Dec 3, 2012

Thailand - Crunch time for the AEC

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Some experts say Asean might need to delay the single market by three years, but if leaders insist on just a one-year delay, they have a lot of work to do.

The 364-day delay of the Asean Economic Community was a disappointing but necessary step for the group’s 10 members to get their houses in order before leading the community on to the greater goal of the 16-nation Regional Comprehensive Economic Partnership (RCEP).

The scorecard that the Asean secretariat prepared early this year on how well (or badly) members had fared in making the agreed preparations for the AEC was already a mild wake-up call.

That was followed by a more blunt assessment prepared by the Jakarta-based Economic Research Institute for Asean and East Asia (ERIA) in October and presented to Asean leaders in Phnom Penh two weeks ago. It was a strong reminder of the prerequisites for the effective launch of the AEC.

In a way, the critical decision to delay the inauguration of the single market from Jan 1 to Dec 31, 2015, will give all Asean members time to complete the unfinished targeted actions. During that year, Asean will also have to prepare for the broader FTA under the banner of the RCEP which will also include China, Japan, South Korea, Australia, New Zealand and India.

Asean’s goal for the past 20 years has been to create a unified market of more than 600 million people with a combined gross domestic product of US$2 trillion. But the 10 member countries have so far only met 72% of the economic blueprint for merging their economies into a single trade and investment bloc, with Singapore and Malaysia doing best.  Indonesia, Thailand and the Philippines are struggling with cross-border trade issues, while Cambodia, Vietnam, Laos and Myanmar are wrangling with tariff and non-tariff barriers (NTB).

ERIA executive director Hidetoshi Nishimura told the Bangkok Post that the leaders’ decision to delay the AEC by just one year showed their determination to stick with the much-hyped 2015 deadline.

However, he added: “In order to meet ERIA’s recommendation, even three years will be tough. However, the determination for AEC 2015 has definitely been shown.

“ERIA is starting the next step immediately in cooperation with Brunei. And the Jakarta Framework decided at the last Summit is also a very important vessel for beyond 2015.” Mr Nishimura.

What needs to be done?

The ERIA’s 86-page report has strongly recommended that Asean “seize the moment” and forge ahead to speed up trade and investment facilitation and to continue and manage liberalisation.

ERIA chief economist Fukunai Kimura is convinced that Asean needs to further maximise its current status of a hub of the global production network by forging connectivity and reducing  network setup costs (part of the institutional arrangement to facilitate foreign direct investment). It must also develop logistics infrastructure and services (cost, time, reliability) and promote trade liberalisation and facilitation.

Another important thing to do, Mr Kimura says, is to develop more special economic zones and improve the investment climate with proper economic infrastructure such as electricity supply.

Echoing the ERIA report, Prof Kimura recommended that Asean seriously address non-tariff barriers systematically, and try to deliver better on trade, investment and transport facilitation. As well, it must forge ahead on services and investment liberalisation, enhance the AEC Blueprint Third Pillar (on small and medium enterprises), and finish RCEP negotiations to deepen Asean integration with East Asia and ensure a continuing central role for Southeast Asia.

Apart from providing specific recommendations for each Asean country, the ERIA report has clearly portrayed the impact of the rise of China and India.

China’s fast and dynamic transformation, said the report, presents tremendous competitiveness challenges to Asean industries and businesses in third-country and domestic markets across wide range of industries.

For example, the drop in global trade shares of Malaysia and the Philippines during the 2000s can be attributed in part to the dramatic rise of China’s global share (from 3.3% in 1990 to 19.9% in 2008) in electrical and electronics equipment.

Some model simulations suggest that China would significantly crowd out Asean exports in most Western and other non-East Asian economies by 2020 if China liberalises unilaterally and Asean does not follow suit and adjust accordingly.

Asean-India trade, meanwhile, has been surging in recent years although the level is still relatively small compared to Asean-China trade. However, India does not appear to be a compelling constraint on Asean’s exports to third markets at the moment, the report emphasised.

As India grows and its middle class increases substantially, the potential for possible complementary relationships between Asean countries and India will likely increase also.

“It’s a contrast: Both are large economies with huge domestic markets — Asean consists of 10 countries with varying priorities, policies, and institutions,” the ERIA said.

“Thus the potential for economies of scale is better realised in the two countries as compared to Asean unless there is greater connectivity, efficient facilitation, and a common regulatory framework in Asean.”

Achara Ashayagachat

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