LONG HARD ROAD AHEAD FOR AEC

On the eve of the New Year, the much talked about, long-awaited ASEAN Economic Community (AEC) will become a reality.
The new kid on the block has a combined population of 625 million, with a collective GDP (in 2014) of US$2.5 trillion.
Potentially, the AEC could become an economic heavyweight.
The operative word here is “potential” because it is not a given that the AEC will blossom into a thriving single market. For AEC countries, there is a long hard road ahead in terms of true harmonisation of standards, rules and
regulations.  
If it achieves the aspirations of its policymakers, ASEAN will become the fourth-largest economy in the world by 2030 – behind only the European Union, the United States and China.
According to the OECD, ASEAN’s growing middle class is expected to account for 59 per cent of global middle-class consumption by 2030. By then, it is expected to have become an export market that is larger than either the EU or North America.
Realising that the world is both excited and expectant of the benefits of a single market in Southeast Asia, ASEAN’s leaders have rightly warned that there will not be dramatic changes overnight.
Singapore’s Prime Minister, Lee Hsien Loong, said recently that the grouping has come a long way, but there will be work to be done after the AEC is established on December 31.
Lee said ASEAN has made progress in lowering barriers to trade and mobility as well as “in the thinking, the realisation that we do have to work together”.
The leading Singapore think-tank, SIIA, says in a report on the AEC that there is not likely to be a ‘big bang’ effect at the launch, but the promises of the formation of an integrated
region should not to be discounted.
Singapore’s Lee says that most of the commitments outlined in the AEC charter on freeing up trade have been met.
In the report, Moving Ahead with the ASEAN Economic Community: Business Initiatives Across Borders, SIIA Chairman, Simon Tay, writes that ASEAN leaders have been successful in implementing 91 per cent of the AEC’s priority goals.
“However, ASEAN needs to have a clearer direction of how to engage with the private sector and to align investment from non-ASEAN countries with development plans at both the subregion and regional level,” he says.
ASEAN leaders have pledged that their countries will co-operate across a dozen areas, including trade financing measures, enhancement of private sector involvement for the building of the AEC, and development of electronic transactions through e-ASEAN.
To reiterate, ASEAN aspires to be a region with free movement of goods, services, investment, and skilled labour, with freer flow of capital. Broadly, and on paper, this means ASEAN promises a single market and production base.  By 2025, the region’s aggregate output isexpected to rise by seven per cent — and that will create about 14 million new jobs.
Tay believes there is scope for businesses in an integrated AEC to better distribute production nodes according to cost, skill and competitiveness across ASEAN.
As barriers to trade and services continue to fall, an integrated ASEAN has the potential to better compete against China and India, according to SIIA.
The think tank envisages relocation of labour-intensive operations to developing States such as Cambodia, Laos and Myanmar to benefit from their cheaper labour costs, with Thailand and Vietnam complementing them on mid-value skills.
Companies that have different tiers of production sophistication, including the car and aero-engine component industries, will benefit from this complementarity.
The Institute cites the example of Rolls-Royce, which is establishing operations across ASEAN to capitalise on economies of scale, and is encouraging its supply chain to do likewise.
Rolls Royce has signed a long-term manufacturing agreement with a company in Malaysia to supply major aero engine components to this assembly and test facility in Singapore.
Rolls-Royce also has a facility in Vietnam, which manufactures marine winches and thrusters. In Thailand, the company has a supply chain that produces and exports parts for aero engines to Singapore and the UK.
The report also mentions Caterpillar, the American heavy equipment and machinery manufacturer, which is drawing on the comparative advantages of respective ASEAN States to set up its domestic manufacturing and sales operations.
Similarly, carmakers have noted the cost-saving benefits of widening their investment in Southeast Asia to develop production networks. Japan’s Mitsubishi plans to relocate its US factories to principal production hubs in Southeast Asia, Japan and Russia. Those will supply Misubishi’s North American market in future.
If it is to compete against China and India, ASEAN needs to offer companies opportunities of scale by enabling a free flow of goods and services across the region, write Tay and his co-author, Sivashangari Kiruppalini.
“This will allow ASEAN-based producers to scale up quickly, reduce unit costs, and become more competitive to match or even overtake Chinese and Indian businesses.”
The Chinese economy was built on its ability to provide cheap labour. This made locating labour-intensive manufacturing factories in Chinese cities cost-effective for businesses.
However, China’s rising labour costs and its ambitions to move up the value chain have created a vacuum which the AEC can fill.
Garment factories from China have begun to shift to Cambodia, Myanmar, Vietnam and Indonesia.
Consequently, it is expected that foreign direct investment into developing manufacturing industries such as the textiles and garment sectors in ASEAN will help some countries
diversify their economies and reduce their reliance on the agricultural sector.
Countries with mid-value production industries, such as electronics and apparel, are likely to deepen their comparative advantages in capital-intensive manufacturing sectors under the AEC. Vietnam, which has established a mid-value production network for mobile phones, is likely to double its production of handsets and other electronics by 2025.
The report says Samsung is moving large segments of its manufacturing base to Vietnam, setting up factories along the borders of Thai Nguyen province to produce components for mobile devices and other electronic items. As industries start to develop across ASEAN, demand for complementary services such as customer support, market-based research and technical support will also grow.
SIIA says the Philippines, which has developed a comparative advantage in providing Business Process Outsourcing (BPO) services, can support international and regional MNCs. The Philippines will benefit and see the contribution from BPO services to its GDP grow in coming years, the report says.
Singapore and Malaysia are well-placed to attract high-value-added industries, including financial services and research and development. However, SIIA says that in order to
better attract high-valued-added companies, ASEAN countries need to ratify the Madrid Protocol, an internationally-recognised system which secures trademark registration and protects IP rights of companies registered in the signatory the countries.
But AEC’s real potential can only be harvested if ASEAN Governments can resist strong pushback from the domestic private sectors.
This is particularly so in countries where Government support in the form of subsidies has created industries with artificial comparative advantages.
It is no secret that, in recent years, ASEAN countries have seen a rise in economic nationalism. Populist demands have pushed Governments towards more protectionist policies and measures.
Such factors have contributed to the rise of non-tariff barriers (NTBs) that continue to endure even after tariffs have been broken down.
A study commissioned and paid for by US car maker General Motors highlights a lack of progress by ASEAN to harmonise trade and investment rules.  
The study finds that NTBs have gained momentum in ASEAN since the global financial crisis. It identifies 190 additional non-tariff measures implemented between 2009 and 2013, with 75 of these in Indonesia, 39 in
Vietnam, 27 in Thailand and 16 in Malaysia.
Indonesia implemented a rupiah-only rule, requiring investors to complete all transactions in rupiah. This forces companies to take on additional currency risks and raises the costs and difficulty of doing business in Indonesia.
Politically-sensitive sectors such as agriculture, car production and steel will remain protected in ASEAN over the next decade, the GM study says, pointing out that these barriers are a drag on the region’s economic growth — and that they cost jobs.
If they were removed, GDP in the bloc’s five biggest economies could grow by an extra 0.5 per cent in 2025, the study says.
GM International executive Matt Hobbs told Reuters newagency that ASEAN could be the world’s sixth-largest car market by volume by 2018 — if it operates as a true
single market.
The World Bank says that many ASEAN countries tend to restrict foreign ownership to protect local industries and resources. It also found that, despite the importance of FDI to spur economic growth, ASEAN countries impose more laws restricting foreign ownership than any other region in the world.
Many believe that for MNCs looking to invest in ASEAN, the presence of such inward-looking protectionist measures presents a picture of a complex and costly region in which to invest and establish
businesses.
One way to circumvent these complexities is to look to the many subregional economic zones and economic corridors set up to attract investors. These offer attractive investment incentive packages, including more streamlined entry requirements.
The Greater Mekong Subregion (GMS), created in 1992, connects Cambodia, Yunnan and the Guangxi -Zhuang autonomous region in China, Laos, Myanmar, Thailand and Vietnam. It is the one of oldest subregional zones of ASEAN.
Foreign investment in the transportation sector, a key infrastructure development in the GMS region, rose from US$4 billion to US$10 billion from the early 2000s to 2010.
The nub of the issue facing AEC is the diversity in the economic development of its member States. Singapore, with per capita purchasing power of US$83,066, and Brunei, at US$79,890, are the third-and fourth-richest countries in the world respectively — but Cambodia had a per capita income of just US$3,276 in 2014, according to the IMF.
National policies, such as Malaysia’s Bumiputra affirmative action programme, can also act as a deterrent.
Tariffs on exports of ASEAN-originating products between member States have been removed, but businesses investing across borders continue to face non-tariff issues such as red tape, convoluted licensing and land acqusition requirements.
Barriers to the flow of services are significant.
Companies face various foreign equity restrictions in all ASEAN countries, while service trade policies in ASEAN are more restrictive than in any other region in the world except the Persian Gulf, according to a World Bank report published earlier this year.  
ASEAN governments have agreed to a mutual recognition agreement on labour mobility for six sectors — engineering, nursing, architecture, medicine, dentistry and tourism.
But implementation in this area has been slow because, in practice, existing national legislation and regulations run counter to regional commitments to labour mobility, and discourage cross-border movements by professionals.  
ASEAN countries still require work permits, which can be cumbersome and time-consuming for non-citizens.
Observers say the issue here is the fear of brain drain. Poor countries remain concerned that there could be an exodus of their best and brightest to the more-developed countries within AEC if they are able to travel freely.
Others fear that nationalism is a problem. These people argue that if a Malaysian or an Indonesian can do the job, why is there a need to employ a Singaporean or a Filipino. Thailand requires doctors or nurses from other ASEAN countries to sit for examinations in Thailand before a licence to practice in Thailand is given.
 Then there is the very practical problem of language skills. Thai is not spoken outside Thailand, or Tagalog outside the Philippines. Therein lies an inherent problem for full integration of the peoples of ASEAN.
“Efforts to tie and develop the region together will be slow and on a step-by-step basis. The benefits of the AEC may also not be immediate and at times difficult to quantify,” says SIIA’s Simon Tay.
“However, in the long run, an integrated and united ASEAN has the potential to bring long-term returns not only to businesses and investors in the region but to its citizens.”
Speaking at a forum on the AEC in Singapore, Samuel Tsien, Chief Executive of OCBC, one of Singapore’s big four banks, said the AEC has the potential to become a “powerful” force, but it could take another 10 to 15 years
before this is achieved.