ASEAN Economic Community by 2015: Transforming Vision to RealityTransforming Vision to Reality

Dr Denis HewSenior Fellow and Coordinator

Regional Economic Studies Programme

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ISEAS Singapore

The ASEAN Economic Community At the Bali Summit in October 2003At the Bali Summit in October 2003,

ASEAN leaders agreed to integrate their economies and establish an ASEAN

i C i b 2020Economic Community by 2020. Deadline accelerated to 2015 (Cebu

Summit)Summit). The AEC envisaged to be a single market

and production base where there is free flow pof goods, services, investments, freer flow of capital and skilled labour.

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ASEAN Economic Integration Basic idea of AEC is about achieving aBasic idea of AEC is about achieving a

higher level of regional economic integration that what exists today.

Consistent with the economic aspect of the Consistent with the economic aspect of the ASEAN Vision 2020 envisage a stable prosperous, highly competitive economic

iregion. The AEC is a logical extension of existing

economic initiatives, building on AFTA, , g ,AIA and AFAS

Final goal of AEC connotes an European style common market is this possible?

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style common market is this possible?

Rising Competition

2003 McKinsey study finds that most ASEAN countries no longer competitive - mediocre growth rates, low productivity, problems g , p y, pmoving up the value chain

FDI has played a major role in this regions economic development over past 3 decades..economic development over past 3 decades.. but there is now fierce competition for FDI (China and India)

Middle income countries like Malaysia andMiddle income countries like Malaysia and Thailand appear stuck in the middle

But there is a lack of urgency (despite the global crisis) too wrapped up with domestic

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global crisis) - too wrapped-up with domestic political problems

FDI Inflows to China and ASEAN

70,000

80,000

90,000

40,000

50,000

60,000

S$ m

illion

s

10,000

20,000

30,000US

01980 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007

ASEAN China

5

ASEAN China

Source: UNCTAD

FDI Inflows to ASEAN ex-SingaporeFDI Inflows to ASEAN ex-Singapore and China

70 000

80,000

90,000

40,000

50,000

60,000

70,000

$ m

illio

ns

10,000

20,000

30,000US

$

01980 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007

ASEAN ex-SIN China

6Source: UNCTAD

Why ASEAN needs to integrate? Economic integration will take advantage ofEconomic integration will take advantage of

complementarities between ASEAN economies to achieve economies of scale, i d i l ffi i d d i iindustrial efficiency and productivity.

Revitalise regional production networks and strengthen the trade FDI nexusstrengthen the trade-FDI nexus

Alternative production platform, MNCs will diversify risk and not put all eggs in one y p ggbasket

ASEAN not starting from scratch there b ildi bl k i l

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are building blocks in place

ASEAN Free Trade Area (AFTA)

By 2003 AFTA implemented for ASEAN By 2003, AFTA implemented for ASEAN-6. Tariffs for over 99% of products in CEPT IL now between 0-5%.

Vietnam in 2006, Laos and Myanmar by 2008 and Cambodia by 2010.

Target 0% by 2010 (ASEAN 6) and by Target 0% by 2010 (ASEAN-6) and by 2015 (CLMV).

But AFTA not fully functioning, non-tariffBut AFTA not fully functioning, non tariff barriers (NTBs) still being tackled

Intra-ASEAN trade remains relatively low d tili ti t f CEPT b l 10%

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and utilization rate of CEPT below 10%

Non-Tariff Barriers

Cutting tariffs is the easy part tackling NTBs is ag y p glot harder.There are many types of NTBs. Cross-border NTBsviz. cumbersome custom procedures. Behind thepborder technical barriers viz. technical regulationsfor safety and health reasons, and product qualitystandards and testing procedures etcNTBs remains a major impediment to freer flow ofgoods and services across ASEAN.Studies find a wide variety of persistent NTBs evenff i h i i k d f faffecting the priority sectors earmarked for fast-

track integration.Hence, eliminating NTBs would be crucial for

f l i i t ti9

successful economic integration.

Intra-ASEAN Trade Share

24 24.7 24.1 24.426.6 26.7 27.2 27.2

25

30

17.920.3

18.8

15

20

%

10

5%

0

5

1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006

10Source: ASEAN Secretariat, Kawai & Wignaraja 2008

Total Intra ASEAN tradeVietnam

Total Intra-ASEAN trade

3 0000

400000

Thailand

Singapore

250000

300000

350000

n U

S$

ThePhilippinesMyanmar

100000

150000

200000

in m

illio

n

Malaysia

Lao PDR

0

50000

100000 Indonesia

Cambodia

B i

1993

1995

1997

1999

2001

2003

2005

Year

BruneiDarussalamASEAN 6

11Source: ASEAN Secretariat (2007)

ASEAN Investment Area (AIA)

G ti f ti l t t t t ASEAN Granting of national treatment to ASEAN investors by 2010, all investors by 2020ASEAN FTA b d ASEANs FTA partners may be granted national treatment by 2010

f i But this makes no sense! If ASEAN isnt competitive, shouldnt the AIA be open to ll i t ?all investors now?

Sectoral coverage limited, 2/3 of most tt ti t l d d

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attractive sectors excluded

FDI flows to ASEAN by Source (1995-2005)

ASEAN 4 2% US , 18.4%Asian NIEs,

29.2%

ASEAN, 4.2%

EU, 29.1%Japan, 19.1%p ,

13Source: UNCTAD

ASEAN Framework Agreement onASEAN Framework Agreement on Services (AFAS)

Suppose to be more liberalising than WTO GATS, AFAS covers air transport, business services, construction, financial services, maritime transport, , , p ,telecommunications and tourism.

But more AFAS is more GATS than GATS +, progress has been slow and uneven appliedprogress has been slow and uneven applied ASEAN-X to speed-up the process

MRAs is a recent development that should facilitate f f f i l i ifreer movement of professionals. MRAs in nursing and engineering services concluded. Others being negotiated include architecture, accountancy,

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surveying, medical practitioners.

AEC Economic MeasuresO th t f ASEAN h i iti t d Over the past few years, ASEAN has initiated a slew of initiatives to kick-start the AEC project. These include:Improvements in the CEPT Scheme ROO Transparency of NTMs and eliminate barriers to tradetradeFaster customs clearance and simplified customs proceduresA l t d i l t ti f MRAAccelerated implementation of MRAsHarmonization of standards and technical regulations

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g

Fast-Track Integration of 12 Priority Sectors

Wood-based ProductsAutomotives

ICTHealthcare

Rubber-based productTextiles & Apparels

Air-TravelTourismpp

Agro-based ProductsFisheries

Logistics (endorsed in Fisheries

Electronics

(2006)

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More Effective ASEAN DSM One of the most important recommendation wasOne of the most important recommendation was

the creation of a more effective ASEAN Dispute Settlement Mechanism.C DSM b d li i ll Current DSM never been used too politically charged.

If nothing was done to make the existing DSMIf nothing was done to make the existing DSM more workable, the number of unresolved cases is liable to accumulate.A dibl DSM ld i kl d ffi i tl A credible DSM would quickly and efficiently resolve any economic disputes among member countries and facilitate the efficient

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implementation of economic agreements.

The European Model? The European Economic Community (EEC) was p y ( )

established under the Treaty of Rome in 1957 by original 6 countries.

The Europeans had a clear vision and roadmap i.e. p pto establish a customs union and provided the basis for a common market.

Today the European Union (EU) is a common market and has a common currency (Euro).

Not ideal model for ASEAN but there are valuable lessons from the European experience e.g. Institutional development started earlyHuge resources allocated to narrow the development gap among its members

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p g p g

Concept of a Single MarketPeter Lloyd finds that the conditions toPeter Lloyd finds that the conditions to create a single market is very definite and strict - will require coverage of all measures to remove discrimination against ASEANto remove discrimination against ASEAN suppliers of goods, services and factors.In this regard, Lloyd finds that ASEAN still h l t t hi EU thas a long way to go to achieve an EU-type single market. It will also require a fundamental change in q gthinking by ASEAN economic policy-makers especially in the way they approach economic integration.

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economic integration.

Challenges faced by ASEAN Problems with implementation andProblems with implementation and

coordination of economic commitments Progress made in integrating priority sectors

uneven and slow (wrong approach?)uneven and slow (wrong approach?) Changing the ASEAN Way of doing things

which is based on consensus may need to be yconsidered

ASEAN -X and 2+X as tools to expedite the integration processthe integration process

Competition from China and India will only intensify yet member countries still compete

th th l t h th20

rather than complement each other

Narrowing the Development Gap Economic divide is most pronounced between ASEAN Economic divide is most pronounced between ASEAN-

6 and the CLMV Economic integration should benefit all member

countries and must not be perceived as a zero sumcountries and must not be perceived as a zero sum game where there are winners and losers

Appropriate resources should be allocated to bridge the economic divide and ensure the full participation of lesseconomic divide and ensure the full participation of less developed countries in the integration process.

New strategy for the IAI, new innovations needed to fund NDG programsfund NDG programs

In the EPGs report on the ASEAN Charter, it was noted that ASEANs ability to achieve its long-term economic goals would depend on how the development

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economic goals would depend on how the development gap is addressed today

Weak Institutional Structure

ASEAN till i t i l ASEAN still maintains a very loose institutional structure. This has slowed down the integration process

Need for greater institutional development to expedite integration.

ASEAN Charter will strengthen ASEANs ASEAN Charter will strengthen ASEAN s institutional structure by setting up a more rule-based/legalistic framework M fl ibl h h f More flexible approach to the concept of national sovereignty, more open to the idea of pooled sovereignty esp. over economic

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p g y pmatters

ASEAN Charter

All b h ifi d h ASEAN All members have ratified the ASEAN Charter.

The Charter should provide ASEAN not The Charter should provide ASEAN not only with a legal personality but also set out the long-term strategic direction for the region.

Not a perfect document or panacea to ASEANs current problemsASEAN s current problems

But a workable Charter is an important step and should advance the AEC process

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and should advance the AEC process

AEC Blueprint

Th AEC bl i t l l h d t th The AEC blueprint was also launched at the Singapore ASEAN Summit.

The implementation of the AEC blueprint which sets out the approach, targets and milestones leading up to 2015 is absolutely critical.

This includes getting member countries to meet theThis includes getting member countries to meet the blueprints demanding targets and deadlines over the next 7 years.

The challenge lies in getting member countries to The challenge lies in getting member countries to comply with their economic commitments. This is why the ASEAN Dispute Settlement Mechanism (hitherto never used) has to be made workable

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(hitherto never used) has to be made workable

AEC Blueprint: 4 Pillars

1 Si l M k t d P d ti B1. Single Market and Production Basefacilitate free flow of goods, services,

investments, capital and skilled labour2. Economic Competitiveness

competition policy, IPR, consumer protection, infrastructure development etcprotection, infrastructure development etc

3. Narrowing the Development DivideIAI, SME development, sub-regional

economic cooperation (BIMP EAGAeconomic cooperation (BIMP-EAGA, IMT-GT, AMBDC)

4. Integration into the Global Economy

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g yASEAN+1 FTAs

Recent AEC-Related Developments

S h i h b ildi bl k f h Strengthening the building blocks of the AEC - ASEAN Trade in Goods Agreement (ATIGA) and ASEAN Comprehensive(ATIGA) and ASEAN Comprehensive Investment Agreement (ACIA) signed in Dec 2008.

Developing a scorecard mechanism to track the implementation of AEC Blueprint commitmentscommitments

ASEAN-India and ASEAN-CER FTA negotiations concluded. Currently

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g ynegotiating an ASEAN-EU FTA.

AEC by 2015

EU t l k t t li ti EU-style common market not realistic, no political desire and no resources

But ASEAN can still be a highly g ycompetitive economic region

AFTA Plus arrangement where there is a fully functioning free trade area withfully functioning free trade area with minimal NTBs is feasible by 2015

ASEAN as an FTA hub, most ASEAN+1 FTA (Chi J K I di )FTAs (China, Japan, Korea, India), ASEAN-CER (Australia, NZ) will be operational

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p

Concluding Remarks

AEC is a bold and ambitious project AEC is a bold and ambitious project. Crucial for the regions competitiveness and longer term economic sustainability.and longer term economic sustainability.

ASEAN is over US$1 trillion economy (if all GDP combined) and has about 570all GDP combined) and has about 570 billion consumers but attractive only if its integrated! g

ASEAN policy-makers will need to be flexible and far-sighted, political will

28needed to make tough decisions