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Asean Economic Community a solid pathway to prosperity

Geopolitics may have been what brought the Association of South-east Asian Nations (Asean) together 50 years ago, but it will be economics that defines its future. Nothing will drive the vision of regional cooperation forward more than the Asean Economic Community (AEC).

Asean Economic Community a solid pathway to prosperity

Vietnam’s Trade and Industry Minister Tran Tuan Anh speaking at the 3rd Inter-sessional Regional Comprehensive Economic Partnership Ministerial Meeting in Hanoi in May. When it is finalised, the RCEP, will have 16 member countries that together account for about half of the world’s population, 30 per cent of global GDP and 25 per cent of world exports. Photo: Reuters

Geopolitics may have been what brought the Association of South-east Asian Nations (Asean) together 50 years ago, but it will be economics that defines its future. Nothing will drive the vision of regional cooperation forward more than the Asean Economic Community (AEC).

By promoting regional growth through enhanced trade and investment opportunities for its 10 member countries, the AEC has set Asean on the path of shared prosperity, creating a future where each country’s economic resilience will depend on its closest neighbours.

Although not all of the initiatives set out by the AEC agenda were implemented by 2015, when Asean was declared an integrated community, the region has benefited greatly from the initiatives that have been implemented since that watershed moment.

Notably, intra-regional tariffs have been abolished for 99.2 per cent of the tariff lines of the six older member countries — namely Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand — since 2010. Asean’s newer members — Cambodia, Laos, Myanmar and Vietnam (CLMV) — which are at a more modest level of development, were given concessions under the “ minus X” formula of up to 2018 to bring their intra-regional tariffs to 0 per cent.

Tariff reduction has increased the region’s attractiveness for foreign direct investment (FDI), which is one of the primary goals of the AEC.

While earlier waves of FDI were primarily driven by market forces, the reduction in intra-regional tariffs has encouraged multinationals to reconfigure their production networks in Asean.

This is particularly important for some sectors, such as the automobile industry, as the production structure of this industry can be spliced into 20,000 to 30,000 parts.

Global automobile producers such as Toyota have utilised intra-regional tariff reduction to organise and divide their production of parts and components across Asean, based on the member states’ respective competitive advantages.

Of its 53 overseas manufacturing companies, a total of 11 are located across Asean, namely Indonesia, Malaysia, the Philippines, Thailand and Vietnam. Other global automobile producers have also followed suit.

Importing and exporting parts and components among the various production sites of host economies in Asean have increased intra-regional trade to 24 per cent in 2015.

The increase in FDI provided more jobs in host economies and improved their labour productivity, thereby contributing to economic growth.

Although it would appear that the AEC has given more benefits to the advanced Asean economies, the CLMV countries have not been left far behind. Labour-intensive FDI is already shifting steadily to the CLMV economies because of their relatively lower wages compared with the developed Asean economies.

Japanese outbound investment, in particular, is reportedly increasing in these countries, with Vietnam a leading recipient due to its better infrastructure and large domestic market. In February this year, Japan’s Panasonic broke ground for a new 3,000 square metre factory in Binh Duong in southern Vietnam to produce wiring devices and circuit breakers for the country and the rest of Asean. Again, employment creation and the steady expansion of manufacturing capabilities have fostered economic growth in the CLMV countries.

Home-grown enterprises from member countries have taken advantage of the growing Asean market to expand regionally. CIMB, United Overseas Bank, OCBC Bank and Maybank have made aggressive expansions outside their home countries into other Asean member states.

Singapore’s Super Group has established manufacturing facilities in five Asean member countries. Black Canyon from Thailand, Jollibee from the Philippines and Secret Recipe from Malaysia are other examples of home-grown firms that have expanded to other Asean member countries.

Low-cost carriers such as Malaysia’s AirAsia, the Philippines’ Cebu Pacific and Indonesia’s Lion Air will be able to increase the number of international flights from their home countries to the region because of the removal of restrictions on capacity and competition with the progressive opening up of Asean’s aviation market under the open-skies agreement.

Small and medium enterprises (SMEs) also stand to gain from the lower tariff as a result of the AEC.

Popular Cambodian coffee chain Brown Coffee has revolutionised coffee culture in a country that has yet to have an outlet from the otherwise-ubiquitous Starbucks chain. It has reaped the benefits when tariffs on imported coffee beans from Thailand — which hovered at around 20 to 25 per cent in 2015 — were reduced to a maximum of 5 per cent and will gain even more when this tariff is further brought down to zero by 2018. This is but one example of how the AEC can motivate innovative South-east Asian entrepreneurs to seize the opportunities presented by a regional hinterland.

Moving goods across borders is being progressively improved by ongoing efforts to simplify international trade procedures and processes. There is also increasing transparency on the rules and regulations governing cross border trade. The Asean Trade Repository was established in 2016 to provide online, free information in English on cross-border processes and procedures, including customs, in each member country. This contributes towards lowering the costs of trading across borders, thereby facilitating trade among member countries.

In recognition of the importance of external markets for Asean, the AEC is also globally connected with several non-member countries such as China, Japan, Korea, Australia-New Zealand and India, through bilateral free trade agreements (FTAs) between Asean and these non-member countries.

These five FTAs are the building blocks for a Regional Comprehensive Economic Partnership Agreement (RCEP), which is currently being negotiated. The RCEP, when it is concluded, will have 16 member countries that together account for about half of the world’s population, 30 per cent of global GDP and 25 per cent of world exports.

More gains from the AEC can be expected if Asean can successfully overcome its implementation challenges and close the gap between aspired goals and actions taken. This is especially important in the elimination of non-tariff barriers that have replaced tariff barriers in hindering regional trade.

Domestic regulations that control the supply of service providers in each member country continue to restrict the entry of both domestic and foreign service providers. Harmonising regulations and removing regulatory barriers are vital for promoting trade in services as Asean member countries gradually shift from manufacturing towards the production of services.

Improving the physical connectivity through infrastructure and info-structure development is also equally important to smoothen the movement of goods and services.

Likewise, the aspired goal of a free movement of skilled labour requires Asean to overcome the remaining obstacles in the intra-regional mobility of skilled labour, such as constitutional restrictions as well as complex and opaque employment visa requirements and procedures.

Asean must therefore make good its outstanding promises in order for the region to realise its full potential as an economic community of substance and significance by 2025. This will require individual member states to invest political capital to implement the necessary economic reforms so as to reap the bountiful harvest that the AEC promises.

 

ABOUT THE AUTHOR

Dr Tham Siew Yean is Senior Fellow at Iseas-Yusof Ishak Institute. This is the first of a series of commentaries TODAY is running to mark the 50th anniversary of Asean this month.

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