Blog poll: Protectionism biggest challenge to AEC

Published on Wednesday, 02 December 2015

Published by Jayant Menon on Wednesday, 02 December 2015

AEC signing ceremony at the XXVII ASEAN Summit in Kuala Lumpur. Photo by ASEAN Secretariat.
AEC signing ceremony at the XXVII ASEAN Summit in Kuala Lumpur. Photo by ASEAN Secretariat.

In our November blog poll, we asked readers what they considered to be the major challenges facing the achievement of the ASEAN Economic Community (AEC). 

The AEC is an ambitious initiative, which aims for freedom of movement of goods, services, capital and skilled labor in ASEAN by 31 December. It is founded on 4 pillars: (i) a single market and production base; (ii) a competitive economic region; (iii) equitable economic development; and (iv) integration with the global economy.

The AEC Blueprint defines actions, measures, and timelines to be met by 2015 covering each of the 4 pillars, and originally contained 316 priority measures to be completed over four phases from 2008 to 2015. This number has since risen to 611 measures, which now includes some targets that have been deferred until after 2015. According to a report released at the XXVII ASEAN Summit in Kuala Lumpur in November, ASEAN has implemented 92.7% of the 506 targeted measures for 2008-2015 – but the implementation rate for a full AEC scorecard of 611 measures currently stands at 79.5%.

Below is a breakdown by pillar which shows how the biggest achievements have been made in pillars 3 and 4, followed by pillars 1 and 2:

One of the greatest successes of the AEC has been in tariff reductions. On average, ASEAN member states now have 96% tariff lines at 0% under the common effective preferential tariff rates. Some progress has also been made in trade facilitation, and liberalizing capital and skilled labor flows. Great strides have also been made under pillar 4. A combination of multilateral and unilateral measures to reduce barriers to trade in goods, services, and investments has made ASEAN one of the most globally integrated regions in the world, and has enabled a thriving “Factory ASEAN.” ASEAN stands as a shining example of how regional integration is fully compatible with globalization.

However, most of this progress has come from “low-hanging fruit” reforms. Moving forward, ASEAN will have to tackle the more politically sensitive areas of reform, such as opening up economically sensitive sectors like agriculture and services; addressing unskilled labor flows; and reducing non-tariff barriers which are increasingly replacing tariffs as protective measures. Given these remaining barriers, it is not surprising that majority of readers polled (41%) identified protectionism as the greatest challenge facing the AEC. Achieving full and free movement of goods, capital, and people is a long process that must continue beyond 2015.

To meet the AEC’s goal of creating a competitive region under pillar 2, improving ASEAN member countries’ business environments and improving infrastructure connectivity will be critical, and 21% of respondents polled identified weak regulatory environments as a major challenge to the AEC. Addressing this issue has proven particularly difficult. In light of widely different levels of development among ASEAN members and their often clashing national interests, cooperation and coordination—rather than uniformity in regulatory rules—are likely to be more achievable as goals.

As for infrastructure connectivity, ASEAN is unlikely to deliver on all of the AEC targets for infrastructure, given the huge delays in completing the Singapore-Kunming Railway Link. This has been mainly due to the lack of financing for regional infrastructure development – a challenge identified by 29% of readers polled. The ASEAN Infrastructure Fund, created by ASEAN and ADB in 2011, will hopefully help address such financing issues in the future.

Finally, in order to achieve the AEC’s goal of promoting equitable economic development under pillar 3, development gaps between ASEAN member countries must be addressed. This was the second biggest concern (29%) for respondents. There is some evidence to suggest that convergence has begun – the ratio between the per capita income of the ASEAN-6 and that of the CLMV countries has fallen from 3.4 to 2.6 between 2000 and 2011. To sustain this process of convergence, the CLMV countries must continue with their market-oriented reforms. In addition, ASEAN will need to continue sub-regional initiatives such as the Initiative for ASEAN Integration. Support for small and medium-sized enterprises will also have to be continued, and this was mentioned as a concern by 2% of readers.

While the AEC will not fully meet its December 2015 targets, it should be viewed as a milestone on its long journey toward regional integration. ASEAN leaders have already signed a follow-up document entitled “ASEAN 2025: Forging Together Ahead” that lays out the vision for the next 10 years. The real test will be implementation beyond 2015.