INTRODUCTION

Constant pressure to stay competitive built the momentum for ASEAN Leaders to conceptualize the ASEAN Economic Community (AEC) as a vision for deepening and broadening regional economic integration in 2003. The AEC is characterized by four pillars: a single market and production base; a highly competitive economic region; a region of equitable economic development; and a region fully integrated into the global economy (ASEAN Secretariat 2009). While the original timeline for the AEC was 2020, it was subsequently accelerated to the end of 2015 in response to the confluence of regional as well as global challenges that confronted the region (Austria 2015).

As a founding member of ASEAN, the Philippines has embraced the challenge of moving towards attaining the AEC vision because it is consistent with the overarching goal of increasing the country's competitiveness in an era of globalization and regional economic integration. The Philippines has implemented substantial market-oriented reforms covering liberalization, facilitation, privatization and deregulation since the 1980s. These were carried out in various stages involving unilateral, regional as well as multilateral approaches (Austria 2003). Yet despite these policy reforms, the country has been affected by the boom-bust cycle of economic growth, lagging behind its neighbours in the region after more than three decades of reforms. Nevertheless, for the past three years, the country's growth performance was not only higher than its past records, but it was also the highest in the region, after China. However, it remains to be seen if this performance is sustainable.

In fact, the country's expected structural transformation from agriculture to manufacturing did not take place (Aldaba 2014). The contribution of the manufacturing sector to the economy remained at less than a quarter of GDP, in contrast to Thailand's experience where the sector gradually evolved to become the driver of economic growth. The automobile industry was one of the early industries promoted by the Philippines in its bid for industrialization in the 1980s. This was logical as the country participated in the changing landscape of global production networks in East Asia, whereby the labour-intensive segments of technologically complex production processes are separated from the capital- and skill-intensive segments and located in developing countries, linked through international sub-contracting and outsourcing arrangements (Austria 2013; Aldaba 2008; Rosellon and Medalla 2011).

INTRODUCTION

A significant milestone of economic integration in the ASEAN region is the substantial progress in tariff liberalization. The achievement in tariff reduction, however, has been marred by non-tariff barriers (NTBs). First, they have replaced tariffs as protective measures for domestic industries (World Bank 2008). Second, the bulk of intra-regional trade transactions among the ASEAN economies is driven by the global production networks of multinational companies in the region. Efficiency in moving goods across borders has thus become crucial in capturing and creating trade opportunities arising from the vertical and horizontal operations of these networks (Austria 2004). Third, behind-the-border interventions have increasingly emerged as the new form of protectionism since the recent global economic crisis (Wermelinger 2011).

NON-TARIFF BARRIERS AND MEASURES: DEFINITION AND CONCEPTUAL ISSUES

Broadly defined, non-tariff measures (NTMs) refer to any measure, other than tariffs, that distorts trade. In general, distortions include border and behind-the-border measures that arise from government regulatory policies, procedures and administrative requirements which are imposed to serve a particular purpose.

While the pursuit of domestic policy objectives is legitimate, NTMs have the potential to become NTBs. This could arise when such measures specifically discriminate against imports or foreign firms; when they are imposed explicitly to protect domestic industry; when they are not applied uniformly among trading partners; or, when they include unjustified and/or improper application of sanitary and phytosanitary (SPS) measures and other technical barriers to trade.

ASEAN INITIATIVES TO ADDRESS NTMS AND NTBS

The commitment to eventually phase out or eliminate NTBs in the region has always been an integral part of the trade liberalization program.

Starting in 2004, The High Level Task Force (HLTF) on ASEAN Economic Integration outlined specific recommendations with regards to NTMs:

1. a. Establish ASEAN Database of NTMs by mid-2004;

2. b. Set clear criteria to identify measures that are classified as barriers to trade by mid-2005;

3. c. Set a clear definitive work program for the removal of the barriers by 2005; and

4. d. Adopt the WTO agreements on Technical Barriers to Trade and on Sanitary and Phytosanitary and Import Licensing Procedures and develop implementation guidelines appropriate for ASEAN by the end of 2004.

Introduction

A significant milestone of economic integration in the ASEAN region is the substantial progress in tariff liberalization, with the average tariff rate now at less than 5%. The achievement in tariff reduction, however, has been marred by non-tariff barriers (NTBs). While the commitment to eliminate NTBs has always been an integral part of the liberalization program of the ASEAN member states, little progress has been made to address them.

There are increasing concerns about NTBs. First, they have replaced tariffs as protective measures for domestic industries (World Bank 2008). Second, the bulk of intra-regional trade transactions among the ASEAN economies is driven by the global production networks of multinational companies in the region. Efficiency in moving goods across borders has thus become crucial in capturing and creating trade opportunities arising from the vertical and horizontal operations of these networks (Austria 2004). Third, behind-the-border interventions have increasingly emerged as the new form of protectionism since the recent global economic crisis (Wermelinger 2011). This is also observed with the shifting of growth potentials away from developed countries and toward developing countries.

NTBs could undermine the economic integration process and the realization of the AEC by 2015. Unlike tariffs, whose effect on trade is certain (i.e., direct effect will increase the price of imports), the effects of NTBs are ambiguous. They can be restrictive of trade, some may even promote it. Also, when they come in the form of regulatory measures, they may affect different products and different countries in different ways.

Given that the 2015 target for AEC is fast approaching, it is essential to examine closely the non-tariff issues affecting the economic integration of the region. The objectives of this chapter are as follows: (i) to identify and examine the non-tariff barriers affecting the integration of the priority sectors in the ASEAN region; (ii) to assess progress in the implementation of actions in the AEC Blueprint that are meant to address NTBs; (iii) to examine the possibility (or impossibility) of achieving the AEC by 2015; and (iv) to identify policy issues as well as make recommendations to address NTBs in the region.

Introduction

The Association of Southeast Asian Nations (ASEAN) has gone a long way in opening up the region to greater trade and foreign direct investment (FDI) from the rest of the world. The competitive pressure arising from the process and the region's response to meet the challenge paved the way to the region's economic integration. Prior to the 1990s, this was considered by many as impossible, especially if one looks at the member economies' economic structures that are more competitive rather that complementary. With the exception of Singapore, the economies have similar resource endowments and levels of technological development; thus, resulting in the production and export of similar primary and labour-intensive products. They are also all heavily dependent on the developed countries, particularly the United States, Europe and Japan, for their export markets and sources of foreign direct investment and technology. These factors were perceived to make economic integration in the region difficult, if not impossible.

From the initial goal of establishing the ASEAN Free Trade Area in 1992, ASEAN is now aiming to deepen economic integration through the ASEAN Economic Community (AEC) by 2015, a timeline which was initially set at 2020. The AEC is one of the three pillars of an ASEAN Community embodied in the Declaration of ASEAN Concord II (also known as Bali Concord) adopted during the 2003 ASEAN Summit. The AEC is characterized as a single market and production base, with free flow of goods, services, investment, labour and capital. As an initial step towards the goal, the ASEAN leaders signed the Framework Agreement for the Integration of the Priority Sectors during the ASEAN Summit in 2004. The agreement outlined the steps to be taken to accelerate the integration of eight priority sectors and three services sectors. Three years later, during the ASEAN Summit in November 2007, the ASEAN leaders signed the Declaration on the ASEAN Economic Community Blueprint, the master plan that guides ASEAN towards achieving AEC by 2015.

Introduction

The commitment to reduce barriers to intra-regional trade has always been an integral element to the goal of achieving economic integration in the ASEAN region. It dates back to 1977 under the Preferential Trade Agreement (PTA). In 1992, a more definite target for trade liberalization was laid down under the ASEAN Free Trade Area (AFTA). The target date was set at 2003. Over the years, however, the ASEAN took serious steps to deepen economic integration. During the ASEAN Summit in 2003, the ASEAN leaders resolved to establish an ASEAN Economic Community (AEC) by 2020. The time-line was later accelerated to 2015 during the ASEAN Summit in January 2007.

The AEC is characterized as a single market and production base, with free flow of goods, services, investment, capital, and skilled labour. As an initial step towards the goal, the ASEAN leaders signed the Framework Agreement for the Integration of Priority Sectors during the ASEAN Summit in 2004. The framework agreement outlined the steps to be taken to accelerate the integration of eight priority goods sectors and three services sector. During the ASEAN Summit in November 2007, the ASEAN Leaders signed the Declaration on the AEC Blueprint, the master plan that guides the ASEAN towards achieving an AEC by 2015.

Soesastro (2008) made clear what AEC means when he said, “the idea of a single market and production base is essentially about providing consumers in the region with an expanded market from which they can fulfill their consumption needs and producers in the region with an expanded space in which they can undertake their production activities without having to worry about national (administrative) boundaries within the region”. This calls for the free flow of goods among the ASEAN members, which in turn requires the elimination of both border and across-the-border policies and regulations in the region. This means zero tariffs and elimination of NTBs; and once across a border, the good should be accorded the same treatment as any other domestic good.

ASEAN has achieved significant progress in tariff liberalization, with the average tariff rate now at less than 5 per cent. However, this achievement has been countered by non-tariff barriers (NTBs) that are persistent and on the rise, and for some, in even more complex forms.

Foreign direct investment (FDI) has played a significant role in the growth and dynamism of the member economies of the Asia-Pacific Economic Co-operation (APEC). Most APEC economies are both recipients and sources of FDI. Up to the late 1980s and early 1990s, a number of these economies pursued highly restrictive policies towards FDI for fear that multinational companies would control important activities in their domestic economies (Bora and Graham 1995). However, the development experience of the newly industrializing economies (NIEs) of Asia in the late 1980s has fundamentally changed this view. The capital as well as the technology, management skills, and other expertise brought in by the multinational companies (mostly from Japan and the United States) have played a major role in the unprecedented growth experienced by these economies that has become the envy of other developing economies.

As a consequence, a number of economies began reorienting their FDI regimes towards greater openness and less regulation. This eventually led to the surge of investments into the region during the last decade. At the same time, however, this flow of FDI facilitated industrial adjustment in the source economies as it enabled them to relocate their labourintensive industries in Asia, where labour is relatively cheap, as part of their global strategy to remain competitive. This was also true of the experience of the NIEs when they themselves later became sources of capital, targetting labour-intensive industries in ASEAN and China (ESCAP 1998). Such a development strategy ultimately increased economic integration among many APEC economies where the production networks of multinational companies located in the region are now interlinked in technologically advanced industries.

The region's dependence on FDI as a source of capital has not diminished and the role of the region in global FDI flows continues to be strong. In light of the general recognition of the importance of FDI in the economic development of the region, an investment environment that facilitates the smooth flow of FDI becomes crucial. To this end, APEC is aiming for free and open investment no later than 2010 for its developed member economies and by 2020 for its developing member economies.