Insights: What the AEC is, and isnt

Muslim women stand in front of ASEAN sign ahead for ASEAN Summit at the Kuala Lumpur Convention Centre
(KLCC) in Kuala Lumpur Tuesday, Nov. 17, 2015. Pic: AP.

by Murray Hunter-26th December 2015

AFTER almost two decades of discussion, the ASEAN Economic

Community (AEC) will be proclaimed on 31st December. The AEC is a
potentially significant and competitive economic region, should it be
allowed to develop according to the aspiration of being a single market
and production base, with free flow of services, investments, and labour,
by the year 2020.

The ASEAN region as a composite trading block has the third highest
population at 634 million, after China and India. GDP per capita is rapidly
rising. The AEC would be the 4th largest exporter after China, the
European Union (EU), and the United States, with still very much scope
for growth from Cambodia, Burma/Myanmar, the Philippines, and
Vietnam from a diverse range of activities ranging from agriculture, food,
minerals and commodities, electronics, and services. The coming AEC is
already the 4th largest importer of goods after the United States, EU, and
China, making it one of the biggest markets in the world.
Unlike the other trade regions, the AEC still has so much potential for
growth with rising population, rising incomes, growing consumer
sophistication, and improving infrastructure.
Perhaps the biggest benefit of the upcoming AEC is the expected boost
this will give to intra-ASEAN trade. Most ASEAN nations have previously
put their efforts into developing external relationships with the major
trading nations like the EU, Japan and the US through bilateral and free
trade agreements. To some extent, the potential of intra-ASEAN trade
was neglected, perhaps with the exception of the entrepot of Singapore.

Today intra-ASEAN trade is approximately 25% of total trade, growing around

10.5% per annum, and expected to reach 30% of total ASEAN trade by the year
2020.

The AEC is an opportunity to refocus trade efforts within the region,

especially when Vietnam, Cambodia, Indonesia are rapidly developing,
and Burma is opening up for business with the rest of the region.
The social, cultural, political and business interchange within the region

has traditionally been low, until the rapid increase of intra-ASEAN travel,
due to the low-cost airline explosion within the region.
Today intra-ASEAN trade is approximately 25% of total trade, growing
around 10.5% per annum, andexpected to reach 30% of total ASEAN
trade by the year 2020.
However the necessary infrastructure to support intra-ASEAN trade
growth is lagging behind with a delay in the completion of the Trans-Asia
Highway in Cambodia, and vastly inadequate border checkpoints
between Malaysia and Thailand in Sadao and Kelantan.

The flags of ASEAN nations. Pic: Asia Sentinel.

Some infrastructure development projects have been severely hit by
finance shortfalls within member states.
There are a number of outstanding issues concerning the growth and
development of the AEC.
The ASEAN Secretariat based in Jakarta has a small staff, where the best
talent is lacking due to the small salaries paid. The Secretariat, unlike the
EU bureaucratic apparatus in Brussels, relies on cooperation between the

member state governments for policy direction, funding and

implementation of the AEC.
Thus the frontline of AEC implementation are the individual country
ministries, which presents many problems, as some issues require multiministry cooperation and coordination, which is not always easy to
achieve as particular ministries have their own visions and agendas.
Getting cooperation of these ministries isnt easy.
There are numerous structural and procedural issues yet to be
contended with. At the inter-governmental level, laws and regulations
are yet to be coordinated and harmonized. So in-effect there is one
community with 10 sets of regulations in effect this coming January 1.
Consumer laws, intellectual property rights, company and corporate
codes (no provision for ASEAN owned companies), land codes, and
investment rules are all different among the individual member states.
There are no integrated banking structures, no agreement on common
and acceptable currencies (some ASEAN currencies are not
interchangeable), no double taxation agreements, and no formal
agreements on immigration.
There is not even any such thing as a common ASEAN business visa.
These issues are going to hinder market access for regional SMEs. Any
local market operations will have to fulfil local laws and regulations which
may not be easy for non-citizens to meet and adhere to.
Even though there are some preferential tariffs for a number of classes
of ASEAN originating goods, non-tariff barriers are still in existence,
which are insurmountable in some cases like the need for import licenses
(APs) in Malaysia, and the need to have a registered company which can
only be formed by Thai nationals within Thailand.

Some of these problems are occurring because of the very nature of

ASEAN itself. ASEAN was founded on the basis of consultation,
consensus, and non-interference in the internal affairs of other members.
This means that no formal problem solving mechanism exists, and the
ASEAN Secretariat is a facilitator rather than implementer of policy.
Illegal workers, human trafficking, money laundering, and haze issues
between member states have no formal mechanisms through which
these issues can be solved from an ASEAN perspective.
This weakens the force for regional integration.
One of the major issues weakening the potential development of the AEC
is the apparent lack of political commitment for a common market by the
leadership of the respective ASEAN members. Thailand is currently in a
struggle to determine how the country should be governed. Malaysia is
in the grip of corruption scandals where the prime minister is only
clinging onto power. Burma is going through a massive change in the
way it will be governed. Indonesia is still struggling with how its
archipelago should be governed. There is a view from Vietnam
that business within the country is not ready for the AEC.

One of the major issues weakening the potential development of the AEC is the
apparent lack of political commitment for a common market by the leadership of
the respective ASEAN members.

Intense nationalistic sentiments, among for example Thais, exasperated

by the recent Preach Vihear Temple conflict along the Thai-Cambodian
border, need to be softened to get full advantage out of the AEC. The
dispute in the International Court of Justice over Pedra Branca, and the
Philippine rift with China over the South China Sea show the delicacy of

relationships among ASEAN members. The recent Thai court decision on

the guilt of Zaw Lin and Win Zaw Tun in the murder of two young British
tourists may also show how fragile intra-ASEAN relationships can be.
The AEC is going to fall far short of achieving its full potential of
becoming a major influence in global trade.
The AEC is not intended to be the same model as the European
Economic Community (EEC). The AEC is far from being any fully
integrated economic community. The lack of social, cultural, and political
integration within the ASEAN region indicates the massive job ahead that
Europe had been through decades ago.
There is still a lot of public ignorance about what the AEC is, and lack of
excitement or expectation for what should be a major event within the
region. Respective national media are scant on information about the
forthcoming launch of the AEC.
Economic nationalism is very strong within ASEAN. Malaysia has its
Government Linked Companies (GLCs), State Economic Development
Corporations (SEDCs), Thailand its Crown Property Bureau, and family
business empires within each country which have vested interests in
keeping market access at the current status quo. The AEC is seen as a
threat to many existing business empires, which fear open market
access. Many of these business empires have enormous political
influence upon their respective governments.
The AEC could be deemed to conflict with the special advantages
bumiputera businesses in Malaysia enjoy in areas of government
tendering and contracting.
It is yet to be seen how some of these businesses will behave within an
AEC environment. However what can be said for sure is that the AEC will

not create any level playing field for ASEAN businesses in the
foreseeable future.
With the problems the EU is currently facing, maybe it is wisdom in
hindsight that the leaders of ASEAN have been extremely cautious in
their approach to the formation of the AEC. Any opening up of the labour
market could also be a potential disaster. A free flow of labour across
ASEAN would potentially put many under-qualified people out of
work according to Gyorgy Sziraczki, the director of the ILO in Vietnam.

Pic: AP.
This could lead to economic downturns in some of the more susceptible
parts of the AEC like Lao PDR and Cambodia. The AEC, rather than

promoting intra-ASEAN trade, could lead to a more domestic orientation,

where the unemployed may see the informal economy looking a much
more attractive means of making a living.
However, if the leadership of ASEAN see the opportunities of
dramatically increasing intra-ASEAN trade, then the AEC has great
potential to assist the region withstand any steep economic downturn
from the rest of the world.
Projects that are able to boost regional synergies like coordination of
education, river system water management, energy, transport, banking
and finance, may very quickly improve regional integration. Regional
clustering can be developed in education, auto-parts, food production,
electronic parts, and the value adding of basic commodities to benefit
the economies of the region.
Infrastructure development will be vital to the success of the AEC. For
this purpose the ASEAN Infrastructure Fund, financed by member
countries and the Asian Development Bank will be extremely important.
The recent ASEAN summit in Kuala Lumpur also reactivated the ASEAN
Joint Consultative Committee to resolve trade and investment issues.
The slowness of the AEC should not be seen as a failure of ASEAN. We
can see the slow pace that ASEAN makes decisions with the long period
it is taking to admit Timur Leste as ASEANs 11thmember.
The vital questions here are whether the AEC will be able to attract direct
foreign investment to the region; take advantage of rising opportunities
like international education; stop the talent drain from the region
with China becoming more aggressive in attracting the best from the
region; and create an ASEAN awareness within the region.

Sadly, one may expect the fate of the AEC to be similar to that of the
Indonesia-Malaysia-Thailand Growth Triangle (IMT-GT), and the Brunei
Darussalam-Indonesia-Malaysia-The Philippines East ASEAN Growth Area
(BIMP-EAGA). They are in existence by name, but with little real
substance on the ground.
Posted by Thavam