Mr. Benny Wachjudi, Director-General for Manufacturing Based Industry, Ministry of Industry of Indonesia
Mr. Fazwar Bujang, Chairman, Indonesian Iron and Steel Industry Association
Ladies and Gentlemen
It is a privilege for me to address you today during the 2013 ASEAN Iron & Steel Sustainability Forum. I congratulate the Forum’s hosts for organizing such an important event where industry decision makers, sector experts, and government policymakers have the chance to engage in meaningful discussions about the iron and steel industry. The Forum comes at an opportune time as the region continues to explore possibilities and find ways to sustain its economic dynamism. And the iron and steel industry is a sector crucial in sustaining ASEAN’s economic vigor.
The Macroeconomic Environment and the Iron and Steel Industry
The iron and steel industry and the manufacturing sector, as a whole, have been key growth drivers bolstering the region’s economic performance in the face of market slowdown and heightened economic risks of late. In 2012, ASEAN economies remained strong with regional output growing by 5.7% even higher than the 4.1% growth registered in 2011. Also, ASEAN was also able to maintain its level of FDI inflows at US$108.2 billion in 2012, despite a significant decline in global FDI inflows including in most developing economies. However, ASEAN’s total merchandise trade recorded a slower growth rate from 16.8% in 2011 to 3.6% in 2012, but still fared relatively better than the global trend.
So far in the year, ASEAN economies are holding steady. During the first half of 2013, output of ASEAN-5 (Indonesia, Malaysia, Philippines, Singapore, Thailand) expanded by 5.1%, slightly higher than the 4.9% growth registered during the same period in 2012. And the economic prospect in the near-term remains broadly positive. The Asian Development Bank estimates that ASEAN’s output growth in 2013 will be at 4.9% and at 5.3% in 2014 (ADB, Asian Development Outlook Update, October 2013). Also, preliminary data from the United Nations Conference on Trade and Development indicates that total FDI inflows to ASEAN-5 in the first half of 2013 reached US$46.5 billion, quite close to the level recorded in the first half of 2012 (UNCTAD, Global Investment Trends Monitor, October 2013).
Still, downside risks to the region’s economic outlook remain. For one, the turning point of the U.S. monetary policy may generate reversal of capital flows in ASEAN, in turn, exposing financial systems to increased volatility. Likewise, forecasted economic slowdown of major ASEAN trade partners like China and India may result to sluggish export performance, in turn, weakening countries’ external (balance of payment) position which is detrimental to growth.
It is within this macroeconomic milieu that the steel and iron industry in the region operates. Trade has been steadily recovering in recent years following the collapse in metal prices and weak global demand in the wake of the 2008/2009 global financial crisis. The data bears the fact. ASEAN’s total trade of iron and steel fell to US$53.5 billion in 2009, a decrease of 33.8% from the year before. Since then, trade of the commodities has recovered. In 2012, ASEAN’s total trade of iron and steel (including articles thereof) reached US$92.5 billion, which translates to a growth rate of about 11.9% relative to 2011.
In 2012, intra-ASEAN trade accounts for about 20% of the total trade. Yet, intra-ASEAN trade notwithstanding, ASEAN remains to be a significant importer of steel products in order to accommodate the rising steel demand in the region. According to the South East Asia Iron and Steel Institute (SEASI), steel consumption in ASEAN registered a strong compound annual growth rate (CAGR) of 12% from 2009 to 2012. The still robust steel consumption in the region bodes well for the industry as it provides an offset to sluggish demand elsewhere as growth momentum weakens in developing economies like China and India.
ASEAN Economic Community (AEC) in Support of the Iron and Steel Industry
While the iron and steel industry have benefitted from policies pursued individually by national governments, benefits from regional initiatives are also far from being trivial. Collectively, ASEAN Member States have a deep understanding of such benefits from regional integration. As a testament to this understanding, ASEAN Member States adopted the ASEAN Economic Community (AEC) Blueprint in 2007. The Blueprint operationalizes ASEAN’s vision of economic integration which is supportive of the region’s economic dynamism, eventually, leading to an ASEAN Economic Community by 2015. The Blueprint is multifaceted. First, broadly defined by four pillars, then, further articulated with 17 core elements, and finally, mapped to specific priority actions to be carried out within definite timelines. Taking the Blueprint’s four pillars, AEC is characterized as a region: with a single market and production base; that is highly competitive; that promotes equitable economic development; and that is fully integrated to the global economy.
Progress has been steady in the implementation of the AEC Blueprint. By end-July 2013, the overall implementation rate is 79.7% covering advances in a wide range of priority actions. Allow me to highlight the achievements and work in progress on these initiatives, especially those with the most direct impact to the activities of the iron and steel industry.
One, tariff rates under the ASEAN Trade in Goods Agreement (ATIGA) has been significantly reduced. Average intra-ASEAN preferential tariffs have been reduced to almost zero (0.6% remaining) in ASEAN-6 countries (Brunei, ASEAN-5). For CLMV countries (Cambodia, Lao, Myanmar, Vietnam), average preferential tariff stands at 2.4%. Talks are on-going for CLMV countries to expedite the reduction of the remaining tariffs.
Similarly, there are several ASEAN initiatives to address the issue of non-tariff measures (NTMs). An interagency body at the national level in each ASEAN Member State has been established to complement regional initiatives on NTMs. Realignment of the ASEAN NTM database with the new UNCTAD classification is being undertaken. ASEAN Member States endorsed both national and regional level work programme on NTMs, with the goal of using the endorsed national level work programme as a guideline to for ASEAN Member States to streamline NTMs at each national level.
Noteworthy as well are the advances to enhance trade facilitation process in ASEAN.
The ASEAN Rules of Origin (ROO) under ATIGA are being continuously upgraded to respond to changes in in the production processes in the region. To date, the revised ROO is reflected in the Product Specific Rules (PSR), which provides two choices: regional value content (RVC) or change in tariff classification (CTC). A study has been completed which recommended the most appropriate ROO for the automotive industry. Continuing on this effort to review product specific rules, a similar study has been endorsed for iron and steel.
The ASEAN self-certification project is also on going, in fact, already on its second pilot phase where more ASEAN Member States have participated. Self-certification allows for selected registered exporters to certify rules of origin in export documents on their own, as compared to the current practice of getting certified by a related government agency.
Progress in the areas of standard and conformance is likewise encouraging. Currently the harmonization of standards, conformance procedures and mutual recognition arrangements are targeted towards priority integration sectors which include, among others, automotive products and electrical and electronic products. For instance, a mutual recognition arrangement has been formed in the electrical and electronic sector to assist manufacturers to access the ASEAN market with less impediment.
And further to ease trade in ASEAN, headway has been made on the ASEAN Single Window (ASW) Project. It aims to provide a platform for seamless electronic exchange of trade-related documents. To date, seven participating ASEAN countries have successfully undertaken a pilot testing of the information architecture, the ASW Gateway Connectivity.
Aside from trade-related initiatives, ASEAN is mounting great efforts to create an enabling environment for business and investment. This is especially essential to a sector like the iron and steel industry which is highly capital-intensive and, thus, investment requirements are high.
The implementation of the ASEAN Comprehensive Investment Agreement (ACIA) is a priority. To this end, ASEAN Member States have continued implementing reform programs leading to further liberalization of reservations to open up more sectors, greater transparency and clarity of measures and improved facilitation measures. An ASEAN Investment website (http://investasean.asean.org) has been launched to serve as a gateway of information to promote ASEAN as a single investment destination.
Towards the goal of fostering a culture of fair competition in ASEAN, countries have initiated several information sharing efforts. The “Handbook on Competition Policy and Law in ASEAN for Business in 2013” was published. Just recently, an ASEAN website on Competition (www.aseancompetition.org) was launched.
All these efforts are just several of the many endeavors that ASEAN is undertaking to promote economic dynamism in the region. And they have come to bear fruit.
Trade cost in the region has significantly reduced. The ASEAN Integration Monitoring Report 2013 (July 2013),a joint publication between World Bank and ASEAN, indicated that trade costs in ASEAN are generally lower than elsewhere, both in intra- and extra-regional trade. For instance, trade costs for ASEAN-5 have substantially fallen over, by as much as 50% between 1990 and 2007. This, in turn, has led to an increase in trade flows.
Also, World Bank’s Doing Business Report 2014 (October 2013) took note of good progress made by several ASEAN Member States. Malaysia moved to the top 10 and the Philippines is one of the economies who improved the most.
There are indications that the private sector is responding to these changes. The latest ASEAN Business Advisory Council’s (ABAC) Report noted that in the latest ABAC Survey on Competitiveness conducted from May to August 2013, almost half of the businesses surveyed (48% of respondents) indicated that their organisation now considered the investment attractiveness of the ASEAN region as a whole when planning their investment strategy over the next three years. More notably, this is up from 39% as recorded in the 2011-2012 survey. This is an encouraging sign that a growing number of ASEAN businesses now have an “ASEAN strategy” in mind when planning their investment activities.
Challenges to the AEC and Moving the Agenda Forward
Indeed, ASEAN has come a long way in bridging the path from where it started in 2007 with the adoption of the AEC Blueprint towards the frontier of an ASEAN Economic Community by 2015. However, while we celebrate our triumphs we are not oblivious to the fact that the work is far from being done. Challenges abound.
For one, progress in implementation is uneven not only across initiatives but also among ASEAN Member States. Despite progress in a number of areas as I enumerated earlier, several key measures like service liberalization, ratification of transport agreements to name a few are still pending. The timely implementation of measures continues to be the key challenge. Several ASEAN Member States find difficulty aligning regional initiatives with domestic laws and regulation and addressing domestic constraints to implement regional and country-specific commitments.
Also, awareness of the AEC initiatives is low. While business groups are beginning to grasp the importance of ASEAN community building, as evident from their response from the recent ABAC survey, the same does not hold true for the general public. The Surveys on ASEAN Community Building Efforts, released by ASEAN in March 2013, indicated that 76% of the surveyed general public in the 10 ASEAN capital cities have almost no idea of what an ASEAN Community is all about.
These challenges become more acute especially at this time when economic integration in ASEAN is getting more complex, borne about by the growing inter-linkages between economies. As such, the region has become more vulnerable to external shocks.
Still, the agenda for economic integration supportive of the region’s economic dynamism is a continuing process. The journey is fraught with challenges without a doubt. Hence, to succeed, all stakeholders—not least the business sector and industry players—have to rise up to the demands of the times.
The iron and steel industry has been one of the growth drivers fuelling ASEAN’s economic vigor and it would continue to be a pillar of growth as we go forward. And the process of integration generates opportunities for the industry. Steel demand in the region is expected to be further boosted with the implementation of many infrastructure projects to enhance ASEAN connectivity. With the narrowing of development gap, steady rise in income of least developed ASEAN economies means more purchasing power to buy products like automobiles and appliances. This is favorable to the iron and steel industry as the automotive and appliance sectors are major users of iron and steel products as intermediate inputs. Further rationalization of transport cooperation in the region, especially maritime transport, signifies more opportunities for the industry in many construction activities including shipbuilding.
Let me conclude by highlighting that ASEAN’s economic integration has been served well by the strong performance of the iron and steel industry through the years. Similarly, the industry has benefitted from the integration process. And as the agenda of economic integration in ASEAN continues, the mutually beneficial dynamics carry on.