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Politics

Malaysia's big chance to help shape ASEAN's new era

By the end of 2015, the ASEAN Economic Community is to be born -- and as the current chair of the Association of Southeast Asian Nations, Malaysia will be its presiding midwife. Using an elaborate scorecard, each of ASEAN's 10 members has been asked to report progress on steps taken to promote economic integration and make the community a reality.

     The latest count shows that, on average, 78% of required actions have been completed. By the end of the year, reported progress will likely be close enough for declarations of "victory," even if the 100% target is not reached. But such declarations would be premature.

     The reality is that while ASEAN has made progress toward economic integration, there remains much heavy lifting to do. As ASEAN chair for 2015, Malaysia should make a candid assessment of the unfinished trade and investment agenda and find a way forward to the goal of genuine integration.

     Make no mistake, ASEAN countries have made progress in dismantling at-the-border trade restrictions. At about 130%, the region's ratio of trade to gross domestic product is the highest among developing regions. Each of the 10 countries has liberalized its trade unilaterally and acceded to the World Trade Organization. As a result, trade has expanded rapidly within the region and between the region and the world, providing the foundation for the impressive economic growth performance of the last three decades.

     Collectively, ASEAN's agreements on trade in goods, trade in services, and investor protection have helped to consolidate these advances. Unfortunately, however, protectionist forces within countries have found ways of circumventing these agreements, largely through behind-the-border measures -- licenses, regulations, taxes, and health and safety regulations.

     Indonesia, for example, introduced port entry restrictions and licensing requirements for horticultural imports in 2012, imposed restrictions on mineral exports (which implicitly protect downstream smelting industries) in 2014, and requires importer licensing for 200 iron and steel products. Similarly, Malaysia applies discriminatory excise taxes to shield its automotive industry from foreign competition, and Thailand uses costly certification procedures for tile imports.

     In services, nearly all ASEAN countries impose opaque and discretionary licensing requirements for service providers. As a result, the World Bank's services trade restrictiveness index for the region is 60% higher than the global average. These behind-the-border measures tend to be idiosyncratic and difficult to quantify; consequently their removal is difficult to negotiate. The non-interference credo of ASEAN -- the so-called "ASEAN way" -- does not help. It is a convenient fig leaf behind which countries can resist external pressure for reform.

Sense of urgency

As chair of ASEAN in 2015, Malaysia has an opportunity to infuse a sense of urgency into the process of removing these behind-the-border barriers to trade and investment. There is no better way to do this than to quantify the protective outcomes of such measures.

     Focusing on the effective rate of protection -- which quantifies the protective effect of trade and nontrade policies on the domestic measure of value-added for traded goods -- would be a good start. It would highlight the extent to which industries in each country benefit from being shielded against foreign competition. Where the effective rate of protection is negative, it would identify industries penalized under prevailing policies.

     Of course, each country will eventually need to examine its own protectionist barriers, but there are some actions they can take together. First, ASEAN under Malaysia's leadership should initiate an independent inventory of behind-the-border barriers to trade in goods and services in all the member countries. The review should be made public, together with independent estimates of the effective rate of protection in every industry.

     Second, investor protection -- currently restricted to ASEAN investors producing goods and manufacturing-related services -- should be extended to non-ASEAN investors and all services. This would give foreign investors assurance that ASEAN governments would not subject them to discriminatory treatment, unlawful expropriation or profit repatriation restrictions.

     Third, Malaysia should strongly encourage ASEAN members to adopt the ASEAN Single Window for customs declaration information -- a procedural measure intended to reduce the time needed to process import and export documents -- which would reduce the cost of trade significantly.

     Malaysia should also use its opportunity as the ASEAN chair to lead a discussion that establishes a consensus on the region's post-2015 vision for the AEC. The end of 2015 should not be viewed as the beginning of the end of AEC reforms, but as the end of the beginning. There remains a long road ahead for coordinated policies that not only facilitate smooth intra-regional trade in goods and services, but also remove barriers to the intra-regional movement of capital and labor.

     Of course, none of this can be done unless Malaysia extends every effort to strengthen the Jakarta-based ASEAN Secretariat. Its 300-plus staff and $17 million budget are scarcely enough to organize the 1,400 or more ASEAN-related meetings that take place each year. Not only should Malaysia seek to expand the secretariat's manpower and budget by several multiples, it should also encourage recruitment and operational reforms to boost the organization's capacity to lead thinking on the region's strategic issues.

     By the reckoning of its own leaders, 2014 was a very difficult year for Malaysia -- an "annus horribilis," as Razaleigh Hamzah, a veteran parliamentarian, put it. But as chair of ASEAN -- such a crucial year for the AEC -- Malaysia has an opportunity to put the past behind it and demonstrate genuine forward-looking leadership for the region. Let us hope it seizes the moment.

Vikram Nehru is senior associate and Bakrie chair in Southeast Asian studies at the Carnegie Endowment for International Peace. Previously he was the World Bank's chief economist for the East Asia region. Yun Tang is a junior fellow in the Carnegie Endowment for International Peace.

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