What next for ASEAN?

In advance of next month’s meeting of the ASEAN Economic Integration task force, TMF Group has today published a briefing paper entitled, The ASEAN Economic Community: Capturing the zeitgeist of rising Asia exploring how international businesses can best harness the potential of this growing region.

TMF Group’s Head of APAC, Paolo Tavolato, said, “2015 is set to be a defining moment for Southeast Asian economies as the deadline for the formation of the ASEAN Economic Community (AEC) looms. Given the great range of diversity in economic development, political systems, cultures and religions, many are wondering if the regions can actually be integrated into a unified economy. As China’s population ages and the workforce becomes more expensive, ASEAN can offer the full value chain to multi-national companies, from, say, research and development in Singapore, to labour-intensive manufacturing in Indonesia and Vietnam, supported by Business process outsourcing in the Philippines.”

He continued, “The diverse range of industrial specialisations in ASEAN would make the region suitable for a wide array of investors.” The paper notes that Singapore and Malaysia specialise in electronic products, Thailand is the leading manufacturer of fast moving consumer goods and processed foods, while Vietnam and Cambodia focus on garments. Indonesia, Brunei, the Philippines and are the main producers and exporters of natural resources such as palm oil, rubber, sugar cane, rice, cocoa, timber, petroleum, natural gas, coal and tin. “The vertical and horizontal integration of Southeast Asia economies under the AEC would stimulate intra-regional investment, trade and business connections benefitting both foreign and local firms.”

Nevertheless, TMF Group did highlight that a crucial step to this new era for the region would be the removal of non-tariff barriers. According to the Chairman’s statement at the 26th ASEAN Summit in April 2015, 458 out of the total 506 high-priority measures outlined in the AEC roadmap have been fully implemented across all ASEAN countries. This took the AEC’s implementation to 90.5%. For the remaining deliverables, the ASEAN Economic Ministers (AEM) have been tasked to identify, prioritise and implement measures that carry the highest economic impact in a bid to achieve 95% implementation rate by year-end.

“Among the remaining deliverables, the removal of non-tariff barriers (NTBs) is the hardest to implement as most are populist measures designed to protect strategic national industries,” said Paolo. “Challenges remain in the elimination of NTBs such as a single channel for imports, price control measures, natural resource subsidies, and preferential treatment of state-owned enterprises. Although the withdrawal of NTBs might inflict short-term pain it would eventually be beneficial as competition will push these industries to move up the value chain and increase productivity.”

A study by the Institute of Southeast Asian Studies (Plummer and Chia, 2009) shows that the total removal of tariff and NTBs in ASEAN could reduce the cost of doing business in the region by 5% and increase its GDP by 5%.

According to the Asian Economic Journal (2012), the establishment of the AEC could generate US$280 billion to US$615 billion (equivalent to 5% to 12% of projected ASEAN GDP) in annual economic value by 2030. It is predicted that by 2025, more than half of the world’s consumers would live within a five to six hour flight from ASEAN.

Paolo concluded, “Every step towards creating the AEC tests the commitment and political will of the leaders to sacrifice their national agenda for the common good. Investors are drawn to ASEAN countries as they hope to leverage the region’s emerging consumer market, rising middle classes and equally increasing spending power. All of this makes ASEAN one of the most important consumer markets of the future, and helps pave the way for an ASEAN Economic Community to emerge as a powerhouse of the world economy.”

Download the report.

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