The ASEAN Economic Community: can the reality match · PDF fileEY The ASEAN Economic Community...

The ASEAN Economic Community: can the reality match the vision?

Contents

3EY The ASEAN Economic Community |

1. Introduction 5

2. Context: a growing region 8 Gross domestic products in ASEAN 6 Foreign investment 12

3. The AEC vision 14 The road to 2015 14 The AEC blueprint 16 An ambitious blueprint 18

4. The AEC reality 21 Progress to date 21 The challenges ahead 22 What will the new AEC look like? 29

5. Is Indonesia ready for the AEC? 33 Strengths 33 Weaknesses 36 Opportunities 38 Threats 40

6. What will the AEC mean for foreign investors? 42

7. A continuing journey 46

8. Find out more 48


1 Introduction Welcome to The ASEAN Economic Community: can the reality match the vision?

In this publication, which builds on our earlier report ASEAN 2015 and beyond: Are German investors missing out?, we outline the growth story in the ASEAN region and set out the ASEAN’s ambitious plans for the ASEAN Economic Community (AEC) as it prepares to launch later this year.1

All 10 ASEAN member states have signed up to the blueprint for the AEC, which aims to create a tariff-free zone while setting a timetable for the removal of non-tariff barriers (NTBs) across the region.

Here, we review the progress toward greater economic integration in the region, and set out the future challenges – not least the difficulties in reducing NTBs. We focus in particular on ASEAN’s most populous country, Indonesia, and ask if it is ready for the AEC.

And, finally, as the growth of ASEAN member states makes the region particularly attractive for foreign investors, we ask what the AEC means for investors.

1 ASEAN 2015 and beyond: Are German investors missing out? (AHK-ASEAN, EY and the German Embassies in ASEAN, March 2015).

Chart 1: The member states of the ASEAN Economic Community

Myanmar51 million inhabitants63e billion US$ GDP1.222 US$ GDP per capita

Thailand68 million inhabitants374 billion US$ GDP5.518 US$ GDP per capita

Cambodia15 million inhabitants17e billion US$ GDP1.071 US$ GDP per capita

Singapore6 million inhabitants308e billion US$ GDP55.307 US$ GDP per capita

Indonesia254 million inhabitants889 billion US$ GDP3.504 US$ GDP per capita

6 | EY The ASEAN Economic Community

Philippines108 million inhabitants285 billion US$ GDP2.646 US$ GDP per capita

Laos7 million inhabitants11e billion US$ GDP1.716 US$ GDP per capita

Vietnam93 million inhabitants186e billion US$ GDP1.991 US$ GDP per capita

Brunei Darussalam0.4 million inhabitants15e billion US$ GDP35.730 US$ GDP per capita

Malaysia30 million inhabitants327 billion US$ GDP10.871 US$ GDP per capita

Source: Populations of 2014 from The World Factbook; GDP and GDP capita estimates of 2014 based on IMF data and EY assumptions.



2 Context: a growing regionGross Domestic Product (GDP) in ASEAN After the recent boom in efficiency-driven markets, particularly Brazil, Russia, India, China and South Africa (BRICS), attention is now shifting to the ASEAN region.

In the past five years, the GDP of ASEAN has grown by 5.6% on average. The International Monetary Fund (IMF) predicts GDP growth will remain above 5% during 2015–2020 for the ASEAN region.

Already, ASEAN accounts for more than 5% of the world’s GDP. This proportion is rising: ASEAN created US$2.4 trillion of nominal GDP in 2014, about two-thirds the GDP of Germany and just under half that of Japan (Chart 2).

Of the 10 ASEAN member states, Singapore has the highest GDP per capita, at US$55,182 (Chart 1). Indonesia’s GDP per capita is more than 14 times smaller, at $3,745, but the country accounts for 36% of the total GDP of the ASEAN region (Chart 2).


2 Japan

US$4.9t

GermanyUS$3.9t

China(mainland)US$10.4t

IndiaUS$2.0t

TaiwanUS$0.5t

ASEANUS$2.4t

AustraliaUS$1.4t

SouthKorea

US$1.4t

Thailand15%

Malaysia13%

Singapore12%

Vietnam8%

Philippines11%

Brunei1%

Laos0%

Indonesia36%

Cambodia1%

Myanmar3%

GDP of ASEAN countries, 2014

Chart 2: ASEAN GDP compared to major Asia-Pacific economies and Germany, 2014


Legend: t – trillionSource: International Monetary Fund (IMF)


As a result, industrial nations such as Germany, the US and Japan face slightly decreasing shares of global GDP based on purchasing-power-parity (Chart 3). Such changes will eventually have a greater effect on the world economy.

Chart 3: GDP based on purchasing-power-parity (PPP) share of world total

GD

P ba

sed

on P

PP in

%

25

20

15

10

5

0

Source: IMF World Economic Outlook Database, April 2015

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020


Foreign investment Foreign direct investment (FDI) into ASEAN continues to grow, and now rivals FDI into China (Chart 4).

Japanese investors, for example, have already shiftedFDI from China to ASEAN. According to the Japan External Trade Organization (JETRO)2, FDI by Japanese investors into China in 2013 totalled US$9.1 billion, a dip of 32.5% from 2012; compared to US$23.6 billion invested in ASEAN in the same year, marking an increase of 120%.2

German companies are increasingly interested in the ASEAN market: In our recent report, ASEAN 2015 and beyond: Are German investors missing out?, 75% of the 135 German companies we interviewed plan either to increase their FDI or to make their first investment in ASEAN in the coming years.3

Some 65% see the implementation of the AEC as a factor that will increase their willingness to invest in the region in future.

2 2014 JETRO Global Trade and Investment Report – On making Japan a base for international business circulation (JETRO, August 2014).

3 ASEAN 2015 and beyond: Are German investors missing out? (AHK-ASEAN, EY and the German Embassies in ASEAN, March 2015).


Chart 4: Value of annual foreign direct investment inflows (US$ million)

140,000

120,000

100,000

80,000

60,000

0

Source: UNCTAD World Investment Report 2015

40,000

20,000South Africa

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

ASEANChina

Brazil

IndiaRussia

ASEAN overtakes China


3 The AEC visionThe road to 2015 The proposed launch of the AEC at the end of 2015 is a culmination of more than two decades of economic integration.

1992 ASEAN Free Trade Area (AFTA) agreement signed• This establishes the Common Effective Preferential

Tariff scheme (CEPT): customs tariffs to be reduced to 0–5% within 15 years

1998 ASEAN Investment Area (AIA) framework signed• Foreign investors to receive “national treatment”

2003 “Bali Concord II” signed, agreeing to establish the AEC on three pillars:• Economic Community (AEC)• Political-Security Community• Socio-Cultural Community


3 2007 AEC blueprint adopted • Creates roadmap for setting up the AEC in 2015

2009 ATIGA (ASEAN Trade in Goods Agreement) signed• Enhances CEPT scheme

2015 AEC to take effect on 31 December 2015


The AEC blueprint The ASEAN Community comprises three pillars: • Economic Community (AEC)• Political-security Community• Social-cultural Community

Characteristics and elements of the Economic Community (AEC) involve:

1. Establishing a single market and production base. The aim is to break down barriers to trade and investment, and to free up the movement of skilled workers.

2. Developing a competitive economic region. This will include:

• Breaking down non-tariff barriers (NTBs)• Reducing transport costs by developing

infrastructure• Encouraging innovation by enforcing intellectual

property rights more uniformly


The AEC will in theorybe the “strongest” Asia-Pacific FTA

3. Building a region characterized by equitable economic development. There will be support for small businesses, as well as technical assistance and capacity-building programs to help the region’s less developed economies.

4. Integrating ASEAN into the global economy.


An ambitious blueprint There are currently 119 free trade agreements (FTAs) in the Asia-Pacific region. Most of them – including AFTA – are considered “weak” agreements, with regard to customs, controlling mechanisms and their many exceptions.4

The AEC will be much more ambitious:

• Customs: The blueprint envisages a general tariff-free zone without exceptions. The common objective for ASEAN member states is “0% tariffs on 100% of traded goods and services”.

• Non-tariff barriers: The ATIGA, signed in 2009, envisages that countries remove NTBs according to the following schedule:• ASEAN-6 countries (Brunei Darussalam, Indonesia,

Malaysia, the Philippines, Singapore and Thailand): 2015

• CLMV countries (Cambodia, Laos, Myanmar, Vietnam): 2015, with flexibility until 2018

4 The ASEAN Economic Community – A Work in Progress, p. 25 (Asian Development Bank/Institute of Southeast Asian Studies, 2013).

“ASEAN recognizes that the group is far more influential collectively than individually. The launch of the AEC at the end of 2015 will forge closer ties between other-wise highly diverse nations.”

Dr. Georg Witschel, Ambassador of the Federal Republic of Germany to Indonesia



4 The AEC realityProgress to date In some ways, ASEAN is already well down the road to economic integration.

Tariff rates are almost zero on 99% of goods traded among ASEAN-6 countries (Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore and Thailand), although much work remains to be done on non-tariff barriers.

CMLV countries (Cambodia, Myanmar, Laos and Vietnam) are set to abolish all import tariffs by the end of 2015, with a three-year grace period on up to 7% of items.5

However, there are significant challenges ahead if the AEC is to be implemented successfully.

5 Source: Institute of South-East Asian Studies (ISEAS) 2013.


The challenges ahead Challenge 1: Slow reduction of NTBsMany important trade barriers – such as import limitations, mandatory registration or licensing of products, standardized specifications, admissions processes and customs handling – are “non-tariff” barriers; that is, they do not involve a customs tariff. Countries use them to protect their local markets by complicating market access for foreign providers. This means that, with regard to regional integration, their impact is as important as customs tariffs.

Reducing NTBs in ASEAN is a gradual process. This is often a result of poor past experience; e.g., after the ASEAN-China FTA, some local companies in Indonesia were put out of business by cheaper producers from China. It can also take a long time to make changes, even when the intention and willingness are there, because of the lack of firm and consistent controlling mechanisms in many ASEAN countries.

Indeed, some countries, such as Indonesia, have not reduced their NTBs but have actually set up more regulations to protect their domestic economies.6 6 Source: Economic Research Institute for ASEAN and East Asia (ERIA).

“The issue right now is not so much about wider trade liberalization, but rather about non-tariff measures and technical barriers to trade, which are much more challenging to address than tariffs alone.”

Anders Jonsson, Policy Analyst: South East Asia, OECD



Challenge 2: Public perception of the AECAnother major challenge for the AEC is public awareness – or rather, the lack of it. Well over half (about 55%) of ASEAN SMEs do not know what the AEC is, according to a survey by the Institute of South-East Asian Studies (ISEAS) in 2013.7 In Indonesia, these numbers are even higher: more than three quarters (77%) of Indonesian SMEs do not know what the AEC is.

7 Institute of South-East Asian Studies, 2013.


Challenge 3: Power and resources of ASEANAlthough the plans for the AEC are promising, implementing them will be more difficult. ASEAN has no power or mechanism to ensure individual countries keep to their side of the bargain. The likelihood is that there will be plenty of sticking points, especially on politically sensitive issues, even if governments do recognize the economic benefits of the AEC.

Related to this are the ASEAN Secretariat’s limited resources. An article in The Diplomat recently noted that the ASEAN Secretariat’s total budget for 2013 was US$16 million, compared to approximately US$4.3 billion for the European Commission (EC) in 2012. The ASEAN Secretariat employed roughly 300 people, while the EC employed 34,000.8

8 http://thediplomat.com/2014/09/why-the-asean-economic-community-will-struggle.


Further hurdlesFurther challenges to the future of the AEC may be summarized as follows:

• Language barriers and cultural differences could influence future agreements and implementations, which might result in internal competitions.

• The increased movement of skilled workers across borders is likely to meet resistance.

• Infrastructure deficiencies, which raise the transport costs of doing business, will take years to address.

• Political instability and regulatory overkill, combined with a high incidence of corruption, may prevent ASEAN member states from integrating.

“It’s difficult. There are different languages, different systems and different ethnicities and very little homogeneity.”

Seng-Leong Teh, Partner, EY Indonesia and Singapore



What will the new AEC look like? The act of launching the AEC on 31 December 2015 will not transform the ASEAN region overnight. As long as the tariff-free trade plays a minor role compared to the individual diverse NTBs in ASEAN member states, the AEC will not become a true “single market”. If realized, the AEC could make ASEAN a common market, with free flow of goods, services, investment and labor – and freer, but not free, flow of capital.

“Free trade area with benefits”

How ASEAN General Secretary Le Luong Minh described the emerging AEC at a meeting with ambassadors of EU member states on 7 October 2014.


Indeed, ASEAN countries will still have issues creating a “common market”. Failure to meet the initial requirements within individual countries will prevent the AEC becoming what it is intended to be. The free flow of labor, for example, is today only accessible in eight occupational areas.

Initially the AEC will therefore be an economic alliance with a highly diverse group of member states that strengthens ASEAN’s competitiveness on a global scale, creating incentives for investors. There is already evidence of increased investment: FDI into Indonesia grew by 22.8% in Q1 2015.9

This increased competitiveness should lead to better global integration for the ASEAN region, which is likely to continue to improve and prosper.

9 http://www.indonesia-investments.com/news/news-columns/ domestic-foreign-investment-in-indonesia-on-the-rise-in-q12015/item5510.

“With ASEAN we have embarked on a longer journey. Even the new date of 31 December [2015] should be seen more as an aspirational milestone rather than a final deadline. Will everyone be 100% ready by then? No. But we definitely are on the move.”

William Chea, Partner, EY Thailand



5Is Indonesia ready for the AEC?Indonesia has the largest population in ASEAN, with 254 million inhabitants. As a “test case” of how the wider ASEAN might fare in the AEC, here we outline the strengths, weaknesses, opportunities and threats facing Indonesia, as the 2015 launch gets closer.

Strengths

• Indonesia’s vast population is an indisputable strength (Chart 5), as are its favorable demographics, with the average age being 29.2 years.

• Highly competitive wages.• The possibility of tariff-free trade with other ASEAN

member states, due to the launch of the AEC.• The 2014 Indonesian Government’s gross debt, as a

proportion of GDP, is just 25.0% compared to the G8 average of 108.6% (Canada, France, Germany, Italy, Japan, Russia, UK and US)10

10 IMF.


• Resistant and strong domestic market• Robust domestic demand makes up about two thirds

of GDP• Exports represent around 30% of GDP

• Natural resources (oil, natural gas, coal)• Strategic location• Indonesia’s current economic growth is forecast to be

above five percent per year until 2020 (Chart 6)11

300

250

200

150

100

0

Brune

i

Chart 5: Population of ASEAN member states in 2014

50

Singap

ore

Laos

Cambo

dia

Malays

ia

Myanm

ar

Thaila

nd

Vietna

m

Philipp

ines

Indon

esia

Source: The World Factbook

11 IMF.


15

10

5

0

−5

−15

Chart 6: Indonesia’s economic growth

−10

Sources: GDP annual growth data from World Bank (1980–2013) and estimates from IMF World Economic Outlook Database, April 2015 (2014–2020)

GD

P gr

owth

(in

%)

1980

1985

1990

1995

2000

2005

2010

2015

e

2020

e

Average over 14 years: 7.27% (1983–1996)

Average overpast 10 years: 5.79%(2005–2014)

Forecast growthbased on IMFestimate

Rarely influenced during financial crisisOil crisis

Asian financial crisis


Weaknesses Among ASEAN member states, Indonesia has the most restrictive NTBs; these add 30% on costs on more than half of imported goods.12 In addition to such cost drivers, Jakarta’s Tanjung Priok has the longest customs clearance time of any of the ASEAN ports (Table 1). Other weaknesses include:• Infrastructure deficiencies • Instable politics• Corruption• Risk of natural disaster• Severe environmental pollution • Language barriers

• Diverse population with more than 15 ethnic groups• Governance and bureaucracy• Poor education levels/educational system• Rising wages • High inflation • Stagnating productivity13

12 ERIA – AEC Blueprint Implementation Performance and Challenges: Non-Tariff Measures and Non-Tariff Barriers.

13 ILO Global Wage Database, ILO Trends Economic Models, January 2014.

14 Institute of South-East Asian Studies.


Table 1: Customs clearance for ASEAN ports14

Singapore 1–1.5 daysThailand (Laem Chabang) 1–1.5 daysPhilippines (Manila) 1–5 daysCambodia (Sihanoukville) 2 daysVietnam (Haiphong and Saigon) 2–3 daysMalaysia (Kelang) 2–3 daysMyanmar (Yangon) 3–5 daysIndonesia (Tanjung Priok) 4–7 days


Opportunities

• The ASEAN region’s middle-class population is predicted to double to 400 million by 2020.15 This is likely to herald a significant rise in demand for consumer goods.• Primarily benefiting investors in industries such

as e-commerce, health care, tourism and financial services.

• Companies are planning to operate more production hubs in Indonesia, especially in manufacturing and production industries (Chart 7).

• Tariff-free trade with other ASEAN member states as well as reduction of NTBs

• ASEANs numerous free-trade agreements with other partners (e.g., China, India, South Korea, Japan, Australia, New Zealand).

15 ASEAN 2015: Seeing around the corner in a new Asian landscape (Nielsen, 2014).


Brune

iLao

s

Cambo

dia

Myanm

ar

Vietna

m

Singap

ore

Thaila

nd

Philipp

ines

Malays

ia

Indon

esia

Chart 7: How many factories do you operate in ASEAN today? How many will you operate in five years?

Source: Economist Corporate NetworkResponse from 75 companies with manufacturing operations in ASEAN

Increased number of factories over the next five yearsNumber of factories today

54

79

11

90748170

51

24178

24

276301

0 0 0


Threats

• Empirical studies show that trade liberalization is highly beneficial to market actors. However, there are two important exceptions to this:• Local companies operating just above break-even

might be pushed out of the market;• State-owned enterprises, usually unaccustomed to

open markets, may be left behind (there are 139 state-owned companies in Indonesia – within ASEAN, only Vietnam has more).

• Investment conditions/prohibitions in certain business fields (Negative Investment List)16

• Inefficient implementation of investment plans for infrastructure development

• Indonesian economy depends heavily on commodity exports and lately faces changes:• Commodity cycle has passed its peak• Weaker demand especially of China and Japan• Current account deficit due to imports outstripping

exports (Chart 8) which puts high pressure on the currency with a trend of a weaker Rupiah

16 The Negative Investment List indicates which sectors are open to for-eign investors in Indonesia, and the percentage of foreign ownership permitted. (Source: www.bkpm.go.id).


• Dependence on monetary policy of the US Federal Reserve• If economic conditions tighten, consumers may be

less likely to spend

Chart 8: Indonesian current account

Numbers in billion US$Sources: World Bank

2009 2010 2011

2012 2013

10.65.1

1.7

−24.4−29.1


6 What will the AEC mean for foreign investors? From foreign investors’ point of view, the main opportunity from the launch of the AEC is that tariffs on goods and services will, in theory, be limited to those imported from outside the ASEAN region. Tariffs within the ASEAN countries will no longer apply.

By 2016, foreign investors with a production hub within the ASEAN region will largely benefit from the AEC arrangements. Investors may, for instance

• Concentrate production lines in a chosen ASEAN country, thus creating economies of scale, and then export the finished product tariff-free to other ASEAN countries as well as to ASEAN’s free-trade partners in the region (China, India, South Korea, Japan, Australia, New Zealand);

• Identify comparative advantages of individual ASEAN countries and then split the manufacturing process to different countries.


In our recent report, ASEAN 2015 and beyond: are German investors missing out?, 91% of the German investors we surveyed cited ASEAN’s internal market as a key factor driving them to invest.17 Most expected the implementation of the AEC to make ASEAN more attractive as a production hub and to simplify international trade.

Our survey showed that German investors are realistic about the AEC but recognize the opportunities – even if these may take time to develop.

17 ASEAN 2015 and beyond: Are German investors missing out? (AHK-ASEAN, EY and the German Embassies, March 2015).


Closer ties with Europe

Further in the future, there is also the possibility of an FTA between the EU and ASEAN.

According to research company Ecorys, for example, an ambitious “FTA Plus” agreement between the EU and ASEAN would lead to GDP growth of 0.23% inside the EU, and growth in ASEAN ranging from 3.66% in Indonesia to 15.27% in Vietnam. For the EU, missing out on what could be the fastest growing market in the next 5–10 years could be costly.

“Within ASEAN, different countries are beginning to establish their own competitive advantages. For example, Thailand is one of the automobile centers of Southeast Asia. The Japanese have brought their entire auto supply chain into Thailand, and are also exporting from Thailand into other countries in ASEAN.”

Seng-Leong Teh, Partner, EY Indonesia and Singapore



7 A continuing journeyThe launch of the AEC in late 2015, as discussed above, will not be the end of the journey to ASEAN economic integration. It will be just the latest step along that road. Many hurdles both intra-regional and national will continue to challenge on true economic union.

It is, however, likely to be a significant step: one that strengthens the region’s global competitiveness, leading to even further growth, and one that increases incentives for international investment. Despite the indisputable challenges to doing business in parts of ASEAN, at a time of lackluster growth in other regions, many international investors will feel that the potential reward is well worth the effort.

“10 states with 600 million potential consumers and workers bring an infinite amount of business opportunities, especially in automotive, logistics and infrastructure.”

Thomas Wirtz, Partner, EY Indonesia



8 Find out moreFor more information, read ASEAN 2015 and beyond: are German investors missing out?.18 This March 2015 report is the result of cooperation between AHK-ASEAN, EY and the German Embassies in ASEAN.

The following online sources may also be useful:

The Association of Southeast Asian Nationswww.asean.org

ASEAN competition policy and lawwww.aseancompetition.org

Asia-Studies.comwww.asia-studies.com

Germany Trade & Investwww.gtai.de

Indonesia Investmentswww.indonesia-investments.com

Institute of Southeast Asian Studieswww.iseas.edu.sg

18 ASEAN 2015 and beyond: Are German investors missing out? (AHK-ASEAN, EY and the German Embassies, March 2015).


The Organisation for Economic Co-operation and Developmentwww.oecd.org

United Nations Conference on Trade and Developmentwww.unctad.org

World Bankwww.worldbank.org

ASEAN 2015 and beyond: Are German investors missing out?

In our report we comprise opportunities offered by the AEC; things you need to consider before entering the ASEANmarket; cultural, fiscal and legal obstacles you need to be aware of and other interesting questions. We present the results of a survey among 135 entrepreneurs in Germany, as well as our assessment of the ASEAN market.

Contacts

Contacts

Holger Seubert Head of Economic Department Embassy of the Federal Republic of Germany

Jl. M. H. Thamrin No. 1Menteng Jakarta Pusat DKI Jakarta 10310, Indonesia Tel: +62 21 3985 5141 [email protected]

Thomas Wirtz Partner, Transaction Advisory Services, Head of German Business Center PT Ernst & Young Indonesia

Indonesia Stock Exchange Building Tower 1, Level 13 Jl. Jend. Sudirman Kav. 52–53 Jakarta 12190, Indonesia Tel: +62 21 5289 5031 [email protected]

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