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Non-tariff measures: Not really all that bad

While import tariffs have been successfully reduced through World Trade Organization (WHO) negotiations, non-tariff measures (NTMs) are often blamed for the lack of integration of ASEAN markets

Olivier Cadot and Lili Yan Ing (The Jakarta Post)
Geneva
Mon, October 12, 2015

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Non-tariff measures: Not really all that bad

W

hile import tariffs have been successfully reduced through World Trade Organization (WHO) negotiations, non-tariff measures (NTMs) are often blamed for the lack of integration of ASEAN markets.

Thus, economists routinely calculate how many imports are affected by NTMs and point fingers at countries with the largest numbers, branding them as '€œprotectionists'€ as if fewer regulations were always better.

Yet, the discovery of Volkswagen'€™s large-scale cheating with US emissions tests serves as a reminder of a stark truth: The '€œinvisible hand'€ does not work. Shareholders appoint managers to do well, not to do good; without checks and balances, companies would just serve their own interests whatever the costs to the larger community.

In democracy, society'€™s collective will is expressed by the State, whose responsibility is to impose regulations to prevent one'€™s actions from hurting others. NTMs are there, in the majority of cases, to play just that role.

The belief, widely shared in the trade community, that trade negotiations can somehow '€œreduce'€ NTMs is futile. Most NTMs are not primarily trade instruments '€” notwithstanding the analogy with tariffs that is implicit in their name. It is also doomed. Regulatory systems are becoming increasingly risk-averse all over the world, as sanitary and environmental crises get ever larger media resonance.

Not only will NTMs not be reduced '€” they will keep on proliferating. As to the finger-pointing, it is squarely counterproductive, as NTM reforms are held back by the perception that they would be concessions to trade partners, like tariff reductions, and should therefore be done only as part of a negotiated quid-pro-quo.

Does this mean that all NTMs are benign? Not quite. Many regulations are poorly designed, failing to protect the public while unnecessarily complicating business.

For instance, many countries have complicated rules for pharmaceutical imports that nevertheless fail to prevent widespread traffic of counterfeits. There are several reasons for this.

First, bureaucrats know little about incentives and even less about how to design market-based regulations, confusing effective with cumbersome.

Second, regulations are often enforced in punitive ways, reflecting the anti-business culture of many administrations.

Third, NTMs typically span the competences of several ministries, with no coordination mechanisms to make the necessary trade-offs. For instance, regulations aimed at consumer safety may hurt competitiveness.

Yet, each ministry makes decisions based on a narrow mandate without regard to broader societal interests. As a result, trade-offs are often political, with the most powerful ministry winning in lieu of society'€™s overall interests.

Disciplines exist in the form of the WTO'€™s agreements on technical barriers to trade (TBT) and sanitary and phytosanitary (SPS) .

These agreements are useful in reminding governments that regulations should be science-based and transparent, and that they should be neither discriminatory nor disproportionate.

However these guidelines are loose and many absurd regulations manage to pass through the net.

In order to make NTMs work for the common good, ASEAN should break from the '€œtrade negotiation'€ approach and strive instead for three objectives.

First, a drive for transparency. NTMs are complex, and whereas large firms easily get the information, it is much harder for smaller ones. Lack of transparency works against free markets and competition.

Second, cooperation in conformity-assessment procedures (CAP). Recent research shows that the mutual recognition of CAP substantially reduces NTM compliance costs, while the Volkswagen incident highlighted the need to tighten up verification tests. Both point to benefits in regional cooperation to make CAP both effective and standardized.

Third, '€œdynamic disciplines'€;by this, we mean a quality-control process, internal to each government, ensuring that important regulations are examined from a broad, cost-benefit perspective (what is called a '€œregulatory impact assessment'€) before being imposed.

All three objectives could be achieved through a blend of regional and multilateral approaches. At the multilateral level, the WTO'€™s Trade Facilitation Agreement mandates that each country set up a trade portal and a trade facilitation committee. An ambitious reading of the agreement would make the trade portal an open-access repository of all NTMs, in local language and in English.

This would be a tremendous step toward transparency, and it would be politically acceptable if it were clear that posting was not the first step toward negotiated elimination.

Likewise, trade-facilitation committees could be entry points for the creation of supervisory bodies for trade-relevant regulations, with the analytical capabilities to do meaningful reviews.

This could prove difficult for member countries with limited capabilities; which is where the ASEAN Secretariat could have a role to play, providing technical and financial support while sharing and publicizing best practices in a regional '€œbeauty contest'€.

In the long run, one could even consider merging such bodies with competition authorities, as the issues at stake are similar (bad regulations are those that stifle competition) and the skills required for antitrust and regulatory reviews are the same.

An agency enforcing disciplines on both the private and public sectors would have a balanced perspective on the economy and the clout that goes with impartiality.

The vision proposed here is one where all ASEAN countries would set up regulatory supervisory bodies with competent technical staff that could cooperate with each other, ensuring that regulatory systems naturally converge, at the regional level, toward common best practices.

Such '€œdynamic deep integration'€ would largely eliminate the high-visibility political friction that goes with poorly-designed NTMs (or those captured by special interests). It would also be fully consistent with the objectives of ASEAN'€™s integration and would put the region at the forefront of regional innovation.
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Olivier Cadot is Professor and vice dean at the Faculty of Business and Economics, University of Lausanne. Lili Yan Ing is economist at Economic Research Institute for ASEAN and East Asia and lectures at the Faculty of Economics, University of Indonesia. The views are personal.

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