SOU TH A S IA P OLIC Y N OTE S A D VA N C IN G R E GION A L 2015  APRIL RATI IN TEG|  ON 2 ISSUE 1 97141 How Has Regional Integration Taken Place in Other Regions? Lessons for South Asia Sanjay Kathuria, Sohaib Shahid, and Michael Joseph Ferrantino A s the momentum for multilateral trade liberalization agreements primarily among high-income countries (e.g. the has slowed, an increasing amount of liberalization European Union) and linking countries at different stages of is taking place at a regional level. As of April 2015, development (e.g. North American Free Trade Agreement there are 406 regional trade agreements (RTAs) in force and the proposed Trans-Pacific Partnership). Increasingly, worldwide, more than double the number in force in 2000.1 there are south-south regional agreements such as Asso- These agreements cover over half of international trade. ciation of Southeast Asian Nations (ASEAN) in Southeast Countries engage in regional cooperation for a variety of Asia, Southern Common Market (Mercosur) in South reasons. First, it is easier to achieve agreement among a America, Common Market for Eastern and Southern Africa small number of regional partners than it is globally. Second, (COMESA), Economic Community of West African States regional cooperation takes advantage of existing natural (ECOWAS) and Southern African Development Community tendencies for regional trade that arise from geography and (SADC) in sub-Saharan Africa. Each of these agreements shared culture. This reinforces the regional division of labor has its own features, allowing for countries to develop closer already taking place among firms. Global value chains, in ties in a manner suitable for regional conditions. which lead firms organize a division of labor for complex This piece will focus on four aspects of trade liber- products among many countries, often turn out to have a alization (trade facilitation, non-tariff measures/barriers, regional focus. Think, for example, of the electronics value intra-regional investment, and energy cooperation) that go chain in East Asia, and the automotive value chains focused beyond traditional preferential tariff reduction to illustrate on the United States, Germany, and Japan. South Asia itself both the potential of south-south liberalization and some is a small but growing part of value chains in textiles and of the particular challenges faced by South Asia. There is apparel with both regional depth and cross-linkages to East widespread agreement that deeper regional engagement in Asia. these areas will benefit the people of South Asia. More importantly, it is possible for regional agreements to go deeper than the more general standards applied by the Trade Facilitation World Trade Organization. The types of issues covered in such As tariffs are reduced, it is becoming increasingly apparent agreements often go beyond the traditional topics of tariffs and that the main costs involved in trading arise from problems quantitative restrictions, and cover provisions related to trade with moving goods around—getting goods from the factory facilitation, non-tariff measures (NTMs), and investment. Practi- or farm via a road to the port, across the ocean, through cal forms of inter-regional cooperation, such as in energy, may the port again, down the road in the importing country, and arise because of natural linkages among geographic power through the wholesale and retail network. It is estimated networks. These may be taken up in separate institutional that even for high-income countries, the price of goods at structures that sit parallel to traditional trade agreements. the importing country’s retail level averages 170 percent Regional cooperation has taken hold among countries higher than the price received at the factory or the farm in at a variety of levels of development. There are regional the exporting country.2 Worldwide, reducing trade costs www.worldbank.org/southasia How Has Regional Integration Taken Place in Other Regions? 5-19-15.indd 1 5/19/15 11:08 AM 2 S O UT H A SIA P OL IC Y N OT E S AD VA N C IN G R E GION A L IN TE GR ATION associated with border administration, transport and to another on a temporary basis to offer a wide range of communication infrastructure even halfway to global best business services that can enhance development in manu- practice would lead to an additional $2.6 trillion in global facturing, mining and agriculture. In Mercosur, the Residence GDP (4.7 percent).3 Agreement, which was implemented in 2009 among full and On a percentage basis, the potential gains to trade associate members, allows workers to reside and work for facilitation in South and Central Asia, at 8 percent of up to two years in a host state.7 This residence permit can GDP, are almost twice as large as the global average.4 be extended to a permanent one if the person proves that Challenging issues such as the difficult border procedures they can support themselves and their family through work. between India and Pakistan, the equally challenging land While there are some national differences in implementation transport environment between Bangladesh and India, and of the Residence Agreement, it represents a major step the landlocked status of Afghanistan, Bhutan and Nepal in facilitating trade in those kinds of services that require imply that much can be done to reduce trade costs. Average personal presence to deliver most effectively. level of trade costs between country pairs in South Asia is 85 percent higher than between country pairs in East Asia.5 Non-Tariff Measures (NTM)/Barriers High trade costs have contributed to South Asia being the Countries impose a wide range of NTMs affecting interna- least integrated region in the world (Figure 1). 6 tional trade.8 Some of these are relatively heavy-handed ASEAN is a good example of a south-south agreement measures prohibiting trade in certain categories of goods, where regional cooperation has enhanced trade facilitation, or requiring a non-automatic license to be allowed to import. reduced trade costs and enhanced intra-regional trade. Other measures have the stated intent of promoting human, In ASEAN, most countries have established either Trade animal, or plant life and health, or workplace and product Information Portals or Single Windows. A Trade Information safety. These include sanitary and phytosanitary standards Portal allows traders to electronically access all the docu- (SPS) and technical barriers to trade (TBT). While such ments they need to obtain approvals from the multiple units measures may pursue legitimate national policies, they can of government involved in exporting and importing. A Single be designed in such a way as to be more trade-restrictive Window also allows for electronic submission of such doc- than necessary or to constitute a disguised barrier to trade. uments. These windows, which are national initiatives, are In most but not all cases, an NTM becomes a non-tariff linked in the ASEAN Single Window (ASW), which allows barrier (NTB) to the extent that the measure applies only to compatibility of national windows using international open imports and is not imposed on domestic production. communication standards. This facilitates trade both within To reduce the incidence of NTBs, NTMs need to be the region and with other countries using similar standards. streamlined. This requires initiatives to (1) identify the existing The ASW supports a unified ASEAN Customs Declaration stock of NTMs; (2) identify those policies of most concern to Document and exchange of the intra-ASEAN certificate traders; and (3) where possible, streamline the most problem- of origin. In the area of trucking, three ASEAN countries atic measures so they can achieve their regulatory ends. (Malaysia, Singapore and Thailand) are piloting the ASEAN Within ASEAN, there is a commitment by all members Customs Transit System as of November 2014. to document their NTMs using an internationally recognized Trade facilitation can apply to trade in services as classification scheme developed by UNCTAD. ASEAN well as goods. In the case of services, one barrier to trade members have also formed intra-governmental committees involves the movement of national persons—accountants, to identify the most problematic NTMs and select candidates engineers and consultants who may move from one country for streamlining or removal. The World Bank Group has been heavily engaged in this work. Separately, ASEAN has also FIGURE 1: Intra-regional trade share (percent of total harmonized regulatory regimes for electrical and electronic trade), 2012 equipment, going substantially deeper than the zero-tariff commitments in the Information Technology Agreement, and 35 has also implemented a Cosmetics Directive. 30 25 Among the African Economic Communities (COMESA, 20 EAC, SADC) there is an online Mechanism for Reporting, 15 Monitoring and Eliminating NTBs (http://www.tradebarriers. 10 5 org). This type of mechanism for collecting complaints can 0 be very effective, helping to resolve disputes in a transparent South Africa Middle East Southeast Asia East Asia Asia and multi-country setting, thereby also contributing to build- Source: Authors’ calculations based on WITS (World Bank Group) data. ing trust between trading partners. So far, the Mechanism www.worldbank.org/southasia How Has Regional Integration Taken Place in Other Regions? 5-19-15.indd 2 5/19/15 11:08 AM SOU TH A S IA P OLIC Y N OTE S A D VA N C IN G R E GION A L IN TEG RATI O N 3 has addressed nearly 500 cases, of which more than FIGURE 2: SIEPAC regional transmission line connects 80 percent have been resolved, according to the website.9 six countries Traders may address a wide variety of complaints, including rules of origin, customs clearance and border procedures. Some ways to reduce trade frictions arising from NTBs are harmonization of regional standards and mutual recognition of standards (countries allow imports on an agreement that the other country’s standards provide for the same degree of safety or protection, but the details can differ on a national basis). Mercosur has established guidelines for recognition of equivalence in food control systems, and designed harmonization of regulations in telecom technologies, and is moving forward with a protocol on harmonization of industrial design standards. Source: Global Energy Network Institute (GENI)16 Intra-Regional Investment Energy Cooperation A high share of international trade—as much as 80 percent National geography often affords opportunity for regional by some estimates—is associated with direct investment, cooperation in power generation and transmission. In either because firms engaged in foreign direct investment Central America, the Central American Electrical Intercon- (FDI) are also large traders or because such firms engage nection System (SIEPAC) is fully operational as of 2013, in trade in their own intra-firm networks. Thus, promoting and interconnects the grids of six Central American nations intra-regional investment is an important tool for promoting over 1,790 km of 230 kV transmission lines extending from intra-regional trade. In addition, maintaining policies that are Guatemala to Panama (Figure 2). SIEPAC was financed by attractive to FDI are now widely understood as important for a variety of sources led by the Inter-American Development attracting current technology and capital. As a result, many Bank, and is owned by a regional operations entity with RTAs now include investment provisions. Such agreements public-private ownership (75 percent from integrated utilities aim at insuring non-discrimination between domestic and and transmission companies, and 25 percent from Spanish foreign investors, limiting such requirements on foreign and Colombian power companies).13 SIEPAC is expected to investment as domestic content and hiring provisions and lower rates throughout the region and has been credited with restrictions on repatriation of assets or profits, and providing helping Panama to recover from an energy crisis that had for some type of dispute resolution mechanism between arisen due to drought-depleted reservoirs. Similar geograph- investors and states. ical circumstances afford opportunities for energy cooper- An example of such provisions is the ASEAN Com- ation in the South Asian region, where sharp differences in prehensive Investment Agreement (ACIA), which entered elevations make for untapped hydropower resources. into force in 2012.10 This agreement protects investments Countries in the Greater Mekong Sub-region (GMS) made by non-ASEAN parties in ASEAN countries. These have been successful in trading power since 1971. This parties are guaranteed fair and equitable treatment, and exchange intensified in the 1990s with the formal launch in ASEAN governments agree not to make arbitrary decisions 1992 of the GMS Economic Cooperation Program. These and to enforce their own laws. Foreign investors are also countries have overcome possible issues relating to size protected against unlawful expropriation, and to the extent asymmetries of the countries involved. Initial years of the feasible, extended security in the event of civil unrest. Free GMS Program focused on networking, studies, and building transfer of funds into and out of ASEAN are also guaranteed trust. The GMS is now in the process of transitioning from to foreign investors.11 The role of investment in ASEAN’s bilateral power purchase agreements to grid-to-grid trading economic development has grown substantially in recent between bilateral pairs of countries.14 15 years. In this context, intra-regional investment, which currently stands at 17.4 percent, has played a central role.12 Implementation The ASEAN experience also suggests that in order to take Regional agreements suffer from a gap between intentions full advantage of a regional investment framework, each and implementation. One way to address this would be to South Asian Association for Regional Cooperation (SAARC) set up credible institutional mechanisms to monitor compli- member would have to undertake reforms to improve its ance and outcomes, housed in regional secretariats such as respective investment climate. COMESA, or, in the case of South Asia, SAARC. www.worldbank.org/southasia How Has Regional Integration Taken Place in Other Regions? 5-19-15.indd 3 5/19/15 11:08 AM 4 S O UT H A SIA P OL IC Y N OT E S AD VA N C IN G R E GION A L IN TE GR ATION The other lesson is that regional integration is a long 4. Calculated from ESCAP-World Bank International Trade Costs and incremental process. Improved regional outcomes, such Database 5. Simple average of trade costs between available bilateral pairs. as higher trade volumes, price convergence, reduction in Figure based on authors’ calculations using the ESCAP/World border crossing times, or increase in energy trade, take time Bank International Trade Costs database. and patience, and require political will and institution build- 6. This is true in the aggregate, but it does obscure the fact that ing. South Asia can capitalize on recent political momentum for countries like Afghanistan, Nepal and Bhutan, intra-South Asian trade dominates their overall trade. in the region and keep pushing on issues that have a strong 7. Arcarazo, D.A. (2014), ‘Is free movement in Europe an anom- developmental impact—energy sharing, reducing costs of aly? The new open borders policy in South America’, web blog trade, and encouraging intra-regional investment. post. PolicyBristol Hub, November 25. 8. An NTM is any measure other than an ordinary customs tariff which applies to imports or exports. Identifying an NTM as About the Authors an NTB implies that the measure in question is needlessly Sanjay Kathuria is Lead Economist in the World Bank’s restrictive, unfair, or violates some agreed norm. It is easier to South Asia Regional Cooperation and Integration Unit, catalogue NTMs than to identify NTBs. based in Washington, D.C. He tweets from https://twit- 9. Not all cases are resolved to full satisfaction, but the import- ant point is that there is a multi-country forum for reporting, ter.com/Sanjay_1818 monitoring and resolution. Sohaib Shahid works with the South Asia Regional 10. Solstad, S.U. (2013), ‘Introduction to the ASEAN Comprehen- sive Investment Agreement’, ASEAN Briefing, April 12. Cooperation and Integration (SACRI) unit of the World 11. These protections are not unbounded: legally authorized Bank, and is a Ph.D. Candidate in International Eco- acquiring of land subject to compensation are not covered by nomics at the Graduate Institute of International and the expropriation provision, as well as compulsory licensing Development Studies in Geneva. of certain intellectual property, and capital controls requested by the IMF or otherwise imposed in a balance-of-payments Michael Joseph Ferrantino is Lead Economist in the emergency. 12. Rillo, A., P. Sirivunnabood, A. Ahsanand J. Maur (2013), Trade and Competitiveness Global Practice in the World ‘Association of Southeast Asian Nations (ASEAN) integration Bank, based in Washington, D.C. monitoring report: a joint report by the ASEAN Secretariat and the World Bank’, Washington DC, World Bank Group. Acknowledgements 13. Inter-American Development Bank (2013), ‘Energy integration in Central America: Full steam ahead’, June 25. Retrieved from: The authors would like to thank, without implicating: http://www.iadb.org/en/news/webstories/2013-06-25/energy-in- Mombert Hoppe, and David Michael Gould. tegration-in-central-america,10494.html 14. Jude, A. (2013), ‘Greater Mekong Subregion (GMS) Market Coordination’., Asian Development Bank, 27 November 2013. Endnotes 15. For more detail on power pooling arrangements in different 1. World Trade Organization (2015), ‘Regional Trade Agreements regions, see: Oseni, M.O, and M.G. Pollitt (2014), ‘Institutional gateway’, April 7. Arrangements for the Promotion of Regional Integration of 2. Anderson, J. and A. Wincoop (2004), ‘Trade Costs’, Journal of Electricity Markets: International Experience’, World Bank Economic Literature, 42(3), 691–751. Policy Research Paper 6947, Washington DC. 3. World Economic Forum (2013), ‘Enabling Trade: Valuing 16. GENI (2011), ‘Six Central American Nations Getting Con- Growth Opportunities’. nected’, The GENI-us Letter, Vol.19, Issue 8, August. ADVANCING REGIONAL INTEGRATION IN SOUTH ASIA World Bank Group 1818 H Street, NW The SARConnect series aims to provide pointed analysis and discussion Washington, DC 20433 of topical cross-border issues in South Asia, with a view to stimulating and deepening the dialogue on regional economic cooperation. The Tel: 522-08-7775 findings, interpretations, and conclusions expressed in this work do not Email: SARConnect@worldbankgroup.org necessarily reflect the views of The World Bank, its Board of Executive www.worldbank.org/southasia Directors, or the governments they represent. 1415233 www.worldbank.org/southasia How Has Regional Integration Taken Place in Other Regions? 5-19-15.indd 4 5/19/15 11:08 AM