The Association of Southeast Asian Nations (ASEAN) has gone a long way since the original 5 members – Indonesia, Malaysia, Philippines, Singapore and Thailand – signed the Bangkok Declaration on 8 August 1967, binding them together into a regional institution to secure peace, freedom, and prosperity for their peoples. Along with expansion of membership to 10, their cooperation has broadened and gone beyond the realm of economics to include political, security, social, and cultural issues, while preserving the principle of non-interference in each other’s domestic affairs.
At the recently concluded ASEAN Ministerial Meeting (AMM) in Jakarta, the Foreign Ministers have apparently agreed on a Plan of Action for the realisation of an ASEAN Security Community (ASC) by 2020 despite initial disagreement on sensitive issues relating to peacekeeping. While the Plan of Action does not include the original proposal of a Regional Peacekeeping Force, it could lead to adoption of an ASEAN Charter that would enable the institution to acquire a legal personality and make its agreements more binding.
On the economic front, it has fashioned its own model of economic integration comfortable to its members in terms of approach, scope, and pace of implementation. A key feature of this model is the gradual reduction and eventual elimination of tariff barriers with a two-tier timeline: zero tariff by 2010 for the 5 original members and Brunei, and by 2015 for the remaining four members – Cambodia, Lao PDR, Myanmar and Vietnam. The two-tier timeline was agreed upon in recognition of the development gap that exists across 10 ASEAN Member Countries (AMCs) and the different levels of preparedness and comfort in opening up their markets. More recently, ASEAN has adopted the so-called 10 Minus X principle in forging new agreements. Under that principle, all members must agree to the goal they are targeting. However, members who do not feel ready can join later or at the same time but at a slower pace, depending on their level of development, preparedness and comfort. It is an alternative to opting out altogether. Flexibility is one unique characteristic of the ASEAN model of economic integration.
It is worth noting that the fundamental basis of ASEAN’s existence is only a declaration rather than a treaty. The Bangkok Declaration simply proclaimed the aims of ASEAN to promote peace, stability and prosperity through regional cooperation, respect for the rule of law and adherence to UN principles. It is not like the Treaty of Rome signed on 25 March 1957 that created the European Economic Community (EEC) as a legal entity, along with a powerful Commission to implement decisions of its member states and to verify and enforce compliance to those decisions. The EEC later became the European Union (EU) when the Treaty of Maastricht was signed on 7 February 1992. In addition to economic cooperation, the Treaty on European Union added two other pillars: common foreign and security policy; and justice and home affairs.
For lack of legal personality, ASEAN could not even get an observer status to attend UN conferences despite its declared adherence to UN principles. Yet, it did not deter ASEAN Leaders to embark on a bold vision – creation of an ASEAN Economic Community (AEC) by 2020, along with the ASC and the ASEAN Socio-Cultural Community (ASCC) – and to pursue a host of regional cooperation initiatives to realise that vision.
Regional economic integration in Southeast Asia may be seen as essentially driven by market forces arising from competitive pressures of globalisation. Reacting to market signals, multinational corporations (MNCs) have been setting the direction and pace of economic integration. They are locating their production base where the cost of doing business is lowest and outsourcing inputs from countries that can supply them at least cost in producing goods and services intended for the regional market. For instance, even without an AEC, a number of MNCs have decided to set up their production base in Thailand for export to other ASEAN countries and to other parts of the Asia Pacific region. If AEC should be successfully established, more MNCs might be encouraged to locate their operation in ASEAN rather than China, especially if AEC results in a free flow of goods and services across AMCs.
There have been setbacks in WTO negotiations to liberalise trade due to demands of poor countries to reduce huge farm subsidies in rich countries in exchange for trade concessions. Last week’s Economist, for instance, reported that EU’s farm subsidies represent 40 percent of farm output value. In a number of other countries, it is over 50 percent. In turn, rich countries are asking more transparent government procurement in poor countries, one of the so-called Singapore issues that seem to be only remotely related to trade. But, by and large, barriers to free and fair trade continue to be gradually reduced and removed through global and legally binding agreements.
Producers in Southeast Asia would therefore need to be increasingly competitive even in the domestic market. Typically, however, the market of a Southeast Asian country (including Indonesia with a population of 220 million) is relatively limited, especially when compared to India and China. With economic liberalization, producers in China (whether Chinese or foreign investors) would have a competitive edge because of the huge domestic product market for goods and services, both for consumption and investment, and lower wages due to abundant supply as well as mobility of labour in the factor market. Management of the domestic currency to ensure that the exchange rate is internationally competitive provides an additional advantage, enabling them to export their products to the rest of the world, including to Southeast Asia. Producers in Southeast Asia are therefore compelled to find ways of reducing costs in order to survive both in the domestic and export markets. To be competitive, they would need to integrate their small and fragmented markets so that they could benefit from economies of scale and outsource production inputs from each other, depending on their respective comparative advantages in the production chain.
It is now evident but not yet widely recognized that economic integration is the key to enhance competitiveness of Southeast Asian countries. ASEAN can play a significant facilitating role to make this market imperative happen. Many years of regional cooperation have paved the way for an increasingly higher comfort level among AMCs to further deepen and broaden such cooperation. This was demonstrated when ASEAN Leaders declared in Bali Concord II the creation of the AEC by 2020. They envision in the AEC a stable, prosperous and highly competitive region functioning as a single market and production base, in which there is free flow of goods, services and skilled labour and a freer flow of capital, along with equitable economic development and reduced poverty and socio-economic disparities. It is important to note that economic integration is not an end in itself. Rather, it is a tool for enhancing competitiveness, which is an economic imperative for sustained economic growth. But more importantly, it is also a tool for reducing poverty and realizing equitable and inclusive development within and across AMCs. This is another important feature of the ASEAN economic integration model.
In pursuing the AEC, the Leaders decided to accelerate economic integration in 11 priority sectors by 2010, and instructed their Economic Ministers to prepare Roadmaps for integration in those 11 priority sectors for possible adoption at the forthcoming Summit in Vientiane in November 2004.
A sector bas
ed approach is yet another feature of the ASEAN economic integration model. The approach focuses integration efforts initially on a few selected sectors with a view to scaling them up later and then applying lessons learned earlier. A minimum necessary condition for any sector to function as a single market and production base would be removal of tariff barrier on its final and intermediate products. However, it is possible if not likely that a critical intermediate input to the sector is produced by another sector not yet covered by integration measures. Unless tariff barriers on that input are similarly dismantled, the sector can not effectively function as a single production base as outsourcing of that input from one ASEAN country by another would be hindered.
Another distinct feature of ASEAN economic integration is non-formation of a Customs Union. As Singapore is already a free port, formation of a Customs Union would mean that the other nine countries would reduce their external tariff to zero or Singapore would impose external tariff. At best, harmonization of external tariff is being floated around to minimise competitive distortion across member countries, if ASEAN is to function as a single production base. It would also facilitate negotiation of a Free Trade Agreement between ASEAN and a number of its dialogue partners, including China, even as AMCs have agreed to form AFTA and integrate themselves into one economic community. This suggests that regional economic integration being pursued by ASEAN is in the context of open regionalism.
As of 1 January 2002, Common Effective Preferential Tariff (CEPT) under AFTA had already been reduced to a range of 0 to 5 %. However, due to difficulties in meeting the Rules of Origin (ROO) to qualify for CEPT rate and the small margin between MFN and CEPT rates, only 5 % of intra-ASEAN trade has actually made use of CEPT rates. This highlights the critical importance of removing non-tariff barriers (NTBs) to the flow of goods and services across national borders so that they could freely flow as if the AEC is one country composed of ten provinces.
There are many kinds of NTBs. Some are cross-border deriving from complicated and cumbersome customs procedures, including product valuation. Others are behind the border and are sometimes referred to as technical barriers. They arise from differences in technical regulations for safety and health reasons, product quality standards, and testing/certification procedures.
To eliminate these NTBs, AMCs would need to liberalise, harmonise and automate their customs procedures. They should also align and then mutually recognise their regulations, standards, and the results of their testing procedures. Otherwise, even with zero tariff, the vision of a single market and production base can not be realised.
Removal of barriers to the flow of capital and labour in the factor market poses a bigger challenge because of their political sensitivity. With respect to capital, the notion of a foreign investor freely setting and doing business and making and repatriating profit continues to provoke and harbour nationalist sentiments that find expression in national laws favouring domestic investors. But the key to the free flow of investment is to accord national treatment to foreign investors, both from within and outside ASEAN. The challenge for ASEAN is to change the public mindset regarding foreign investment and to inculcate into that mindset the long term benefit to ASEAN peoples as consumers (rather than as profit seeking investors) of trade and investment liberalisation. Without this change in mindset, the political will to amend the laws for national treatment of foreign investors can not be mustered.
With respect to labour, AEC envisions a free flow only of skilled labour. Considering the sector based approach of the ASEAN model of economic integration, the challenge is to agree on a common definition of “skilled labour” in each of the 11 priority sectors, harmonize their qualification standards, and mutually recognize them so that skilled labour could flow freely in the factor market. Their availability and mobility across national borders would be an important consideration when investors take a decision whether to locate the production base of a skilled labour intensive production process in ASEAN, or alternatively in China. Their mobility should not be confused with movement of professionals, self-employed or otherwise, in the trade of non-factor services, which is also important if ASEAN is to function as a single market.
AMCs are now preparing Roadmaps for economic integration in the 11 priority sectors. The big question is whether the measures contained therein would be adequate and effective in removing barriers to the flow of goods and services in the product market and to the flow of capital and skilled labour in the factor market, so that the AEC would function as a single market and production base by 2010. If they are, a related question is how to ensure that those measures are implemented and enforced given the limited if not lack of authority of the Secretariat for verification and enforcement of compliance. Indeed, realisation of the AEC would depend not so much on the capacity as the political will of the AMCs to formulate, adopt and internally police implementation of those measures.