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How should we measure ASEAN’s success?

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An assembly worker in the vehicle production line of the Honda plant in Prachinburi, Thailand. The rapid growth of trade has made ASEAN the fourth-largest exporting region in the world. (Photo: Reuters/Jorge Silva).

In Brief

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, perhaps 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 success.


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On these metrics ASEAN would be judged a failure. Intra-regional trade in ASEAN has remained low and stagnant at 25 per cent for almost two decades. 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.

But should ASEAN be judged this way? What if there are broader objectives being pursued? 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 tariff rates to non-members on a ‘most favoured nation’ (MFN) basis. 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. More than 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 has minimised trade diversion effects and in part accounts for the stubbornly low intra-ASEAN trade shares. These low shares are a sign of success, not failure.

Most intra-ASEAN trade is supply chain-related trade in parts and components that mostly travel duty free anyway. The decision to multilateralise the AFTA tariff reductions has supported value chain-driven trade because 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 China. Although ASEAN accounts for just 3.3 per cent of the world’s GDP, it produces more than 7 per cent of exports. Trade volume and the terms of trade matter most for welfare, not with whom trade is conducted.

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 potential to increase trade in services. For all services and increasingly goods as well, NTBs are the primary problem.

For goods, achievements in tariff liberalisation have been offset by the rise in non-tariff impediments to trade, which increased from 1,634 to 5,975 between 2000 and 2015. Lower tariffs may have promoted a resort to NTBs, and this poses a new challenge for ASEAN. NTBs are not only likely to be more restrictive than lower tariffs, providing more protection to domestic producers, but they are opaque and more difficult to dismantle. In addition, NTBs are a moving target 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.

In the original design of the ASEAN Investment Area the bloc flirted with the idea of providing preferential treatment to investors from member countries, but it 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 its volume and form. The massive economic transformations that the world has witnessed in ASEAN’s original member countries — and continues to observe in the newer members — would not have been possible if ASEAN had chosen the preferential route.

ASEAN’s success lies in its almost unique use of regionalism as a means towards a greater end — maximising the welfare of its citizenry through the pursuit of global integration. The metrics that analysts use to assess regionalism must reflect these objectives, even if they lie below the surface. In the economic sphere, widely used indicators (such as shares of intra-regional trade and investment) not only fail to capture the real story, but point in the wrong direction.

Trade and investment, irrespective of their origin or destination, is what matters. They, not intra-regional shares, are the metrics whereby ASEAN’s integration must properly be judged.

Jayant Menon is Lead Economist in the Economic Research and Regional Cooperation Department at the Asian Development Bank, and Adjunct Fellow at the Arndt-Corden Department of Economics at the Australian National University.

This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Why ASEAN matters’.

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