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ASEAN: At a Crossroads
Achieving important milestones

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by IBR SEA
25 May 2015
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2015 is a pivotal year for ASEAN. It is the year when the 10 member states will formally establish the ASEAN Economic Community (AEC) but, more importantly, it is also the year when the post-2015 agenda will be set.

ASEAN economic integration has moved forward by leaps and bounds since its formation in 1967, when it was conceived by its founding members as a predominantly political body in the midst of the Cold War. The establishment of the ASEAN Free Trade Area, the ASEAN Framework Agreement for Services and the ASEAN Comprehensive Investment Area, and later the ASEAN Community and the ASEAN Charter, are watershed moments in the journey towards becoming a cohesive regional entity. The region is an important economic bloc, and many EU-ASEAN members – large European companies – see it as one of their most important commercial regions.

Taken as a single market, ASEAN has the 7th largest GDP in the world, the third largest population, the third largest foreign exchange reserves and the fourth highest export values. This has not gone unnoticed – many European businesses see huge opportunities in this region which is why Europe is now ASEAN’s largest source of foreign direct investment. Foreign direct investment inflows have skyrocketed from just US$22.6 billion in 2000 to US$122 billion in 2013, a testament to the surge in confidence in the region’s economic strength. The EU-ASEAN Business Council was formally established last year in order to deepen Europe’s commercial engagement with ASEAN as a region and, as its second largest trading partner after China, to reinforce an already strong trade and investment relationship.

International Ties

This interest is not just commercial – the European Union has recently announced that it will appoint a dedicated EU Ambassador to ASEAN, which is likely to take place in the first half of this year.

ASEAN has also grown increasingly vital to Asia-Pacific’s trade and commercial environment. The AEC is the cornerstone of the Regional Comprehensive Economic Partnership (RCEP) currently being negotiated by the member states and its six FTA partners (China, Japan, South Korea, Australia, New Zealand and India). The Trans Pacific Partnership (TPP), the other mega-FTA under negotiation in the region, currently includes four ASEAN members with the likely addition of more once it is concluded.

Challenges remain before ASEAN can fully realise its potential. While intra-ASEAN trade volumes have soared from just US$82b in 1993 (when a FTA was established) to US$609b in 2013, the intra-ASEAN share of overall ASEAN trade has remained stubbornly at around 24% for the past decade, indicating that more could be done to facilitate trade among members.

For instance, the dearth of infrastructure is a major impediment for trade and investment in the region. Estimates of the amount of funding needed to bridge a massive infrastructure gap range from US$550b to US$8tr over the next five years according to reports by Goldman Sachs and the World Economic Forum (WEF).

While ASEAN has cut nearly all tariff lines down to zero as part of the AEC process, non-tariff measures such as incoherent and burdensome customs regulations and procedures still constrain the movement of goods across the region. With the exception of Singapore, which is ranked 1st in the world, not a single ASEAN member state cracks the top 15 in the World Bank’s Doing Business rankings. The most recent ASEAN Business Competitiveness Survey found 30% of respondents citing navigating rules and regulations in other ASEAN markets as their biggest operational challenge in the region.

The comparatively slower progress when it comes to services integration is also hampering growth. Services industries are responsible for much of developing economic growth and could be leveraged more effectively. The business process outsourcing industry in the Philippines, for instance, has seen an average yearly growth rate of 20% since 2004, and revenues and employment have expanded 10-fold in the same period.

Overcome to Succeed

Many of ASEAN’s most pressing challenges are already being addressed at the national and regional levels. For instance, several new initiatives aimed at meeting significant infrastructure needs are already in the works, such as the ASEAN Infrastructure Fund, the Asian Development Bank and IE Singapore’s Asia Infrastructure Centre of Excellence, the Philippines’ Public-Private Partnership Centre and Indonesia’s tol laut strategy to boost maritime connectivity.

National single windows, which aim to streamline customs procedures and documentation on a national level, are in pilot stages before they are combined into an ASEAN Single Window. Mutual recognition arrangements for eight professions have already been concluded and are in various stages of national implementation. So there is progress in the right direction.

Strong regional leadership is an imperative during this critical period in ASEAN’s evolution. Fortunately, Malaysia, the 2015 chair, has long demonstrated its capacity and will to provide this leadership. Under its last chairmanship in 2005, Malaysia presided over the signing of the Kuala Lumpur Declaration on the Establishment of the ASEAN Charter, subsequently adopted two years later. The Charter was the product of a Malaysian concept paper written in 2003, and former Malaysian Deputy Prime Minister Tun Musa Hitam also chaired the Eminent Persons Group charged with making recommendations on the contents of the Charter.

In the past Malaysia’s chairmanship has often resulted in significant progress in terms of ASEAN integration. The EUASEAN Business Council is confident that under Malaysia’s chairmanship in 2015, ASEAN will reach even more important milestones in its path to prosperity.

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