Talking Trade blog
Witnessing the birth of the ASEAN Economic Community (AEC)
Published 12 January 2016
The ASEAN Economic Community (AEC) became official on January 1, 2016. The launch of the AEC represents a high water mark on ASEAN’s decades-long quest to create a stable, more integrated region.
Many ASEAN members are enthusiastically promoting the region and AEC benefits by noting that the market size of the 10 member states collectively add up to US$2.6 trillion with over 622 million people. As a region, the Secretariat has noted that ASEAN is the third largest economy in Asia and the seventh largest in the world.
While there are multiple elements to the AEC, most firms are interested in promises to create a “free market for goods, services, investment, skilled labor and freer movement of capital.”
In general, in ASEAN, soaring rhetoric often obscures a rather less glamorous reality on the ground. Veteran watchers in the region will shrug knowingly and say, “Well, it’s the ASEAN Way—eventually they will get round to doing things properly and certainly, the potential is there.”
The language of the AEC suggests strong parallels with the European Union, but this was never the intention. ASEAN is not a common market, does not intend to pool sovereignty, and has a microscopically small institutional structure and matching budget to manage a complicated structure and many commitments.
So what has ASEAN accomplished and where does it go from here?
The primary benefit of ASEAN has been the elimination of tariffs on goods. This was largely finished in 2010, but note that there are still some gaps in coverage.
Tariffs cannot be viewed in isolation in a trade agreement without simultaneously considering rules of origin (ROOs). This is because it is possible to open a market completely at zero tariffs (duty free), but create such difficult or onerous rules of origin that hardly any products actually qualify for zero duties.
ROOs are necessary in a free trade agreement like the AEC because countries want to make sure that only ASEAN businesses benefit from lower tariffs and not firms from non-ASEAN countries.
Originally, ASEAN used a simple ROO, 40% regional value content (RVC). This meant that as long as 40% of the content of the item being shipped across an ASEAN border into another ASEAN country come from within ASEAN, it would qualify for ASEAN preferential tariff rates. However, this simple rule is not always easy for firms to use and, over time, ASEAN included new options as well, including change in tariff classification (CTC) and process rules. (Note that many of the ASEAN+One free trade agreements use different variations of ROOs.)
With the fall in tariffs, a much more serious problem in ASEAN has been the proliferation of non-tariff barriers (NTBs). NTBs can include a wide variety of mechanisms, not all of which are designed explicitly to keep out foreign products.
For example, rules on the labeling of products can be legitimately about providing consumers appropriate information about the content of a good, but can also be done in such a way to place an unfair burden only on imported products. Other NTBs include other health and safety regulations, as well as import quotas and other quantitative restrictions.
Although ASEAN members promised to eliminate NTBs by 2012 for the original ASEAN 6 members and by 2015 for the CLMV countries, progress has been very slow.
Opening markets for goods only works if products can transit borders, so ASEAN added trade facilitation to the agenda very early. The most visible element of ASEAN’s facilitation agenda is the commitment to the ASEAN Single Window (ASW). This is a very ambitious project aimed at seamless transfer of goods across customs’ authorities in all 10 members.
The original deadline called for national single windows to be implemented in all 10 members by 2012 in order for the ASW to be ready for the AEC prior to 2015. However, with the launch of the AEC, not all 10 ASEAN members had national windows in place, and plans to integrate customs across the region are delayed.
The AEC promised to deliver free flow of trade in services. A fascinating, hard-hitting paper out from the World Bank and ASEAN Secretariat shows how far away the region has been from meeting this goal. The report notes that ASEAN’s last four years of negotiations in services failed to deliver liberalization.
Overall, ASEAN shows levels of restrictions in services that are more than 60% above global averages and worse than any region but the Gulf States. Discretionary licensing regimes create the largest obstacles to the free movement of services and without a renewed focus on regulatory barriers, the situation may not improve in the future.
Investment liberalization has also proceeded slowly, with limited commitments from many member states. Many of the current pledges are not likely to be seen as commercially meaningful.
While skilled labor is meant to move freely as well through the use of mutual recognition agreements (MRAs), these arrangements are in place for just eight industries (like architecture, accounting and nursing). Within these industries, few people have actually moved using an ASEAN MRA, since individuals must clear all domestic immigration and visa hurdles as well as any necessary licensing or regulatory barriers that apply.
In short, the AEC launch does not signify the creation of true common market in Southeast Asia. It does not meet its own stated objectives for free movement of goods, services, investment, skilled labor and freer movement of capital (where the deadline remains 2020).
However, while simultaneously trying to finish up commitments in the AEC and handle negotiations with its Dialogue Partners in the Regional Comprehensive Economic Partnership (RCEP), ASEAN officials were boldly crafting a new vision for the future. The new ASEAN Blueprint 2025 promises to continue the path towards ever-greater economic integration in the future.
The first objective of Blueprint 2025 is to complete all unfinished business from the AEC by the end of this year. Then, officials will turn their attention to a wide range of deeper integration objectives, including fostering greater resilience; supporting equitable and inclusive growth; furthering poverty reduction; facilitating productivity enhancement; improving prospects for good governance; continuing with connectivity expansion; encouraging sustainability; and spreading green technology. Stay tuned!
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