FIA invited Hans W. Vriens, Managing Partner of Vriens & Partners, to share his perspective on the progress of the AEC, the challenges that lie ahead and the role for business.

Introduction

On Dec. 31 2015, government leaders of the Association of Southeast Asian Nations will declare victory: the ASEAN Economic Community (AEC) will have been successfully established. To validate their statement, they will refer to the “ASEAN Scorecard”, which was designed to track progress toward achieving this community. In reality, the AEC will still be a work in progress for many years to come.

The AEC is an ambitious project, promising the free movement of goods, services, investment, skilled labour and freer movement of capital across the ten member states for the 600 million inhabitants of Southeast Asia. Most leaders of the ASEAN countries clearly recognise that integration is the only way forward if ASEAN wants to compete successfully in an increasingly globalised world with India and China and other destinations for foreign direct investment and integrated supply chains. This recognition is also reflected in the fact that ASEAN’s leaders moved the date for AEC completion forward from 2020 to 2015.

But the AEC will be far from fully established by Dec. 31 2015. Full implementation will take many years to conclude. The AEC can be expected to generate fresh momentum for further integration of regional economies beyond 2015. Its creation is particularly important to the private sector, which stands to benefit from the development of an open market of 600 million consumers around Southeast Asia. However, it would be a mistake to expect the region’s younger states to move to the creation of a quasi-supranational union like the European Union.

Challenges

Looking forward, AEC implementation will face many challenges. First, member countries still have a long way to go before meeting their objectives. The removal of non-tariff barriers, especially in the services sectors, determining rules of origin, establishing an ASEAN “Single Window” for customs, and easing foreign equity restrictions are among outstanding issues to be addressed. Such progress will be very difficult to achieve without implementing some form of pooled sovereignty, and establishing a very different ASEAN Secretariat than the current one. Rather than the underfunded, overstretched, and overwhelmed institution struggling away with just 200 personnel in Jakarta today, ASEAN needs a secretariat with the capacity, resources, and expertise necessary to implement and enforce regulations.

Second, individual member states face challenges of their own. Ascertaining and formalising the AEC commitments of each individual member state is a challenging exercise. Commitments differ from country to country and vary for each sector. Many countries have not gone beyond their World Trade Organization commitments. However, for countries such as Vietnam (an ASEAN member since Jan. 11 2007) that have relatively recently joined the WTO, these commitments to open up domestic markets go much further than longer-term members like Indonesia and the Philippines (both members since Jan. 1 1995).

An important question is whether ASEAN member states will be able to continue to follow the course on which they have embarked. Worrying developments, for example, are an increasingly nationalistic and inward looking Indonesia and Thailand’s recent military coup. Both could threaten to derail the process. The new Indonesian Trade Minister Muhammad Lutfi did not even mention the AEC during a forum discussion at the World Economic Forum in Manila in late May. His message was clear: Indonesia with 250 million people is big enough to go it alone. Jakarta doesn’t need the AEC to attract Japanese and other direct investors to the archipelago.

On the positive side, several important external factors are increasingly pushing ASEAN members to uphold their promises. These include the existing ASEAN+One free trade agreements, which include ASEAN trade deals with China, India, Korea, Japan, Australia and New Zealand, negotiations on a 16-nation Regional Comprehensive Economic Partnership, and the ongoing TPP talks. In each, the ASEAN member states have additional incentives to implement AEC commitments.

Role for business

The AEC commitments have given member states clear objectives to work toward. It is up to the private sector to play the critical role of making sure that governments stick to the AEC agenda even if it takes another decade to implement. In that light, the formation of the ASEAN Food and Beverage Alliance (AFBA) to support harmonisation efforts in the region is a step in the right direction. Contributions from AFBA through research and support to ASEAN will help to ensure that regional trade integration stays on track. AFBA President, Abdul Halim Saim, reaffirmed the commitment of the food industry in harmonisation of food standards and mutual recognition of key regulatory standards such as nutrition labelling, production registration and import/export licenses. He shared that “goods can be circulated more efficiently within ASEAN through these efforts and will contribute towards the implementation of the AEC”.

Conclusion

The potential payoffs for ASEAN from further trade integration are substantial. However, this goal will be extremely challenging to meet, given the slow and limited history of market liberalisation in services sectors thus far in ASEAN. Successful implementation of the AEC in coming years will require much broader support for further integration and harmonisation of ASEAN’s rules and regulations. It will require government leaders to agree on a common vision for ASEAN beyond 2015.

Hans W. Vriens is Managing Partner of Vriens & Partners, a Southeast Asia-based public policy and government affairs consultancy. Vriens & Partners recently published a report on ASEAN Economic Community: Potential, Reality, and the Role for Business. For enquiries or should you wish to purchase this report, please contact Tang Wai Leong (waileong@vrienspartners.com, +65-6471 5269) to indicate your interest or to discuss.



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