Ducks in a row: Hammering out the details for the ASEAN Economic Community

ASEAN is preparing to become a common market at the end of 2015, in a move that will create opportunities for investors in a region that has some of the world’s fastest-growing economies and a rapidly expanding middle class. “ASEAN and South-east Asia are among the few bright spots in the world economy,” Teoh Kok Lin, the founder of Singular Asset Management in Kuala Lumpur (KL), told OBG. In the past decade, the emerging economies of Asia have expanded over 7.5% a year, according to the IMF. ASEAN’s combined GDP is valued at $2.3trn, and is expected to reach $10trn by 2030.

BUILDING COMMUNITY: The ASEAN Economic Community (AEC) was launched in Bali in 2003 as part of an attempt to rebuild the region’s economies on a secure foundation, following the Asian financial crisis. “Asians did not draw the wrong lesson from the Asian crisis,” the IMF’s managing director, Christine Lagarde, told press in KL in November 2012. “Asia’s economic foundations became safer, sounder and more resilient, but still open to the world and open for business.” The AEC will transform ASEAN’s 10 members into a single production base, allowing for the free flow of goods, services, investment, skilled labour and capital. Initially set to take effect in 2020, the AEC is now expected to come into force on December 31, 2015.

FACING CHALLENGES: Lim Hong Lin, the deputy secretary-general responsible for the AEC, noted that as of August 2012 72% of measures for the period 2008-11 had been implemented. The most progress has been made in trade liberalisation, while efforts to integrate Customs procedures to create an ASEAN “single window”, liberalise services, and harmonise crucial regulations and standards have been slower. According to World Bank rankings of ASEAN nations, Singapore is the best performer, followed by Malaysia. Indonesia’s trade minister, Gita Wirjawan, acknowledged in November 2012 that his country was finding it difficult to deal with cross-border measures. Thailand and the Philippines have struggled as well. Still, Jayant Menon, lead economist on trade and regional cooperation at the Asian Development Bank, noted that the 2015 target should be seen more as a milestone than a hard target. “One should not expect to see ASEAN suddenly transformed – its nature and processes abruptly changed and its members interests substantially altered – in 2015,” he told OBG. “The fear is that with global economic uncertainty, some ASEAN members may take a protectionist stance to shield their local industries.”

The poorer nations – Cambodia, Laos, Vietnam and Myanmar – have further to go to reach their targets, but even richer countries have been able to negotiate exclusions for sensitive industries, such as automotive manufacturing and agriculture. Malaysia has sought to protect its national carmaker Proton from competition and imposes hefty duties and taxes on imports. Indonesia and the Philippines are seen as among the most restrictive countries, concerned about opening their vast domestic markets even to regional rivals. Still, intra-ASEAN trade and commerce with the rest of Asia have risen sharply. Trade within the group rose to $520bn in 2010, compared with $121m in 1998.

SUPPLY CHAIN: Electronics factories in ASEAN are making components that are shipped to production centres in China for assembly and export. With the richer nations moving up the value chain into higher-end manufacturing, ASEAN’s poorer members are replacing them as locations for basic production. Factories on the outskirts of Phnom Penh now produce clothing for some of the world’s most high-profile brands, including H&M and Gap. All this is creating a middle class with an annual income of $3000. In Indonesia, for example, some 163m people are expected to be “middle class” by 2020. At that level, demand for vehicles, appliances and financial services will increase.

As the 2015 deadline approaches, ASEAN leaders are mindful of the need to take action quickly. However, the area’s extensive cultural and economic diversity also means that the region’s leaders will have to overcome the competing interests and political inertia of their nations in order to benefit from a unified market.