'Behind-the-border' trade measures, seen as non-negotiable by Asean member countries, are exactly what the grouping needs to ensure regional integration and global competitiveness, writes MOHAMED ARIFF.

REGIONAL and bilateral trade agreements deal with trade and investment barriers that exist "at the border" - tariffs, quotas, investment rules, Customs procedures, safety standards, health standards, etc.

They carefully avoid addressing "behind-the-border" measures, on the premise that these are "domestic" matters, which do not discriminate against foreign goods and services or factors of production, although they do add to the cost of doing business.

While the numerous bilateral and regional free trade agreements can help reduce, if not eliminate, tariff and non-tariff barriers to trade, they inadvertently create new barriers through complex sets of rules of origin.

This so-called "noodle-bowl effect" would raise production and transaction costs for the manufacturers and traders, not to mention the horrendous problems it would pose to Customs officers. All this would tend to negate the very purpose of these agreements, namely greater efficiency through improved allocation of resources.
The noodle-bowl syndrome can be effectively handled in two ways. The first is to craft simpler standardised rules of origin for all such agreements. The second is to mitigate the rising service-link costs by reducing the cost of doing business at home through domestic reforms.

In this context, it is important to distinguish "border" measures from "behind-the-border" measures (BBMs). The former relates to protectionist measures that overtly discriminate against foreign goods, services and investments at the border, such as tariffs, subsidies, national content requirements, quotas and restrictions on foreign equity.

The latter refers to domestic measures, such as crony handouts, affirmative-action agendas, monopolistic practices and price controls of sorts, that do not overtly discriminate against exports or imports or foreign ownership.

Although such BBMs do not directly interfere with trade flows, they do cause market distortions, with serious cost implications. BBMs include, in addition to the examples above, regulations that hinder businesses at home, such as licensing procedures, bankruptcy procedures, which depend on the quality of the civil service that administers the system, and the rule of law, which in turn depends on the quality of the legal framework.

An important hallmark of such reforms is transparency, which would not only promote better governance and accountability but also facilitate more informed and intelligent public discussion of policy choices.

The argument for reforms targeted at BBMs rests basically on the enormous efficiency gains that would lead to significant reductions in the cost of doing business in a country. Besides, regional economic integration and community-building cannot take place effectively if BBM issues are left untouched.

Community-building implies subscribing to common values and common standards. Although it is impractical for a diverse regional grouping to adopt common institutional infrastructure that would govern all BBM matters, some convergence would still be desirable and possible, as shown by the European Union experience.

A convergence would enable freer flow of resources within the region and facilitate deeper economic integration.

In the Asean context, this issue may be considered highly sensitive, as it entails erosion of national sovereignty. To be sure, BBM matters belong overwhelmingly to the domain of domestic affairs and are mixed delicately with domestic politics. Thus, BBM issues cannot be placed on the Asean agenda to the extent that any such attempt would be construed as interference in the internal affairs of member countries. These issues are bypassed in bilateral free trade agreements as well, as they are not negotiable.

In any case, BBM issues, by their very nature, do not lend themselves neatly to reciprocal arrangements. Such reforms are best undertaken in a unilateral fashion. Asean should encourage its members to do just that. After all, it is in the member country's own national interest to undertake such reforms voluntarily.

It is however important for the front-runners in Asean to set the pace for others in the regional grouping to follow, which may be described as "leadership by example".

All this would boil down to enhancing competitiveness. While Asean as a group will have to compete with other regional entities for global markets and investments, individual Asean countries will have to compete among themselves to secure a fair share of the gains. Institutional reforms would augment individual countries' competitiveness.

As Asean becomes borderless, thanks to liberalisation "at the border", firms will become increasingly footloose, seeking the best locations within Asean for their activities. They will opt for places where the cost of doing their business is the lowest - hence the relevance of "behind-the-border" liberalisation.

The liberalisation of trade and investment regimes is necessary but not sufficient to bring about meaningful regional economic integration. No wonder intra-regional trade and investment flows often fall short of expectations in many regional groupings. More often than not, behind-the-border measures serve to negate the impact of trade and investment liberalisation.

Thus far, BBMs have not received any attention in trade negotiations for reasons mentioned above, although domestic reforms "behind the border" would complement and reinforce the removal of barriers "at the border". It is only Apec (Asia-Pacific Economic Co-operation) that dares call attention to BBMs, knowing fully well that these are not negotiable. Apec can afford to do this simply because it is not a negotiating body, where concessions are voluntary and decisions are not binding.

The EU could handle BBMs deftly by making domestic reforms necessary, if not mandatory, to qualify for the coveted EU membership. Such requirements would be too outlandish for a loosely-knit grouping like Asean.

Nonetheless, it is in the interest of individual Asean countries to undertake such reforms on their own, not only because such reforms are good for regional integration and community-building but also for their own global competitiveness.

In the final analysis, it is companies, not countries, that compete in the market place. While liberalisation at the border would provide easier market access for aspiring firms, their ability to compete in these markets would depend critically on liberalisation taking place behind the border in countries where they operate.

It is in this sense that "behind-the-border" measures tend to weigh more heavily on individual firms than "border" measures. It is thus in one's own national interest to pursue behind-the-border reforms voluntarily and unilaterally.

Emeritus Professor Datuk Dr Mohamed Ariff is executive director of the Malaysian Institute of Economic Research.