ASEAN Economic Community 2015: What’s Next?

By Ganeshan Wignaraja

Despite much progress so far, it seems likely that the December 2015 deadline for realizing all four pillars of the AEC will be missed. Rather than playing a blame game as to why the deadline will be missed, here's what should be done during Malaysia’s chairmanship of ASEAN in 2015.

Co-written by Jenny D. Balboa

In 2007, the 10-member Association of Southeast Asian Nations (ASEAN) set the goal of creating an integrated economic region—the ASEAN Economic Community (AEC)—by December 2015. However, many feel the regional integration project is unlikely to meet the 2015 deadline due to an overly ambitious timeline and too many ill-thought-out initiatives.

The AEC rests on four pillars of integration: a single market and production base, a competitive economic region, equitable economic development, and integration with the global economy.

There has been notable progress on the AEC’s first pillar. Tariffs have been substantially reduced, with more than 70% of intra-regional trade in ASEAN enjoying zero tariffs, and less than 5% of goods trade being subjected to tariffs of more than 10%. This will encourage intra-ASEAN trade in manufacturing and agricultural goods.

Implementation of the trade in services agreement has been much slower. In part, this is linked to the activities of powerful national service lobbies. There has been slow yet steady progress on liberalizing investment and capital flows. The signing of the ASEAN Comprehensive Investment Agreement in 2012 was an important step in building a better business environment for the private sector. Moreover, to enhance trade facilitation, the National Single Window program is being implemented in the ASEAN-6 countries. The four remaining members are catching up. Initiatives to connect the NSWs to the ASEAN regional portal are also under way and will contribute significantly to reducing trade costs.

There have been modest achievements in the second and third pillars. An ASEAN Intellectual Property Rights Action Plan 2011–2015 was adopted to strengthen intellectual property institutions in the region; while the Master Plan on ASEAN Connectivity was adopted to enhance the region’s transport connectivity and energy security. The ASEAN Strategic Action Plan for Small and Medium-Sized Enterprise Development will facilitate inclusive growth.

There has also been good progress on the fourth pillar over the past decade. ASEAN has emerged as the hub of free trade agreement (FTA) activity in Asia and takes a lead in negotiating trade rules for connecting Asia. FTAs have been concluded with ASEAN’s six dialogue partners: Australia, the People’s Republic of China, India, Japan, the Republic of Korea, and New Zealand. Moreover, negotiations for the Regional Comprehensive Economic Partnership (RCEP), covering ASEAN and its dialogue partners, were launched in 2012. If signed and implemented, RCEP will become the world’s biggest trade bloc, with comprehensive trade rules covering 40% of world trade.

But there are still issues to be addressed. According to the Global Trade Alert database, nontariff measures have been rising in the biggest ASEAN economies since the global financial crisis. Services trade is also limited due to restrictions in most member economies.

One difficult issue is the legal protection of migrant workers. While ASEAN adopted the Declaration on the Protection and Promotion of the Rights of Migrant Workers in 2007, there is debate between sending and receiving countries as sending member states push for a legally binding regional agreement, while receiving countries call for non-legally binding guidelines.

There is also deadlock over unresolved issues about the definition and contents of the agreement. Existing bilateral and regional instruments to regulate services trade are too weak. Developing a strong regulatory framework remains one of the biggest challenges.

ASEAN is home to some of the richest (Brunei Darussalam and Singapore) and poorest (Cambodia, the Lao People’s Democratic Republic, and Myanmar) economies in Asia. An important step toward narrowing the income gap is to develop modern, high-quality infrastructure. This will create vast opportunities for connecting markets and improving the physical mobility of people, goods, and knowledge within the region. Infrastructure investment needs in ASEAN for the next 2 decades are massive, requiring $60 billion each year until 2022. To meet these needs, there will need to be close coordination among ASEAN governments, the private sector, and development banks.

Despite the progress so far, it seems likely that the December 2015 deadline for realizing all four pillars of the AEC will be missed. Rather than playing a blame game as to why the deadline will be missed, it will be useful to do three things during Malaysia’s chairmanship of ASEAN in 2015.

First, ASEAN members should undertake a quick and dirty but honest stocktaking exercise of achievements under the AEC project and a short report should be published by the ASEAN Secretariat.

Second, ASEAN members should focus on a few important next steps for the AEC and get them done in a reasonable time frame, say by 2020. In this vein, reducing restrictions on trade in services and monitoring NTMs are priorities under the first pillar. Financing and implementing a few key infrastructure projects to reduce development gaps between richer and poorer ASEAN economies is important under the third pillar.

Third, ASEAN members should give serious consideration to increasing the capacity of the ASEAN Secretariat. A reasonable increase in the ASEAN Secretariat’s budget and technical skills seems warranted to support effective implementation of the AEC agenda.

While the AEC project may take longer than originally envisaged, with sustained cooperation and commitment among ASEAN economies it will not remain impossible.

This is a modified version of a blog first published in the ADB Institute’s Asia Pathways.