Theory, reality of a single market

Romeo A. Reyes, Jakarta

In theory, a single market is one where barriers to the flow of goods and non-factor services in the product market and of capital and labor in the factor market have been removed. These barriers are at the border, beyond the border, and across borders. If successfully eliminated, all traded goods and services should theoretically have one price across countries, after adjusting for transport and other transaction costs. It would be as if a community of nations, such as the ASEAN Economic Community (AEC), is functioning as one country.

At the border, the most obvious barriers to the flow of goods in the product market are tariffs, import quotas and other import restrictions such as licensing. Complicated rules of origin and cumbersome customs procedures, along with the huge transaction cost to satisfy the rules and to comply with procedures, are barriers that are less obvious.

Restrictions to establishment of commercial presence by a foreign investor, e.g. in a service industry such as tourism or health, would be another barrier at the border in both the product and factor markets. Removal of all these barriers at the border would make the community a Free Trade Area (FTA) but not a single market.

Even after a product or a factor - labor or capital - has successfully crossed the border within a free trade area, there are still barriers beyond the border that must be removed to make the community a single market. These include measures that discriminate against foreign owners of products, labor and capital.

Any discriminatory measure, especially if in the form of a tax law or business regulation, eventually translating itself into a financial cost would constitute a barrier. National treatment of foreigners in the application of laws and regulations that affect the cost of doing business and eventually the price of its products would eliminate those barriers.

Barriers across borders derive from different national laws and regulations, particularly those relating to meeting certain product standards for reasons of security, safety and health and to qualifications of professionals and skilled labor. Those laws and regulations must be harmonized and agreement to mutually recognize the results when the standards are applied must be forged to enable the community to function as a single market.

Finally, to pass the test of a single market, i.e. one price across countries, fiscal and monetary union is also considered as a requirement. This means equal tax rates across countries and use of a common currency as in the European Union. Fiscal union would eliminate price distortions arising from application of unequal tax rates. Monetary union would obviate any cost of foreign exchange transactions.

Given the above theoretical definition and qualification criteria, a single market hardly exists in reality even within a country, let alone in a community comprised of several countries such as ASEAN. Within a country, local taxes can be different from each other. In the U.S., for instance, the consumption tax is not the same across states, which would tend to make the price of the same commodity different from one state to another. Business taxes imposed by local governments of ASEAN Member Countries are hardly the same.

ASEAN Leaders have declared the formation of the AEC as a single market but not to the extent of forming a fiscal and monetary union, not even a customs union. With respect to the factor market, they are aiming only at a free flow of skilled labor and limited liberalization in the flow of short-term capital. Yet, even with those exceptions, they demonstrated their political will and commitment to gradually dismantle the barriers at the border, beyond the border, and across borders when they adopted the Vientiane Action Program to realize the AEC.

AMCs have already gone a long way towards removing tariff and non-tariff barriers under AFTA. Today, ASEAN internal tariff for most traded goods are already between 0 to 5 percent. Removal of these barriers at the border, along with those beyond the border and across borders, will be accelerated in 11 priority sectors through a Framework Agreement adopted at the Vientiane Summit.

For the time being, the target for tariff removal has been advanced from 2010 to 2007 for ASEAN 6 Member Countries and from 2015 to 2012 for CLMV Member Countries. Considering that the target for realizing the AEC in these sectors is 2010, it is likely that the target for tariff removal will be further accelerated in the future.

In reality, ASEAN is aiming at a Free Trade Area plus some of the characteristics of a single market relating to removal of barriers beyond the border and across borders that are deemed politically feasible. For instance, national treatment is envisioned to be extended not only to ASEAN but also to non-ASEAN foreign investors.

That is an important step towards removing a critical barrier beyond the border. Harmonization of standards and technical regulations and acceleration of implementation of agreement on Mutual Recognition Arrangements (MRA) are included in the VAP. They are similarly important steps towards eliminating barriers across borders.

In the context of open regionalism, ASEAN is reaching out to its Dialogue Partners, particularly China, Japan, South Korea, India, Australia and New Zealand to establish a FTA or closer economic partnership. The deal is most advanced with China. At the Vientiane Summit, the two parties signed agreements on trade in goods and dispute settlement mechanism.

Rather than a single market as herein defined, what the Leaders are really aiming at is a FTA + for ASEAN +.

The writer is Senior Adviser, ASEAN-UNDP Partnership Facility. The views expressed here are personal and do not necessarily reflect those of ASEAN, its Member Countries, or UNDP.