Theory, reality of a single market

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.