ASEAN deal on services can be hamstrung by national rules
The 10 nations of the Association of Southeast Nations (Asean) have more than 600 million consumers and collectively have grown faster in the 21st century than any other Asian economy except China.
Its members are negotiating the establishment of the Asean Economic Community (AEC) to replace the old Asean arrangements by the end of 2015. The AEC aims to attain free flow of goods, services, investment, skilled labour and the freer flow of capital. The project is as ambitious as the European Union in most respects, barring monetary union.
But there are big challenges. The sheer diversity of preferences, capacities and priorities among the membership calls for deftness in negotiations. Some embrace the ambition of AEC more than others.
The region has made progress in bringing the vision of integration closer to reality, but the process has been rather slow and patchy. The growth and development potential of a more competitive Asean is enormous.
A meeting last month at the ASEAN Secretariat in Jakarta reviewed progress on services – which is widely perceived as a lagging sector. Many Asean governments would like to do something about this.
That services should merit particular attention is no surprise. They account for a growing share of production and trade year after year, now amounting to over half of GDP and trade across the region. They are also crucial for jobs, innovation and productivity growth.
The APEC Blueprint for promoting AEC speaks of the removal of substantially all restrictions affecting service suppliers in the region. However, the undertaking to open markets is constrained by reference to national regulations.
No argument stands up against the need for regulations at the national level to address legitimate public policy concerns, such as health, safety, environmental quality, national security and so on. What matters is how this is done.
The Jakarta meeting clearly saw the advantage of separating regulatory instruments from trade opening policies. But therein lies a danger as well as the solution to what otherwise will grind progress to a halt.
The danger is that governments can continue to profess an embrace of openness but ensure that de jure market access does not become a de facto reality. A government can, say, putatively remove all obstacles to foreign engineers wishing to enter the market.
At the same time, domestic regulation requires that all engineers are licensed to practice. That is a good idea in the name of public safety, but how does the licensing regime work? Is it automatic, subject to recognised qualifications, or does it impose impossible requirements, administrative hurdles, technical regulations of one sort or another, or costly application processing fees?
Regulators do not need a great deal of imagination to concoct restrictive regimes in the name of protecting their citizens. But instead of waging guerilla warfare against integration they need to be inside the negotiating tent. The design and administration of regulation is a leading determinant of the conditions of competition in markets. Sleight of hand can keep markets restricted to a privileged few.
Despite the dangers of treating regulation and liberalisation apart in a negotiating sequence, their separation puts the spotlight on good regulation first. Through transparent arrangements, governments would establish agreed criteria and processes to ensure sound regulatory regimes with minimal market closing or trade cost augmenting side effects.
Negotiators would go as far as practicable, with full respect for divergent social preferences and values, to make regulatory regimes alike. This could be done through harmonizing regulations, or establishing mutual recognition regimes for divergent norms and procedures.
Institutional arrangements would also be needed for continuing information sharing, consultation, and regulatory cooperation in general.
Once proper regulations were in place, attention would turn to market opening, and governments would negotiate this separately, on its own terms. They would agree, or not agree, to open their markets, secure in the knowledge that what they agreed to is what they would get.
Hong Kong is hoping to complete a free trade agreement with Asean in 2016. Effective regulatory cooperation may be the most valuable component of exchanges in that negotiation.
Patrick Low is former vice-president of research at Fung Global Institute