Is ASEAN meeting targets in services trade liberalization?

Given the robust performance of the services sector and its importance to global and regional economies, ASEAN needs to continue to facilitate its services trade. Two significant frameworks – AFAS and AEC Blueprint – were established to serve as regulatory mechanisms in trade in services regionally. However, much cynicism has been expressed on the effectiveness of both frameworks and it is unclear if ASEAN is meeting/missing targets in services trade liberalization.

Defining services and services trade

Services are defined as economic activities that add value, directly or indirectly, to another economic unit. They are heterogeneous and include a wide range of economic activities. In their “Services Trade and Policy ” (2009) paper, Joseph Francois and Bernard Hoekman recognize that this inherent diversity highlights the basic function that many services perform relative to overall economic growth and economic development: they are inputs into production. Hence, services greatly determine the productivity of the ‘fundamental’ factors of production – labor and capital – that produce knowledge, goods and other services.

The General Agreement on Trade in Services (GATS) describes ‘trade in services’ through four possible modes: Mode 1: Cross border supply; Mode 2: Consumption abroad; Mode 3: Commercial presence; and Mode 4: Presence of natural persons. At the regional level, trade in services in ASEAN continues to be dynamic as its share of world services trade has improved from 4.6% in 2000 to just over 8% in 2012. ASEAN services export to the world market amounted to almost US$ 261 billion in 2011, which is twice more than US$ 121 billion in 2005. Likewise, ASEAN services import from the world market increased, magnifying from US$143 billion in 2005 to US$269 billion in 2011. More importantly, the services sector generates approximately 40-50% of the national Gross Domestic Product (GDP) of ASEAN economies.

The AFAS and AEC Blueprint

At the 5th ASEAN Summit in Bangkok, ASEAN Economic Ministers (AEM) signed the ASEAN Framework Agreement on Services (AFAS) of 1995 which requires ASEAN Member States (AMS) to progressively enhance Market Access and guarantee equal National Treatment for services suppliers among ASEAN countries. In accomplishing these, AFAS is supposed to: 1) enhance efficiency and competitiveness and diversify services within and outside ASEAN; 2) eliminate substantially restrictions to services trade amongst Member States; and 3) progressively liberalize trade in services by promoting GATS-plus commitments.

Another landmark framework covering the facilitation of trade in services is the ASEAN Economic Community (AEC) Blueprint of 2007. It resulted in AMS agreeing to conduct subsequent rounds of negotiations under AFAS and schedule liberalization commitments until 2015 based on the parameters and timelines outlined in the Blueprint. The AEC Blueprint envisions a free flow of services within the region by removing substantially all restrictions on trade in services and increasing foreign (ASEAN) equity participation while allowing for overall flexibilities.

Notable achievements

To date, AMS, under the purview of AEM, have held 6 rounds of negotiations and have agreed on 8 packages of commitments. ASEAN Finance Ministers and ASEAN Transport Ministers have added 4 more packages of commitments in financial services since 2002 to 2011, and another 4 in air transport services from 2004 to 2011.

As of the final quarter of 2012, all AMS have reached the liberalization target required by the 8 packages of AFAS. Commitments undertaken by AMS cover services sectors such as air transport, business, construction, distribution, education, environmental, financial, health care, maritime transport, telecommunications, and tourism. AEM have also concluded 8 Mutual Recognition Arrangements (MRAs) for engineering, nursing, and architectural services, medical practitioners, dental practitioners, tourism professionals and framework agreements for MRA of surveying qualifications and accountancy services. These enable professional service providers certified or registered by the relevant authorities in their home country to be mutually recognized by other signatory AMS.

Challenges and unfulfilled promises

The liberalization of the services sector is a relatively new development compared with the trade in goods. The evolving and intangible nature of trade in services, along with the numerous rules and regulations that govern it (policy constraints), make it difficult for the international community and for ASEAN to frequently cope with the constant changes in services trade. The recent emergence of unique services sectors and sub-sectors (especially in e-commerce) which are not covered by the GATS and the AFAS have created more problems for the region in proactively managing services trade liberalization.

Hikari Ishido and Yoshifumi Fukunaga, in their “Liberalization of Trade in Services: Toward a Harmonized ASEAN++ FTA” (2012) policy brief, assessed the services restrictiveness index on AFAS. It found that the ASEAN average for the AFAS Seventh Package was very low at 0.36, with Thailand at 0.50, Cambodia at 0.41, Singapore at 0.36, the Philippines at 0.33, and Brunei as the lowest at 0.23. Based on the Hoekman Index,1-“fully liberalized”; 0.5-“limited (but bound)”; and 0-“unbound” (government has not committed to liberalize). Evidently, ASEAN registered a lower figure which highlights the region’s struggle in liberalizing its services trade.

Another criticism is the inability of AFAS and the AEC Blueprint to stimulate significant regulatory changes in Member States . According to ASEAN and the World Bank’s ASEAN Integration Monitoring Report (2013), six ASEAN countries – Philippines, Indonesia, Thailand, Malaysia, Vietnam, and Cambodia – registered an average Services Trade Restrictiveness Index (STRI) of 44, which is higher than the East Asia Average (41) and the World Average (29). Studies suggest that mode 4 gained the least commitment. Moreover, none achieved 0 which means a fully open market. Thus, a very restrictive policy stance in essential services sectors – professional, transport, telecommunications, and finance – adversely impact the goal of substantially eliminating restrictions to services trade. A diverse grouping of ten Member States, particularly their economy’s structure, also poses an arduous task for ASEAN in integrating and advancing services trade. Further complications arise due to the political positioning of non -State stakeholders with protectionist interests.

Balancing national and regional interests

Considering that 2015 is the initial deadline, ASEAN has missed liberalizing much in services trade. The region’s ambitious goal of an economic community where there is a free flow of services (including skilled labor) is primed to fall short of expectation come 2015. Restrictive and protectionist national policies and mechanisms ultimately hinder ASEAN’s push toward greater liberalization of trade in services.

The establishment of an AEC is a long and demanding process and it is high time for AMS to be more open and liberal than ever in meeting targets and realizing commitments. To achieve this, AMS must squash fear of local displacement by communicating carefully to its general public the tremendous benefits of an effectively managed services trade in an integrated region.

At the national level, attaining inclusive growth in the Philippines entails a vibrant services trade with other AMS and an efficient services sector with crucial inter-sectoral linkages. To become competitive, the country should also undertake significant policy adjustments particularly the relaxation/removal of unnecessary regulations to attract more foreign investments into the country. More importantly, human capital development through enhanced education and vocational training is vital in upgrading the country’s skills and capacities to perform better in an interconnected region. – Rappler.com

Jovito Jose P. Katigbak is a Foreign Affairs Research Specialist with the Center for International Relations and Strategic Studies of the Foreign Service Institute. Mr. Katigbak can be reached at jpkatigbak@fsi.gov.ph.

This was first published in the CIRSS Commentaries, a regular short publication of the Center for International Relations and Strategic Studies (CIRSS) of the Foreign Service Institute (FSI) focusing on the latest regional and global developments and issues. FSI is on Facebook and Twitter.

The views expressed in this publication are of the authors’ alone and do not reflect the official position of the Foreign Service Institute, the Department of Foreign Affairs and the Government of the Philippines.