Commentary: How Asean Creates Trade History

BY :WOLFGANG LEHMACHER

JUNE 04, 2016

In late 2015, the Association of Southeast Asian Nations (Asean), founded on August 8, 1967 and which is promoting economic and political cooperation among the ten Southeast Asian member states, has established the Asean Economic Community (AEC). The most important pillar of the Asean Community became official on January 1, 2016. The AEC will involve deeper coordination in politics, economics, society, security and culture across the Southeast Asia region.

The goal of the AEC is to move toward a globally competitive single market and production base with free flows of goods, services, labor, investments and capital across the alliance, which comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

On November 22, 2015, the ASEAN Leaders adopted the AEC Blueprint 2025, providing the directions for the next phase from 2016 to 2025. Five characteristics support the vision for the AEC: (1) a highly integrated and cohesive economy; (2) a competitive, innovative and dynamic Asean; (3) enhanced connectivity and sectoral cooperation; (4) a resilient, inclusive, people-oriented and people-centred Asean and (5) a global Asean. Although meeting the AEC integration timetable has been a struggle for each of the members, many companies have already approached Asean as one region.

One timely impact is the Asean Single Window (ASW), the regional initiative to seamlessly move goods across all borders. As the Asean countries are very different, capturing the full economic potential requires a common vision. Even more so as Asean can only proceed at the behest of national governments, a mechanism that might lead to slow and gradual progress.

ASEAN is one of the biggest success stories of modern economy. In 2014, Asean was the seventh largest economic power in the world and the third largest in Asia, with a combined GDP of $2.6 trillion — an economy larger than India.

Between 2007 and 2014, Asean trade increased by nearly $1 trillion as Intra-Asean trade comprises the largest share (24 percent), followed by trade with China (14 percent), Europe (10 percent), Japan (9 percent) and the United States (8 percent). During the same period, foreign direct investment (FDI) rose from $85 billion to $136 billion and in share to the world from 5 to 11 percent. With 622 million people Asean is the world’s third largest market, which has behind China and India the third largest labor force.

The launch of the AEC needs to mark not the end but the beginning of another dynamic process. Asean has to boost intra-regional trade to reduce the vulnerability to external shocks. This requires a common regulatory framework to address infrastructure gaps and the simplification of administrative policies, regulations and rules. Only 50 percent of ASEAN businesses have utilized tariff reductions set out in the Asean's regional free trade agreement (FTA). Although tariffs are in decline, non-tariff measures (NTMs), such as health and safety regulations, licenses and quotas are on the rise and need to be addressed.

Provided the agreement is managed well over the next decade, the AEC could boost the region’s economies by 7.1 percent by 2025 — compared to the 5.4 percent Asean GDP growth from 2004 to 2014 — and, generate 14 million additional jobs. This finds the study “ASEAN Community 2015: Managing integration for better jobs and shared prosperity” conducted by the International Labor Organization together with the Asian Development Bank.

The AEC is not the only agreement dealt with in the region. Three months before the kick-off of the Asean Community, four Asean countries Brunei, Malaysia, Singapore and Vietnam signed up to the Trans-Pacific Partnership (TPP) — five others, namely Cambodia, Indonesia, Laos, the Philippines and Thailand are interested to join the TPP as well. The TPP is a binding agreement, connecting Asian countries to North American and Latin American economies. While countries with high export potential, such as Malaysia and Vietnam, are expected to benefit significantly from TPP, countries that did not sign the agreement risk to lose out — with represents a potential disruptive effects on Asean due to trade and investment diversion.

Once all agreements are in effect, Singapore and Vietnam are the only two Asean countries which would have access to Europe through an FTA, the US through TPP and to Asia through the AEC and the RCEP.

However, the Asean economies currently not included in the TPP might at the end appreciate that the supply chain is not limited to Asean but linked to the world’s largest economy — through the Asean TPP signatories. However, the high standards required by the TPP represent hurdles, which pressure first of all Asean TPP members to enhance practices — in form of better rules and regulations, the improved quality of production et cetera. China, the world’s second largest economy and also not part of TPP, is in the process to form its own bloc. The Regional Comprehensive Economic Partnership (RCEP), which comprises Asean, Australia, China, India, Japan, South Korea and New Zealand would provide access to another major economic bloc.

The situation is not without complexities and I’m looking forward to discuss the challenges during the World Economic Forum on Asean on June 1 and 2 in Kuala Lumpur. Nevertheless, through the entry routes to the different blocs, the AEC might eventually unleash significant unforeseen potential for the Asean countries capturing the opportunity, once TPP and RCEP — with approximately 40 percent and 30 percent of global GDP respectively — will come into force.

Wolfgang Lehmacher is head of supply chain and transport industry at the World Economic Forum.

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