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Free trade agreements

Is it realistic to achieve the ASEAN Economic Community (AEC) by 2025?

Published 27 June 2023

As an intergovernmental organization formed to promote regional cooperation, ASEAN took on new challenges when it decided to move toward a European-style common market by 2025. While there were building blocks, the wide economic development gap between member states remains one of the biggest challenges to implement the blueprint.

The Association of Southeast Asian Nations Economic Community (AEC) was launched in 2003. It envisioned a highly integrated, inclusive, and resilient regional economy by 2025.

References to the AEC in the 2003 ASEAN Concord would suggest that its eventual goal was to realize a European-style common market with “free movement of goods, services, investments and skilled labour”.

Can this lofty goal be achieved in the next two years?

According to the AEC Blueprint, a ten-year implementation plan (2016-2025), the AEC will have achieved five key milestones by 2025: i) a highly integrated and cohesive economy; ii) a competitive, innovative, and dynamic ASEAN; iii) enhanced connectivity and sectoral cooperation; iv) a resilient, inclusive people-oriented, and people-centered ASEAN; and v) a global ASEAN.

As an intergovernmental organization formed to promote regional cooperation, ASEAN moved into uncharted territory when it decided to establish the AEC. But there were building blocks. Over the years, ASEAN member states have signed economic agreements with each other to advance economic integration. These legally binding agreements include the ASEAN Trade in Goods Agreement (ATIGA), ASEAN Comprehensive Investment Agreement (ACIA), and ASEAN Trade in Services Agreement (ATISA), as well as other free trade agreements (FTAs) with major trading partners. ASEAN member states have also signed Mutual Recognition Arrangements (MRAs) to facilitate the greater movement of professionals and skilled labor in the region.

More recently, ASEAN signed a regional trade agreement (RTA) with its major trading partners Japan, China, Korea, Australia, and New Zealand, called the Regional Comprehensive and Economic Partnership (RCEP). This RTA, which came into force on 1 January 2022, will put together ASEAN’s existing FTAs with these five trading partners into a single regional framework to become one of the world’s largest FTAs. RCEP with its relatively straightforward 40% rules of origin (ROO) is expected to help revitalize global supply chains which had been disrupted by the Covid pandemic. There are currently plans to further institutionalize RCEP by establishing a stand-alone secretariat to oversee the implementation of the RTA and support ASEAN’s economic integration agenda.

Implementing the AEC blueprint

The implementation of the AEC Blueprint appears to be progressing well. The mid-term review of the AEC 2025 Blueprint, from 2016 to 2020, reported slightly more than half (54%) of its initiatives have been completed, with another 34% in progress. Unfortunately, the final year of the mid-term review in 2020 also coincided with the onset of the pandemic. Border controls, movement restrictions, and quarantine measures imposed at the height of the pandemic led to a significant drop in economic activities and domestic demand. Global supply chains were severely disrupted due to logistic bottlenecks.

As ASEAN member states rebuild their battered economies, it has become more important to review the key components of the AEC and examine areas that need to be expedited. For instance, as borders open, the implementation of the Master Plan on ASEAN Connectivity (MPAC) needs to be hastened. Given that MPAC’s three pillars of physical, institutional, and people-to-people connectivity are essential to advance economic integration, there should be better coordination among government agencies of member states in the implementation of MPAC and the AEC Blueprint.

With the acute shortage of skilled labor in many ASEAN member states, MRAs for professionals and skilled workers need to be fast-tracked to address these challenges. Supporting greater business mobility is just as important. One way to advance this is to adopt APEC’s Business Travel Card (ABTC) scheme which facilitates freer movement of business professionals across the Asia-Pacific Economic Cooperation region through simplified or visa-less requirements and dedicated immigration checkpoints. ASEAN should also consider building a closer working relationship with its business community as the private sector can play an important role in job skills upgrading and facilitating greater labor mobility of skilled workers.

Moreover, given the rapid changes in the post Covid environment, the AEC Blueprint needs to pay closer attention to new and emerging challenges faced by the region such as digital transformation (including the accelerated adoption of artificial intelligence), climate change, job upgrading, and reskilling. Looking ahead, the global economic landscape has become increasingly uncertain due to persistently high inflation, geopolitical tensions (including the war in Ukraine and US-China rivalry), and banking sector fragility. Against this backdrop, the AEC Blueprint should be fine-tuned to include more initiatives that support macroeconomic and financial stability.

Narrowing the development gap

One of the biggest challenges to realize the AEC is the wide economic development gap that continue to persist among its ten member states. This gap is often referred to as a “two-tier ASEAN” in which there exists an economic divide between the older member states of Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, and Thailand (ASEAN-6) versus the newer less-developed members Cambodia, Myanmar, Laos, and Vietnam (CLMV). To illustrate this huge disparity, the two richest member states Singapore and Brunei Darussalam post gross domestic product per capita at US$72,400 and US$32,383 respectively, while the poorest two are Cambodia (US$1,603) and Myanmar (US$1,314). Related to this is a “two-speed ASEAN” or “two-track ASEAN” where the CLMV countries are given more time to implement economic initiatives, particularly on trade and investment liberalization and facilitation.

The Initiative for ASEAN Integration (IAI) which was launched more than two decades ago by ASEAN to narrow the economic gap has been largely unsuccessful due to the ineffective implementation of its work plans over the years. Like the AEC Blueprint, the next IAI work plan needs to take into account the impact of the pandemic on less-developed member states and to include more relevant capacity-building initiatives, such as digital skills training and financial literacy. Growing income inequality around the world, which has been exacerbated by the Covid-19 pandemic, would mean that efforts to achieve economic convergence among member states should be taken more seriously by ASEAN policy-makers.

Rising trade protectionism

Though ASEAN has a good track record in trade liberalization (eliminating tariffs and other trade related barriers), there are concerns of rising trade protectionism in recent years. For instance, rather than consulting with other ASEAN member states, Malaysia and Indonesia imposed temporary export restrictions on chicken and palm oil respectively last year. ASEAN’s Dispute Settlement Mechanism (DSM) has never been used by member states. Given the challenging economic environment over the next few years, trade disputes could rise as ASEAN governments give more priority to domestic issues compared to regional cooperation. Hence, institutional reforms such as revamping the DSM to make it more workable and empowering the ASEAN Secretariat to play an honest broker role over trade disputes should be on the AEC agenda.

Realistic AEC by 2025 and next steps

Given that the AEC deadline is just some two years away, ASEAN is unlikely to establish a EU-style common market by 2025. In fact, this was probably never the intention of ASEAN leaders when the idea of creating an economic community was mooted more than two decades ago. Even a customs union, which is the next step up the economic integration ladder, was never on the table for discussion among ASEAN policymakers.

It would therefore be more realistic to see the AEC by 2025 as a comprehensive free trade area that is plugged into global markets and supply chains through its free trade agreements like RCEP. Most of the necessary building blocks are in place. From the ASEAN perspective, achieving the strategic goal of a regional economy where there is “free movement of goods, services, investments and skilled labor” is achievable without the need for a common market or a customs union. ASEAN’s oft-criticized low intra-regional trade figure – about a quarter of total ASEAN trade – is more a reflection of how open most ASEAN economies are to trading with the rest of the world as well as the strong presence of multinational corporations (MNCs) and their global value chains in the region.

At the same time, there is clearly unfinished work in the implementation of the AEC Blueprint and there is an urgent need to significantly revise the blueprint to capture emerging challenges facing the region. In this regard, it will be more impactful to have more frequent reviews of the AEC Blueprint to fine-tune targets and introduce new initiatives. The ASEAN Secretariat should also be given more resources to monitor the progress in implementing the blueprint.

The AEC is often referred to as a “journey” which makes it a rather convenient way to move the goal posts and delay deadlines if they are not met. In fact, ASEAN policymakers are already starting to work on a new post-2025 AEC Blueprint, with the possibility of an even longer timeline than ten years. Even though the pandemic is now over, the global economic architecture has already changed dramatically and there will undoubtedly be future shocks that will impact the region.

ASEAN needs to be better prepared to anticipate the challenges ahead as it prepares the next AEC blueprint. The project will otherwise fail if it’s business as usual.

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Denis Hew

Prior to taking up his current appointment as Senior Research Fellow at Singapore's Lee Kuan Yew School of Public Policy, Dr Denis Hew was Director of the APEC Policy Support Unit (PSU) from 2011 to 2022. PSU is the research arm of the APEC, which is a regional grouping that promotes trade and investment liberalisation and facilitation in the Asia-Pacific region.

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