Monday, October 3, 2011

Trade in Services May Present Greater Challenges to the AEC

Last week, several articles brought attention to the role of services in the ASEAN Economic Community (AEC).  Two reports from Thailand indicated that Thai IT companies looked forward to the AEC, while Thai tourism companies demanded additional protection from AEC-led liberalization.  The Philippine Supreme Court Chief Justice called for an ASEAN-level body to regulate lawyers in the region, while another prominent person proposed an “ASEAN immigration lane” devoted to nationals of the member states.

The ASEAN Framework Agreement on Services signed in 1995 provides that member states will provide market access and right of establishment to companies and individuals from other member states.  That access must be at least as open as that guaranteed by the WTO General Agreement on Trade in Services (GATS), if not more, with regard to the four modes of service supply established by the GATS:

1.                  Cross border supply – the supplier is in one country, servicing a customer in another country.

2.                  Consumption abroad – the customer travels to another country to purchase and consume the service.

3.                  Commercial presence – the supplier establishes a commercial presence in the country of the consumer to provide services.

4.                  Presence of natural persons – the supplier stations its staff in the country of the consumer to provide services.

Since 1995 ASEAN has engaged in ongoing negotiations to liberalize services trade, with a stated goal of full liberalization by 2015.  Furthermore, ASEAN members have negotiated mutual recognition agreements that allow service providers accredited in one ASEAN member to be recognized as approved service providers in other member states.

Intra-ASEAN services trade, according to ASEAN Secretariat data, is dominated by Singapore, Malaysia and Thailand.   The three countries account for a supermajority of service export and service import.

Because services can range from the impersonal (downloading a report over the internet) to the intimate (getting a haircut), issues regarding services can become very intense.  An uncompetitive factory can replace its production machinery, and the machinery will not complain.  An uncompetitive service supplier may have to send its staff for retraining or let them go, and the staff will definitely complain!  These articles thus demonstrate some of the issues related to AEC-related services liberalization.

First, an “ASEAN lane” at immigration would be a positive political gesture and would indeed give ASEAN more meaning at the individual level. Some countries already have such lines. However, unlike the EU, which has similar EU lines (or “Schengen lines” named after the EU agreement regarding cross-border travel), ASEAN has not yet agreed on a common visa.  This would require linking immigration databases across the region to establish an ASEAN Single Window for people.  Given the difficulties in establishing an ASEAN Single Window for goods, coordination of immigration databases may face similar difficulties (although this would benefit ASEAN’s bid to host the 2030 World Cup).  Also unlike the EU, ASEAN members have not agreed on complete freedom of movement within the region, which would be controversial given the income and population disparities within ASEAN giving rise to migration.  In short, an “ASEAN lane” would definitely help as a first step, but achieving full movement of persons within ASEAN is a long ways off.

Second, regional oversight of service providers should be encouraged, but will be limited by profession-specific factors.  In the legal sector itself, ASEAN members will need to reach agreement on the level of market access liberalization.  Furthemore, an ASEAN-level bar regulator, as proposed by the Philippine Chief Justice, would practically require that ASEAN members agree to mutual recognition of bar qualifications within the region.  This would be difficult given that some countries have varying routes to lawyer qualification. For example, Indonesia has many bar associations operating at the provincial and city level, even with multiple associations in the same city. 

Third, the two Thai articles demonstrate how service industry issues can be come very personalized.  Both the IT and tourism sectors were specified as priority sectors by ASEAN, with tourism already subject to an MRA.  The Thai tourism service industry is thus complaining about market opening that has already taken place.  The industry difficulties it raises, such as poor language capabilities, should be addressed by better training rather than introduction of market barriers.  The Thai IT industry, on the other hand, sees the AEC as an opportunity to its regional markets, and wants greater access. 

The service industries will thus present ASEAN policymakers with major challenges.  Continued liberalization and achieving full freedom of movement will be necessary for the AEC to develop fully and not remain solely dependent on trade in goods or investments.  Yet service modes 3 and 4, because of their highly visible and intimate nature, will raise local concerns about societal norms, cross-border security, and other issues which affect the socio-cultural and political-security pillars of ASEAN as well.  The EU, and to a lesser extent NAFTA, continue to face these issues every day.  Full development of ASEAN as a community will depend on how its leaders deal with them.