Monday, March 24, 2014

2015: End of the Beginning for the AEC

Last week a couple of “negative” articles about the ASEAN Economic Community (AEC), namely the Asian Development Bank's (ADB) recent report on the AEC.  I’d like to put them into perspective.

One of the editors of “The ASEAN Economic Community: A Work In Progress,” Mr. Shrestha spoke to journalists, economists and policy makers at the book’s launch at ADB headquarters in Manila.  Mr. Shrestha said a survey he helped produce in 2012 showed low awareness of the impending common market. The survey covered 381 companies in Asean member states, mostly in manufacturing and services.  Mr. Shrestha said businessmen in the region are more aware of free trade agreements Asean has signed with outside countries than they are of the looming common market. By and large, they’ve failed to take advantage even of existing benefits as Asean prepares to integrate its markets next year. In Mr. Shrestha’s survey, 77% of respondents said they never benefited from lower tariffs from any free-trade agreement, and 87% said they had not benefited from investment liberalization.

To corroborate his findings, Mr. Shrestha looked at a survey last year by the American Chamber of Commerce of 475 U.S. companies operating in Southeast Asia. It found firms were less interested in the common market and were more focused on constraints in individual Asean countries. The major concerns were corruption, poor infrastructure and the lack of trained labor in the region, Mr. Shrestha said. A majority of respondents in both surveys believe the common market won’t come about next year; that Asean is really 10 individual markets rather than a single one; and that the region remains highly fragmented and diverse, Mr. Shrestha said.

The second was a Philippine Star article titled “ASEAN econ integration not likely in 2015 – ADB”:
The economic integration of the Association of Southeast Asian Nations (ASEAN) will likely not be attained by 2015, economist of the Asian Development Bank (ADB) said.  In the book launching of “The ASEAN Economic Community,” ADB lead economist at the Office of Regional Economic Integration Jayant Menon said the targets for the regional economic integration would likely be missed.  “The December deadline will not see Asean achieving all ASEAN Economic Community (AEC) targets in 2015. And it will still involve more work for post-2015,” Menon said.

The pessimism about the AEC in these articles is correct, if one focuses entirely on the AEC’s objective of creating a single market by end 2015.  I would agree that it is not reasonable to expect a single ASEAN market to come into being by then.  For the single market, 2015 represents not the end, nor the beginning of the end, but rather the end of the beginning, to paraphrase Winston Churchill
On the other hand, the AEC can be said to already exist, as this blog has noted elsewhere.  The single production base of the AEC is fully functional, albeit largely limited to the Japanese automotive and electronics industries.  More has to be done to expand the scope of the AEC single production base to include ASEAN-owned companies, particularly SMEs, in order to increase the local “buy-in” by ASEAN constituents.    There has been more progress on the single production base than the single market, but again more has to be done.
By the way, the Amcham survey, as I have noted, is distorted by the fact that U.S. companies operating in the region are involved less in manufacturing and more in services.  Services trade has not liberalized as fast as trade in goods, and the slow materialization of a single AEC market would naturally make U.S. companies more bullish on Southeast Asia, but bearish on the AEC. But this is not the only way to view the AEC.

In any event, the ADB study is correct in that more has to be done to publicize the AEC within ASEAN and increase usage of the AEC agreements, according to the Philippine Star:

“Removing barriers to trade in sensitive areas such as agriculture, steel and the increasingly important areas of services,” the ADB economist said, adding that the issue of large number of Filipino nurses dominating one or two ASEAN member nations remains an issue. Other issues are the elimination non-tariff barriers such as closing loopholes that permit misuse of rules that have been made for good, including sanitary and phytosanitary rules on food and antidumping regulations; removing border barriers such as quantitative restrictions, border administration, and even closures; removing behind-the-border constraints related to logistics, transport, infrastructure bottlenecks, and weak institutions; and adopting harmonized standards on competition policy and intellectual property rights (IPR).

However, creation of a truly effective single AEC market will require more robust ASEAN institutions. Without stronger regional institutions to monitor, administer and sanction AEC directives, and/or more effective intra-ASEAN dispute resolution, the AEC will remain limited and not fulfill its potential.