45151 Trade Issue Brief WORLD BANK, WASHINGTON, DC July 2008 Benjamin J. Taylor and John S. Wilsoni Deeper Integration in ASEAN: Why Transport and Technology Matter for Trade ii New initiatives to close the development gap and expand trade among members of the Association of Southeast Asian Nations (ASEAN) are at the forefront of policy discussion. Countries in Southeast Asia perform relatively well in terms of costs to import and export. Costs are more or less in line with the OECD average. In terms of the amount of time and paperwork it takes to complete a cross-border transaction, however, much progress remains in ASEAN. On average, the association's members require 32 days and 11 documents for an import transaction, compared with 12 days and 6 documents for the average OECD country (World Bank 2008). There are clear benefits to be gained in addressing these areas. Where might reform initiatives be deepened--and what are the relative impacts of such reform steps? New analysis at the World Bank suggests examining two key areas, among others: port facilities and competitiveness in the Internet services sector. Reform in these areas could expand ASEAN trade by up to 7.5 percent ($22 billion) and 5.7 percent ($17 billion), respectively. By contrast, cutting applied tariffs to the regional average in Southeast Asia--an important step--could increase intra-regional trade by about 2 percent ($6.3 billion) (Shepherd and Wilson 2007). Bolstering ASEAN's Economic Outlook Nevertheless, progress with respect to many behind- the-border trade facilitation reforms, including port and The Southeast Asia region has the potential to reap information technology reforms, has been slow across significant benefits from investments in further trade most ASEAN countries. Based on analysis in SW facilitation reform (Wilson and Otsuki 2007). This (2007), it is difficult to detect any significant would build on the comprehensive tariff reform already improvement in the performance of regional transport realized through the ASEAN Free Trade Agreement. infrastructure during 2000 to 2005. Singapore has Tariff reform among ASEAN's ten members has consistently performed well, while Malaysia and proceeded at a brisk pace since the inception of the Thailand appear to have improved somewhat over the ASEAN Free Trade Area (AFTA) in 1992. This is five-year span. All the other sample countries showed particularly true given the development disparities that relatively consistent rankings, with the exception of exist among member countries. After numerous Indonesia, which appeared to worsen over time. accelerations of the AFTA timetable, tariffs on more than 99 percent of tariff lines covered by AFTA-CEPT The indicators with respect to competitiveness in the are now in the 0 to 5 percent range for the original six Internet services sector are more encouraging; by 2005, ASEAN members (ASEAN-6). ASEAN's four newest all ASEAN economies, with the exception of Vietnam, members have made the same adjustments to about 77 received rankings above the global average. percent of their tariff lines. For ASEAN-6, the average Interestingly, this category of indicators demonstrated tariff on goods covered by AFTA decreased from more the most homogeneous regional performance of all than 12 percent in 1993 to just 1.74 percent in 2006 categories covered in the analysis. Nevertheless, the (ASEAN 2006). data suggest there remains room for improvement in the development of information technology infrastructure and, more generally, in service sector Chart 2 demonstrate, the largest potential gains are liberalization. realized in the simulations that isolate reforms in port facilities and the Internet services sector. By contrast, CHART 1: TIME TO IMPORT (SOURCE: DB the tariff reform scenario yields a much smaller 2008) increase in intra-regional trade. Vietnam CHART 2: POTENTIAL TRADE FACILITATION REFORMS Thailand 8 Singapore 7 6 Philippines 5 Malaysia 4 3 Lao PDR 2 Indonesia 1 0 Cambodia ts Brunei en Comp riffs ISP Ta Number of Paym 0 20 40 60 % Gain from Days Martime Ports reg Ir baseline The Model Overall, the findings with respect to trade trends in ASEAN appear to reflect the fact that AFTA, in its With these figures, among others, used as baseline original form, focused almost exclusively on tariff trade facilitation indicators, SW (2007) conduct an reduction. In fact, the two AFTA founding agreements econometric analysis of trade flows in ASEAN using a do not make an explicit reference to trade facilitation. gravity model. The authors use the model to identify Nevertheless, intra-ASEAN trade has increased by 23 the sensitivity of trade flows to changes in trade percent since 1993 (ESCAP 2003). This figure is facilitation indicators. The trade facilitation indicators especially significant given that other regions in Asia examined include (1) the efficiency of maritime and air continue to have particularly low levels of intra- ports, (2) the extent of irregular payments in customs regional trade (WO 2007). administration, and (3) the level of competition among Internet service providers (as a proxy for regulation of This recent increase in economic integration across backbone service sectors). The model controls for the ASEAN has broadened the trade policy dialogue to the presence of tariffs and standard geographical factors extent that there is now an official goal of an ASEAN that may influence trade volumes; it is estimated for Economic Community (AEC) by 2020. The AEC the years 2000 to 2005. would represent a single market and production base of 520 million people and a combined gross domestic The results are presented through counterfactual product of more than $600 billion. It would allow for simulations to show the potential gains ASEAN could the free flow of goods, services, investment, and labor realize from various reform steps. (The results are across ASEAN. In light of this ambitious goal, the subject to the usual caveats in this type of research.) need for increased prioritization of substantial and far- Each of the first four simulations alters one of the four reaching trade facilitation reforms across the region trade facilitation indicators so that no ASEAN member over the next decade is unquestionable. performs below the regional average for the given variable. The fifth simulation serves as a benchmark and considers a cut in applied tariffs to the current ASEAN average (8.6 percent)--an ambitious but achievable goal for tariff reform. As the results in 2 Emerging Trends in Intra-ASEAN Trade Further Reading A comprehensive trade facilitation reform program ASEAN. 2006. Joint Media Statement of the Twentieth would need to cover areas as diverse as infrastructure, Meeting of the ASEAN Free Trade Area (AFTA) Council. service sector regulation, and customs administration, Kuala Lumpur (August). among others. This approach would likely be Economic and Social Commission for Asia and the Pacific prohibitively costly to institute at once as a single (ESCAP). 2003. "Trade Statistics in Policymaking." initiative. Instead, a building block approach to Bangkok. institute reforms strategically on a priority basis would be optimal. Estimating the range of potential returns to Shepherd, Ben, and John S. Wilson. 2007. "Trade various reform measures requires identifying emerging Facilitation in Southeast Asia: Measuring Progress and trade trends. Assessing Priorities," World Bank, Washington, DC. Analysis in SW (2007) suggests that trade within United Nations Development Programme. 2007. "Trade ASEAN appears to be particularly sensitive to the Facilitation beyond the Multilateral Trade Negotiations." quality of transport infrastructure and to competition in Wilson, John S., and Tsunehiro Otsuki. 2007. "Cutting the Internet services sector. This might be indicative Trade Costs and Improved Business Facilitation in South of the emergence of electronic trade and business in the Asia." In South Asia Growth and Regional Integration, region, as well as a move toward relatively high value Sadiq Ahmed and Ejaz Ghani (eds.). Macmillan and World merchandise. In addition, these results may reflect the Bank. continued importance of transnational production networks in the region, which require platforms to World Bank. 2008. "Doing Business 2008." World Bank, facilitate goods and information quickly. Washington, DC. It may be beneficial for ASEAN economies, therefore, to begin by improving transport links with regional partners and increasing the competitiveness of key i The findings, interpretations, and conclusions expressed in service sectors. Such an agenda could include, for this paper are entirely those of the authors. They do not example, augmenting the ASEAN open skies area and necessarily represent the view of the World Bank, its increased openness to international services trade Executive Directors, or the countries they represent. under the GATS. Although such policies may require ii more investment, the gains would be significantly This brief draws on research under a project on Trade Facilitation and Economic Development at the World Bank, more substantial than tariff reductions of comparable with support of the U.K. Department for International ambition. Development. It is also aligned with work under the Multi- Donor Trust Fund Trade Project on "Trade Costs and Facilitation." 3