March 24, 2017
Assessing the ASEAN Economic Community
by Somkiat Tangkitvanich and Saowaruj Rattanakhamfu
East Asia continues to sustain a high level of economic integration, yet a significant proportion of intraregional trade is still uncovered by agreements to guard against current and possible future protectionism. Without multilateral movement under the World Trade Organization, further regional integration can proceed only through agreements that reduce trade barriers within the region.
ASEAN appears to be leading the Asia Pacific in FTA formation. The ASEAN Free Trade Area was implemented in 1993 and the ASEAN Economic Community (AEC) was officially launched in late 2015. The AEC aspires to go beyond typical trade agreements, aiming to create a single market and production base with equitable development across its 10 member countries.
ASEAN will celebrate its 50th anniversary in August, 2017. While ASEAN has made some significant political achievements during the past five decades, its economic integration project is still very much a work in progress, and could remain so for many years or even decades to come.
The ASEAN Secretariat claims that the implementation of the AEC Blueprint 2015 — the community’s formal agenda — has been substantively achieved in many areas. In reality, the levels of integration vary greatly by sector. The only clear success ASEAN can claim is the reduction of tariffs among member countries. Since the implementation of the Common Effective Preferential Tariff agreement in 1990s, about 99 per cent of tariff lines between member countries have been reduced to zero.
Still, the free flow of goods among ASEAN member countries continues to be hindered by the use of non-tariff measures (NTMs). These may have adverse consequences on the sourcing decisions of firms and the structure of trade and related industries.
Countries such as Indonesia or Malaysia that employ active ‘industrial policy’ apply more NTMs. Car assemblers in Thailand, for example, have long complained about Malaysia’s restriction of the number of cars imported into Malaysia.
While minimising non-tariff barriers is an action target in the AEC Blueprint, ASEAN has relied on a voluntary approach to reduce them — with very limited success. Under the voluntary approach, member countries can have an adverse incentive to under-report the barriers they are using. What’s more, there is no effective monitoring system to keep track of the changes of NTMs among member countries.
ASEAN has been negotiating services liberalisation since the creation of the ASEAN Framework Agreement on Services in 1996. The AEC Blueprint has established clear targets to remove all restrictions on trade in services by 2015. But some ASEAN countries, including Thailand, the Philippines and Indonesia, could not meet their targets by the deadline.
Critically, service liberalisation under ASEAN contains no commitment to address behind-the-border issues, such as interconnection for telecom services or access to ATMs for banking, which are crucial to the creation of competitive markets. The difference in laws and regulations among member countries is also problematic.
Service liberalisation under ASEAN in its current form would fail to create a single service market. Thailand, the Philippines and Indonesia, still could not meet the targets by the 2015 deadline. Indonesia and Thailand’s specific commitments under the latest offer contain many services that are inconsequential or even useless.
In terms of promoting cross-border movement of labour, ASEAN has achieved very little. From an economic development perspective, the opening up of unskilled labour markets through FTAs would be a useful policy option, given the relative abundance of unskilled labour in many ASEAN countries, but the AEC Blueprint attempts to facilitate only the mobility of skilled professionals, currently comprising just eight professions. The arrangement to facilitate the movement of these professionals is also problematic. In the case of Thailand, for example, the requirements imposed on ASEAN professionals are the same as those of the non-ASEAN countries.
To critical observers, ASEAN integration has so far produced very few tangible results. The Asia Trade Centre’s Deborah Elms concludes that ‘ASEAN officials shifted the rhetoric as the deadline loomed to argue instead that the AEC itself should be viewed as process and not a destination’. In September 2016, The Economist mockingly wrote that ‘[w]hen it comes to elevating form over substance, and confusing a proliferation of meetings and acronyms for a deepening of ties, ASEAN is the Zen master’.
The lack of momentum to deepen regional integration in ASEAN is largely a consequence of most member countries’ protectionist stances, perhaps with the sole exception of Singapore. Many ASEAN countries view one another as rivals in their pursuit of exporting to the global market or attracting foreign direct investment.
Domestic political conflicts, along with a lack of strong and stable government, have led political leaders in many ASEAN countries to look inward and lose their appetite for regional integration. Without confronting the core problems of its integration project squarely and urgently, ASEAN will not realise the AEC Blueprint vision of a single market and single production base.
ASEAN prides itself on being the ‘hub’ of bilateral FTAs in East Asia. The concept of ‘ASEAN centrality’ espoused in the group’s initiatives emphasises its role in facilitating economic integration in the region. But the economic integration among ASEAN countries has so far focused on creating a more attractive package for multinationals looking to operate in the region, rather than on creating stronger bonds between member economies.
When it comes to economic integration, ASEAN has to aim at achieving critical targets while ignoring trivial ones. In other words, ASEAN needs to be much more focused than it is now. Its current agenda is overly ambitious considering its limited resources. The AEC Blueprint has established 17 core elements and set 176 priority actions, covering the free flow of goods and capital, movement of skilled labour, equitable development and protection of intellectual property rights, to name just a few.
A sharper focus would help ASEAN to deliver meaningful and tangible results without depriving member countries, especially less developed ones, of their limited resources. This requires ASEAN to return to the core missions of an FTA: reducing barriers to trade and facilitating cross-border trade in goods, services and the movement of labour and inputs to production.
Yet the real challenge for ASEAN is not economic but political. Full national sovereignty and economic integration are incompatible. The success of the European Union’s trade integration, for example, is based on pooled sovereignty.
The idea of ‘pooled sovereignty’ is not all-or-nothing in nature. When started, the EU was a comparatively modest project. It had few members and only one policy area for pooling sovereignty: a common market for coal and steel. Only gradually did it expand its membership and its mission.
Unless ASEAN countries are willing to increasingly pool their sovereignty and meet political challenges head on, the AEC project will go nowhere and ASEAN will be little more than a talking shop.
Somkiat Tangkitvanich is President of the Thailand Development Research Institute (TDRI). Saowaruj Rattanakhamfu is a Senior Research Fellow at TDRI.
This article summarises a paper prepared for the 2016 Pacific Trade and Development Conference in Australia.