50 years on, Asean gears up for new challenges

FINANCE ministers of the Association of Southeast Asian Nations have just concluded their 22nd Meeting in Singapore, as Asean embarks on the second half of its journey towards its centennial. As now the longest-serving grouping 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 that appear on the surface. Analysts assume, quite understandably, that the primary purpose of regional cooperation agreements is to increase regional 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.

On these metrics, Asean would be judged a failure. Intra-regional trade has remained low and stagnant at 25 per cent for almost two decades. Similarly, barely one-fifth of foreign direct investment (FDI) flowing into Asean countries originates from 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 towards greater ends?

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.

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 90 per cent of Asean countries' tariff lines have a preference margin of zero, where preferential tariffs are no lower than the MFN rate. Over 70 per cent of intra-Asean trade is also conducted at MFN rates at zero. Asean rarely uses preferences because there are hardly any preferences to use.

Multilateralisation of preferences has minimised welfare-reducing trade diversion effects, and in part accounts for the stubbornly low intra-Asean trade shares. These are a sign of success, not failure.

Most intra-Asean trade is supply chain-related trade in parts and components. These parts mostly travel duty-free because of product-specific arrangements such as the WTO's Information Technology Agreement, or general ones such as duty drawback schemes, bonded warehouses, or Special Economic Zone privileges.

The decision to multilateralise the AFTA tariff reductions have supported value chain-driven trade due to the fact that final markets for the finished goods lie predominantly in industrial country markets outside the region.

Though multilateralisation has subdued intra-regional trade, it has promoted rapid growth in overall trade. Asean is the fourth largest exporting region in the world, trailing only the European Union, North America and the People's Republic of China.

NEW CHALLENGES

Although Asean accounts for just 3.3 per cent of global GDP, it produces more than 7 per cent of exports. If intra-Asean 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 1,634 to 5,975 between 2000 and 2015, is the primary new challenge for Asean.

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 or dismantled.

While NTBs may be more difficult to identify, track, and dismantle, this does not discount the effectiveness of the multilaterisation 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.

Whether it is tariffs or NTBs, the multilateralisation approach remains Asean's best way forward - for dealing with the problem, and for delivering the greatest benefits in terms of outcomes.

In the original design of the Asean Investment Area, the bloc flirted with the idea of providing preferential treatment to investors from member countries. It however 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-Asean 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 transformations that the world has witnessed in Asean's original members - and continues to observe in the newer ones - would not have been possible if Asean had chosen the preferential route.

This is Asean's defining achievement, and this is how it should be judged.