ASEAN FRAMEWORK AGREEMENT ON SERVICES(AFAS): CHALLENGES & OPPORTUNITIES FOR MALAYSIA

By: Aisha Nasiha Abdullah Noor Farahani Norizan Nur Sahila Binti Ayub Khairoon Arina Mohamed Nashrudin (P72112) (P72105) (P72792) (P67260)

SCOPE OF PRESENTATION:
INTRODUCTION CHALLENGES OPPORTUNITY RECOMMENDATION CONCLUSION

BACKGROUND
Cooperation in Trade in Services in ASEAN was formally institutionalised through the signing of ASEAN Framework Agreement on Services (AFAS)during the 5thASEAN Summit (Bangkok, 15 December 1995) by ASEAN Economic Ministers (AEM) AFAS adopts the structure and approach of General Agreement on Trade in Services (GATS)of the World Trade Organisation (WTO)

OBJECTIVE

The objectives of the Member States under the ASEAN Framework Agreement on Services (hereinafter referred to as "this Framework Agreement") are:
(a) to enhance cooperation in services amongst Member States in order to improve the efficiency and competitiveness, diversify production capacity and supply and distribution of services of their service suppliers within and outside ASEAN; (b) to eliminate substantially restrictions to trade in services amongst Member States; and (c) to liberalise trade in services by expanding the depth and scope of liberalisation beyond those undertaken by Member States under the GATS with the aim to realising a free trade area in services.

CURRENT SECTORAL COVERAGE OF AFAS

Air transport: sales and marketing of air transport services, computer reservation, aircraft repair and maintenance, etc. Business services: IT services, accounting, auditing, legal, architecture, engineering, market research, etc. Construction: construction of commercial buildings, civil engineering, installation works, rental of construction equipments, etc. Financial services: banking, insurance, securities and broking, financial advisory, consumer finance, etc. Maritime transport: international passenger and freight transport, storage and warehousing, etc. Telecommunication: public telephone services, mobile phone services, business networks services, data and message transmission, etc. Tourism: hotel and lodging services, food serving, tour operator, travel agency, etc.

AFAS ARTICLES

1.Objectives 2.Areas of Cooperation 3.Liberalisation 4.Negotiation of Specific Commitments 5.Mutual Recognition 6.Denial of Benefits 7.Settlement of Disputes 8.Supplementary Agreements or Arrangements

9.Other Agreements 10.Modification of Schedules of Specific Commitments 11.Institutional Arrangements 12.Amendments 13.Accession of New Members 14.Final Provision

AFAS IS SUBJECT TO GATS DISCIPLINES

Article XIV(1) of AFAS: The terms and definitions and other provisions of the GATS shall be referred to and applied to matters arising under AFAS for which no specific provision has been made under it. These include commitments and disciplines such as: Most-Favoured-Nation (MFN) Transparency Domestic Regulation Monopolies Business Practices Payments and Transfers Balance of Payments Safeguard General Exceptions and Security Exceptions Market Access, National Treatment, Commitments Progressive Liberalisation GATS Annexes

and

Additional

COORDINATING COMMITTEE ON SERVICES

The official ASEAN Body looking after policies and issues in trade in services is the Coordinating Committee on Services (CCS) The CCS was established in January 1996, and is reporting to the ASEAN Economic Ministers (AEM) through the Senior Economic Officials Meeting (SEOM) The following services are not under the purview of CCS: air transport and financial services (since 1999), and services incidentals to manufacturing, agriculture, fishery, forestry, and mining and quarrying (since 2001).

OTHER RELATED ASEAN BODIES

Liberalisation of air transport services is now negotiated by Air Transport Sectoral Negotiations (ATSN) under the purview of ASEAN Transport Ministers (ATM) Liberalisation of financial services is now negotiated by Working Committee on ASEAN Financial Services Liberalisation (WCFSL) under the purview of ASEAN Finance Ministers Meeting (AFMM) Liberalisation of services incidental to manufacturing, agriculture, fishery, forestry, and mining and quarrying, is subject to ASEAN Comprehensive Investment Agreement (ACIA) disciplines instead of AFAS, and is negotiated by Coordinating Committee on Investment (CCI).

ASEAN FRAMEWORK AGREEMENT ON SERVICES (AFAS)

THE CHALLENGES

CHALLENGES

As one of the key objectives in association of ASEAN is to accelerate the economic growth, social progress and cultural development in the region through joint endeavours ASEAN with the concept of ASEAN Community officially declared at the 9th ASEAN Summit held in Bali, Indonesia in October 2003; of which declaration known as Bali Concord II which stated that :The ASEAN Economic Community (AEC) is the realisation of the end-goal of economic integration as outlined in the ASEAN Vision 2020, to create a stable, prosperous and highly competitive ASEAN economic region in which there is a free flow of goods, services, investment and a freer flow of capital, equitable economic development and reduced poverty and socio-economic disparities in year 2020.

CHALLENGES

With that, ASEAN had take action by formalized its integration commitment through the signing of ASEAN Framework Agreement on Services (AFAS). However, liberalization of the services sector is the key factor or important driver of regional integration in trade in services, and to a significant extent, it is not a simple task. This is because, services trade is intangible and it is governed by myriad rules and regulations, and usually undertaken by different modes of supply. ASEAN countries, specifically Malaysia (as in the context of our presentation) had encountered challenges and not very different from many parts of the world.

CHALLENGES

The liberalization process in AFAS had mostly encounter certain degree of domestic opposition (for every ASEAN countries) due to fear of displacement in the job market or market share. This is because by 2015 as agreed in AFAS, there should be substantially no restriction on ASEAN services supplier in providing services and in establishing companies across national borders within the region. So, with that we believe that ASEAN country specifically Malaysia will encounter lots of challenge in implementing these free flow of services. There are some challenges that can be seen even before full implementation of the AFAS and there are challenges that might arise after the implementation of the AFAS. As from the observation, there are some of the challenges face by Malaysia and other ASEAN countries in implementing AFAS.

CHALLENGES
1st Challenge : Government domestic policies or regulations. Services trade reform cannot take place in vacuum as government is the important key factor of its implementation. In accompanying regulation, governments often want to regulate services market to correct for market failures or to meet equity objectives. In the present, most of the companies whom providing a services believe that government policies and regulations is an obstacles for them to expand their services abroad or even locally. Example : a private tertiary education had pointed out that the restrictions placed on the size of student intakes by the Malaysia Ministry of Health is preventing them from offering their services despite enquiries from interested individuals residing in ASEAN. Another example is dental practice in Malaysia also prohibits employment of foreign dentists on private dental premises. So it is in need for the government to regulate our policies and regulations accordingly in order for us to be prepared for 2015.

CHALLENGES
2nd Challenge : Monopoly. It is a common feature in most of services such as air transport to have the characteristics of a natural monopoly which means that the monopoly operator to deny access to competitors . Natural monopoly usually occurs when the most efficient scale of operation exceed market size. Small country may therefore find it a more extensive problem than large ones, which lead them to pay more attention to the problem of monopoly pricing and less to the problem of access to bottleneck facilities. So it a challenge for Malaysia to compete or being in a competition with others air transport provided by other ASEAN countries. Example : Competition between MAS and Singapore Airlines. Our air transport might been awarded the Best Cabin Crew for several years but as Changi had been chosen among top 10 airport hub in the world, Singapore Airline had monopoly the air transport which made people to choose us less.

CHALLENGES
3rd Challenge : Quality and accreditation. Common objective in liberalization of services is to ensure quality which the consumers in ASEAN might not have the knowledge or information in order to judge the quality themselves. When quality assurance and accreditation frameworks are underdeveloped, authorities in other ASEAN countries may resort to entry barriers . The authorities may refuse to grant licences to foreign profesional as on the ground that they cannot check their quality or as to uphold the liberalization concept they might allow and grant licence to foreign profesional but restricting their activities only to highly specialized cases which not provided by the local. Example : - Many of professions like legal and accounting services. In order to compete, we need to preceded by the implementation of wellspecified quality criteria and better designed quality assurance process. We need to show that we can offer a good quality services.

CHALLENGES
4th Challenge : Lack of scale/capital/funds. In order for expanding and liberalize the services throughout ASEAN, it is important to have a huge capital and funds. Government authorities was in need to actually inject some funds to subsidize access to for example health or education services. Without proper funds and capital, screening criteria for Malaysia services in health services might be underdeveloped and that would actually act as barriers to trade in services throughout ASEAN. Example : health services i.e. hospital services and services of medical laboratories, ambulance and residential health care other than hospitals. Lots of Malaysia health services provider such as Pantai Medical Centre and Prince Court Hospital was in par on services that had been offered by Singapore and Thailand but it is obviously that we are still far behind in having foreign patient whom come for a health tourism. Malaysias health services was in need for some injection of funds and more advertisement over their services throughout ASEAN in order for them to able to competition friendly with other ASEAN countries.

CHALLENGES
5th Challenge : Lack of knowledge of targeted market. In expanding and liberalise the services, Malaysia had problem in reaching the useful and targeted market due to lack of strategic promotion and advertisement. For example, medical tourism had been provided by Malaysia since 2001 but it had been defeated by Thailand which had been the main destination for medical tourism in ASEAN. According to statistic, approximately 1.4millions medical tourist had received their treatment at Thailand in 2007 with the revenue of 1billion for that particular year only. As survey made by Deloitte Center of Health Solutions in 2008, they believe that approximately 6millions American will seeks for medical treatment in ASEAN country by 2010 and above, with the same big amount from European country, Japan and Australia, so this is the time for Malaysia to promote our medical tourism services to a right targeted market and it is perfect for Tahun Melawat Malaysia 2014.

CHALLENGES
6th Challenge : Lack of business and attraction. In expanding services, it is important to have a key factor to attract skilled workforce to provide their services in our country. AFAS had promoted free flow and liberalise services and it will encouraged highly skilled and experienced Malaysian workers to go and work abroad all over ASEAN especially Singapore due to bigger remuneration and experience offered by Singapore. This will be a big challenge for Malaysia not only to invite and have other highly skilled and experienced workers to provide their services in Malaysia, but it is also very challenging to keep those highly skilled Malaysian to keep them working in Malaysia.

CHALLENGES
7th Challenge : Diverse grouping of 10 Member States. ASEAN had 10 member states which diverse in many aspects. According to ASEAN Secretariat statistic; ASEAN countries differs for example in :- population = * Indonesia (231mil) > Brunei (406,000) - annual services trades = * Singapore (USD 169bil) > Lao PDR (USD 675k) It is very challenging for Malaysia to compete with Singapore in various services specially looking at how big their annual services trades income had reach but Malaysia have to work hard in order to compete.

CHALLENGES
8th Challenge : Short time frame for all services sectors. AEC Blueprint envisages removal of restrictions of trade in all services sector by 2015. - with target for priority sectors by 2010; and - logistics services sectors by 2013. with this limited time, Malaysia firms and business had to put their all effort in competing with other establish company in order for them to survive the demands of the market.

ASEAN FRAMEWORK AGREEMENT ON SERVICES (AFAS)

THE OPPORTUNITIES

1) SINGLE MARKET

The goal is that the movement of capital, labour, and services between the members is as easy as within them. The physical (borders), technical (standards) and fiscal (taxes) barriers among the member states are removed to the maximum extent possible. These barriers obstruct the freedom of movement. free flow of services in the region.

2) INCREASE COMPETITION

Making the existence of monopolies more difficult. Efficient firms can benefit from economies of scale, increased competitiveness and lower costs, as well as expect profitability to be a result.

Consumers are benefited by the single market in the sense that the competitive environment brings them cheaper products, more efficient providers of products and also increased choice of products.
Businesses in competition will innovate to create new products - another benefit for consumers.

(source: http://en.wikipedia.org/wiki/Single_market)

Factors affecting competitiveness: Productivity in services tends to depend on human capital/skills and access to technology and digital infrastructure (Source: Jane Drake-Brockman) Free movement of services pushes us to compete with foreign companies.

3) NATIONAL ECONOMIC DEVELOPMENT

Small Medium Enterprises (SMEs) may benefit from the free movement of services no tariff. Diversity production capacity, supply and distribution of services within ASEAN Member Countries. Reduction in the economic distance to markets within ASEAN and beyond the region. Subject to domestic legislation, AFAS commitments allow for greater movement of investment (most notably under commercial presence) within ASEAN compared to other multilateral commitments so far. Furthermore, potential investors have a variety of sectors to invest and create valuable economic linkages in.
(Source Liberalisation of Services under ASEAN Framework Agreement on Services (AFAS) - Ministry Of International Trade And Industry, 17th March 2011)

4) INCREASE EMPLOYMENT

Increase in investment = increase in demand = increase of job prospect. Companies can expand their operations, entering new market sectors, and creating better-paying jobs. The growth in economy also benefits people in ASEAN countries who have access to other ASEAN market, where both the demand for goods and services and levels of remuneration are much higher than they would be at home. People gain the opportunity to earn better wages, acquire more goods, and raise their standard of living.

5) DECREASE POVERTY

Liberalisation of labour industry may increase job demands. The ability to trade freely increases opportunity, choices, and standards of living. With a sound infrastructure based on economic freedom, assured property rights, a fair and independent judiciary, the free flow of capital, and a fair system of low taxation, poor countries can create an environment that is friendly to trade and inviting to foreign investors, thus improve the livelihood of the nation.
(Source : Denise H. Froning is a former Trade Policy Analyst in the Center for International Trade and Economics at The Heritage Foundation.)

6) FREE FLOW OF SKILLED LABOUR

Liberalization of skilled labor may enlarge ASEAN professionals opportunities. Unskilled labour? It is highly unlikely that the ASEAN countries, especially Indonesia, Vietnam, Myanmar, Cambodia and Laos, will allow free movement of unskilled labor, even under the ASEAN Economic Community, considering the high rates of underemployment prevailing in these countries.
(Source : Manila Bulletin Mon, Jul 1, 2013)

7) HOW ABOUT PROFESSIONAL?

Provides mutual recognition of qualifications and experience through mutual recognition agreement. A mutual recognition agreement (MRA) is an international agreement by which two or more countries agree to recognize one another's conformity assessments. A mutual recognition arrangement is an international arrangement based on such an agreement.

Example:
i. ii. iii. iv. v. vi.

ASEAN MRA on Engineering Services ASEAN MRA on Nursing Services ASEAN MRA on Architectural Services ASEAN MRA on Medical Practitioners ASEAN MRA on Framework Accountancy ASEAN MRA on Dental Practitioners

ASEAN FRAMEWORK AGREEMENT ON SERVICES (AFAS)

RECOMENDATION

RECOMMENDATION
It has been reported the real income gains in each economy of between 1.5 and 5.6 cent percent of GDP each year across the whole region. Thus, it requires the real reform and most of ASEAN member states have expressed their commitment and cooperation to work towards the free flow of trade in services as outline in AEC Blueprint. (Dee, P. 2013, The Benefits and Costs of Further Services Liberalization in ASEAN,.)

RECOMENDATION

First and foremost, the progressation can be made by way of using the existing AFAS negotiating structure. Even though, the approach taken by way of request and offer process be held responsible for the lack of progress in the Doha Round of trade negotiations. However, it should be highlighted that the AFAS process shows that when negotiations are held repeatedly and frequently, significant progress can still be achieved. It further added that it could assist the liberalization process under AFAS.

RECOMENDATION
The second is, it should be emphasized that that the key step would be to strengthen the process of policy coordination and cooperation between services trade negotiators and relevant line authorities, and to ensure that it occurred on a continual basis between negotiating rounds. As negotiations move substantially beyond this phase, and as the implementation process demands more real reforms, the need for coordination will be much greater than in the past, and it will need to take place before the commitments are made.

RECOMENDATION

ASEAN member states to explore alternative formats for scheduling trade commitments. This way currently being used mirrors that in the GATS. alternative formats for making the trade commitments. Accordingly, there is a tendency for countries to avoid making any commitments in sectors where their own domestic regulatory restrictions on trade are complex. Yet heavily qualified commitments are better than no commitments at all. And documenting the regulatory qualifications as part of the trade commitments would add to regulatory transparency. ASEAN could pioneer this area by exploring alternative formats for making the trade commitments.

RECOMENDATION

Then, next is for ASEAN to be GATS-plus by developing references papers for domestic regulatory frameworks in areas beyond telecommunications. A key prerequisite for competition, including foreign competition, in many network industries is the separation of bottleneck facilities and the guarantee of access by all competitors to those facilities on non-discriminatory and reasonable terms. Some ASEAN members have already taken first steps in other areas. For example, Cambodia and Indonesia have begun the process of vertical separation in rail transport. In Cambodias case, this has involved the government granting a 30 year concession to Toll Holdings of Australia to operate the railway. Indonesia has gone further, legislating for full vertical separation.

RECOMMENDATION

The Next is by proposing, necessity tests into its Mutual Recognition Agreements in the professions. There is scope for ASEAN countries to remove the purely discriminatory elements of their domestic regulatory regimes for professional services such as accounting and the medical professions, using the existing AFAS negotiating structure. But there is also scope for ASEAN countries to ensure that their non-discriminatory regimes are no more burdensome than necessary. One element of this is to review the licensing conditions for entry into the profession, and to ensure the equivalence of entry conditions for individual domestic and foreign professionals.

RECOMENDATION
The framework Mutual Recognition Agreements that exist for medical practitioners, dental practitioners, and nurses say that foreign professionals can apply for registration in the host country subject to a number of conditions, including being in compliance with any other requirements as may be imposed by the professional body or other relevant authorities in the host country. In addition, recently it has been announced that foreign lawyers can practice in Malaysia after the amendment of Legal Profession Bill to liberalize the service sectors.

CONCLUSION

Malaysia is on the track to achieve the AEC 2015. It has been reported that almost 88% measures and achievement of milestones committed in the AECs strategic schedule. Thus, the AEC is definitely a work in progress. Some efforts will go faster and bear quicker fruit than others meanwhile others might have to face more challenges and may be less crisply implemented. Hence, it can be said that the future is clearly in favor of the AEC and that it offers clear opportunities and challenges that all businesses need to be thinking about and preparing for.
(http://www.theedgemalaysia.com/in-the-edge-financial-daily-today/258034malaysia-on-track-to-embrace-aec-in-2015.html)