacts with regional giants including India and China.

But just how free trade actually is in Asean is up for debate. While regional integration around the world has broadly led to an uptick in intra-regional trade – for example, roughly 65% of the EU’s trade is with itself – the amount of trade Asean carries out with itself as a proportion of the total has remained low and stagnant at around 25% for almost two decades. This is despite average tariff rates of Asean countries decreasing from 8.9% in 2000 to 4.5% in 2015 – when Asean formally became an economic bloc – and tariffs being outright eliminated on 98% of all product lines. The culprit? Rising impediments to trade in the shape of non-tariff measures (NTMs), which surged over the same period to 5,975 from 1,634.

“Yes, Asean has had tremendous success in bringing down tariffs on trade, aside from a few sensitive areas in agriculture, iron, steel and a few sacred cows in different countries. But at the same time, non-tariff barriers have risen quite sharply,” Jayant Menon, a lead economist at the Asian Development Bank (ADB), tells GTR. “Whether one is causing the other is difficult to find clear evidence for, but certainly they’ve been occurring concurrently, and some people will say that they’ve gone up in some sense to make up for the loss of protection from the forced reduction in tariff barriers.”

Protectionism through the back door?

Most trade in the world is subject to some sort of NTM, be it a sanitary or phytosanitary requirement or a technical regulation. While NTMs have primarily non-trade objectives, such as the protection of public health or the environment, some argue that in Asean, many are unnecessarily complicating business and serving as protectionist barriers to trade.

“It’s not just that the numbers of NTMs themselves are rising which is problematic, but the fact that they are impeding trade in Asean,” says Deborah Elms, executive director of the Asian Trade Centre. “One way that we know this is that as tariffs within Asean have fallen, trade within Asean should have gone up. And yet intra-Asean trade is not going up.” The Asian Trade Centre has been tasked with measuring the number and impact of non-tariff barriers (NTBs) in the region, and although the findings will not be released until later in the year, Elms explains that there are a few interesting points of note. “We have lots of examples of excise tax regimes which are clearly designed to keep out foreign products. They apply only to products that are classified in certain ways that capture only foreign products and no domestic products at all. We see lots of that in the region.”

Thanks to roaring trade with global partners, Asean has until now been able to overlook its weak intra-regional flows. Today, amid policy shifts in the US and China and an overall global trade slowdown, member countries can no longer afford not to focus on market opportunities on their doorsteps. But therein lies the rub: in Asean, non-tariff measures are more prevalent on intra-regional trade than on extra-regional trade.

Ines Escudero, a trade and market intelligence expert at the International Trade Centre (ITC), points out: “One peculiarity of this region is that the problems are not so much around trading with international markets but within the region itself.” She adds that this is a result of a heavy focus on the rest of the world, as Asean is criss-crossed by global value chains. “This is quite unique. When we study trade in other regions, this is normally the other way around.” She says that, according to ITC research, fully 75% of exporters in the Philippines said that they were regularly affected by non-tariff measures when trading within the region. In Cambodia, this figure was 70%, while in Thailand and Indonesia, 46% and 38% of businesses respectively reported being held back by NTBs.

A moving target

Trade ministers in the region have agreed to slash NTBs by a tenth by next year, but doing so is a challenging task. “Tariffs are easier to identify and measure and then deal with than non-tariff barriers, which are a very diverse group of things and can be quite opaque,” explains the ADB’s Menon. In keeping with the bureaucratic nature of the bloc, Asean’s approach so far has been to establish working groups to define a working definition of NTBs, then pick out which of the offending measures affect the most widely traded products in the region. It is now diligently cataloguing all non-tariff measures for each Asean member state, which range from performance requirements for refrigerators to certificates of authority for the importation of vehicle parts. A Sisyphean task, and one that not everyone is convinced will succeed.

“If you identify a particular NTM that’s become an NTB and you tell a country to dismantle it over, say, the next six months, it can actually evolve into a new type of barrier that is not within the targeted list. This is the problem. It’s a moving target that is forever changing. Similarly, you’re going to be forever monitoring these things,” says Menon.

What’s more, many of the NTBs that exporters face can’t be captured by the Asean trade repository, as they relate to processes rather than technical regulations. “We went out and interviewed companies in Asean about their challenges, and what is striking is that Asean tends to assume that most of the challenges are around differences in standards between countries, which can be fixed by a mutual recognition agreement. But what our companies are reporting are a lot of procedural hurdles, such as the time taken to get paperwork processed. That’s not going to be addressed by some sort of mutual recognition of standards. That is just an obstacle the firm has to address. And I would argue that one of the problems we have is that we don’t really have a very good mechanism in Asean to fix that,” says Elms.

Assist – a potential solution

A new approach, and one which looks more likely to enable Asean to meet its aims, gives the region’s exporters the opportunity to flag barriers themselves: the newly relaunched Asean solutions for services, investments and trade (Assist) platform.

Established in 2016, Assist originally saw very little take-up due to, among other reasons, a lack of anonymity. “In the past, as a firm, you had to go online, you had to enter the barrier to trade that you experienced, you had to put down your name and your company’s name. So you were facing a problem with a customs official demanding some kind of payment to facilitate the movement of your goods, you’d also have to give the name of the official. Who in their right mind would have filled this form out?” says Elms.

“Many companies may have been reluctant to use it for fear of retribution at the hands of governmental authorities,” adds Theodoor Bakker, senior foreign counsel at law firm ABNR in Indonesia, in a note. To overcome this, the relaunched version will now allow businesses to file anonymous complaints or requests for clarification on NTBs, or NTMs that they think are actually NTBs, through Asean-based trade associations, chambers of commerce, business councils, business federations, or registered Asean-based lawyers or law firms. So far, Assist only covers movements of goods from one Asean member state to another, but it will be further expanded to cover services around May this year.

Whether this will be enough to tackle the ever-increasing number of non-tariff impediments to trade is still unclear. “The problem now is that many countries are questioning the benefits of globalisation and trade liberalisation, given huge domestic inequities and rising disparities in incomes and wealth. We need to make growth more inclusive. The long-term solution to this problem is convincing the population in Asean of the benefits, and getting countries to genuinely implement reforms,” says Menon.

If Asean is to continue to fly the flag for free trade amid a rising global tide of protectionism, reversing the rise in non-tariff impediments to trade will be its primary new challenge. While totting up NTBs and giving exporters recourse to challenge barriers are steps in the right direction, continually convincing its members of the benefits of liberalisation will be key to keeping trade free for Asean.

Tags: ABNR, Asian Development Bank (ADB), Asian Trade Centre, Association of South East Asian Nations’ (Asean), Deborah Elms, Ines Escudero, International Trade Centre (ITC), Jayant Menon, Theodoor Bakkertake me back