Thank you for inviting me to speak at this inaugural ASEAN Business and Investment Summit. It is a useful platform for political and business leaders to discuss the challenges facing our region, and our common strategy for building a better future.

Shortfalls in ASEAN Integration

This year is the 10th anniversary of the ASEAN Free Trade Area. During these ten years, the global trading landscape has changed dramatically. The North American Free Trade Agreement, or NAFTA, came into effect in 1994. It links the world’s largest economy with its northern and southern neighbours. In 1995, the World Trade Organisation was established. In 2001, the Heads of State and Government of the American continents endorsed the first draft of the Free Trade Area of the Americas. When formed, the FTAA will link 34 economies on the two continents, stretching from Alaska to Antartica. Also in 2001, the world’s most populous nation, China, acceded to the WTO. Meanwhile in Europe, after its last round of enlargement in 1995 involving Austria, Finland and Sweden, the European Union will admit ten more Central and Eastern European countries in 2004.

These landmark developments in the global trading environment are exerting tremendous competitive pressures on ASEAN. In this context, it is instructive to compare ASEAN’s progress in economic integration. Is our response to the developments adequate? How far have we moved towards a single market?

On tariff reductions, we have done well. Ten years ago, ASEAN-6 agreed to bring tariffs down to 5% or less within 15 years. We accelerated it to nine years and achieved that goal this year.

But feedback from businesses is that we have not done enough. Traders have made limited use of the preferential treatment under AFTA. Only a small percentage of intra-ASEAN trade is conducted under AFTA. Regional sourcing remains low. For example, only 18% of personal care products and 5% of food are sourced regionally. In contrast, in the EU, the corresponding figures are 50% and 25% respectively. This striking difference shows that while we have made commendable progress in tariff reduction, we are far from an integrated market.

Why is this so?

Some officials argues that ASEAN’s tariffs with the rest of the world are already low. There is therefore little need to make use of intra-ASEAN preferential rates. But businesses will tell you the more troubling reason: it is too costly to apply for preferential tariffs in some ASEAN countries. Companies would rather pay more, than put up with red tape and delays that they would encounter if they applied for preferential treatment under AFTA.

There also remain many non-tariff barriers. Products have to comply with a bewildering range of standards, which vary from one ASEAN country to another. Let me city just two examples.

First, take how we define the weight of a bar of soap. In some countries, this is the weight upon leaving the factory. In others, it is the weight at the point of sale. To meet these differing standards, companies establish two separate production lines. One production line produces 100-gram bars of soap. Another line produces 104 grams, as there would be some loss of weight between the factory and the shop because of evaporation. This means higher cost for companies.

Next, to bring a new pharmaceutical drug to the ASEAN market, a manufacturer needs the approval of ten health authorities. This again raises costs for companies. In major economies like the US or China, they only deal with one health authority.

Indeed, for businesses, ASEAN has yet to become a “single production base” that would enable manufacturing operations to be linked seamlessly throughout the region. But many MNCs want to leverage on the diverse cost structure and comparative advantage across ASEAN. They want to manufacture the different components in the different ASEAN countries, wherever they can be done most competitively. Only when they can do so, will they sink their money in ASEAN.

Though some MNCs are already doing distributed manufacturing, many others hesitate. It is not our geography that holds them back. Shipping between ASEAN ports takes a similar amount of time compared to better-integrated markets like the EU. Apart from the reasons I mentioned earlier, it is also our regulations once the goods land in the ASEAN ports. The time taken for some ASEAN customs authorities to clear the consignments is uncertain. One leading electronics firm observed that identical components sometimes clear customs in one day, sometimes up to five weeks. Such uncertainties translate to higher inventories and higher working capital costs. It makes ASEAN uncompetitive.

In the services sector too, there is room for improvement. Since the conclusion of the ASEAN Framework Agreement on Services in 1995, we have had two rounds of negotiations. This has not resulted in substantive liberalization. The lack of progress in services is delaying our broader economic integration, as the linkage between services and manufacturing is deep and synergistic.

For example, a good logistics service is essential to move components for manufacturing operations. But foreign equity limits constrain freight forwarding companies from investing in ASEAN countries.

To facilitate economic transactions, we also need effective movement of voice and data. Telecommunications is a key enabler in a modern economy. But today, no truly pan-ASEAN telecoms operator has emerged. This is in marked contrast to Europe and the US.

To give another example: across ASEAN, there is a big need for infrastructure improvements. But in several economies, foreign companies are restricted from participating in construction and civil engineering projects. These range from a total ban, to limiting foreign companies to act as sub-contractors, advisors to local firms, or joint-venture partners.

The Challenge to Post-Cancun

Trade liberalisatio is inherently difficult. It requires all of ASEAN to make difficult internal adjustments.At the multilateral level, getting 146 economies at different stages of development to agree to a common agenda is even tougher. The collapse of the WTO negotiations at Cancun testifies to this.

What are the implications for ASEAN post-Cancun? Yes, the pace of multilateral liberalization has slowed down. But it would be a mistake to think that global trade liberalization will come to a halt, and ASEAN can now relax.

Instead, we must expect growing bilateralism and regionalism as countries seek alternatives to the multilateral agenda. That has been the experience in the last ten years. Since the conclusion of the Uruquay Round in 1993, it took eight years before economies could agree to launch the Doha Development Agenda. In the meantime, for lack of progress on the multilateral front, bilateral and regional trade liberalization flourished. As of December 2002, more than 250 regional trade agreements had been notified to the GATT/WTO. Of these, 136 were notified after 1 January 1995, when the WTO was formed.

In fact, the US is already turning its attention to bilateral FTAs. It is making the most of its hard-won trade promotion authority, which will expire in 2005. The EU might be compelled to pursue a similar strategy. A senior EU official was quoted in Cancun as saying that they have a queue of countries waiting to negotiate bilateral deals with them.

Turning the Single Market into Reality

Hence the need for ASEAN to press on with economic integration remains as urgent as ever, if not more so. We must push towards an ASEAN Economic Community: a single production base and a single market, with free movement of goods, services and capital. This is the only way to make sure we remain competitive in the face of growing regional and bilateral FTAs, post-Cancun.

What does it take to make the ASEAN Economic Community a reality? Former ASEAN Secretary-General Rodolfo Severino has observed wryly that, “Regional economic integration seems stuck in framework agreements, work programs and master plans”.

He is right. Achieving the ASEAN Economic Community goes beyond good intentions and visionary plans. It is like climbing a mountain. To reach the top, we need discipline, teamwork and a willingness to try new routes.

Let me elaborate.

Discipline in implementation

First, ASEAN must be disciplined in the implementation of agreements.

ASEAN has done well in committing to reduce tariffs through AFTA, first to 0 to 5 by January this year, and further to zero by 2010 for ASEAN-6. We must now implement our commitments seriously.

Last year, the Philippines informed ASEAN that it intended to postpone the reduction of some petrochemical tariffs. Although this was a setback, the Philippines’ willingness to resolve this according to the CEPT Protocol signaled her seriousness in observed ASEAN agreements. This political commitment to adhere to the agreements is key to investor confidence.

We must continue to strengthen the institutional basis of ASEAN in settling disputes. Earlier this year, the ASEAN Economic Ministers endorsed a non-policitised and legally binding dispute settlement mechanism. This major step forward for ASEAN.

We should emulate the same discipline in expediting customs procedures and reducing non-tariff barriers.

Customs procedures need to be transparent and business-friendly, to facilitate movement of products within ASEAN. Our customs administrations must become models of efficiency and integrity. We need to set goals to improve clearance time. We can start with customs green lane for priority sectors where we seek to significantly increase intra-ASEAN trade.

Similarly, domestic regulations and processes must be designed to move us towards a single market. We should adopt international norms, and have mutual recognition arrangement for cosmetic products is an important achievement for ASEAN. It potentially unifies our markets for these products, which have annual sales of nearly US$400 million. Let us build on this small success and extend mutual recognition to a whole range of products, starting with those in which we trade the most.

Pioneering Spirit

Second, ASEAN must embrace a pioneering spirit, to try new and novel ways to achieve economic integration.

We need this spirit most in services liberalization. ASEAN cannot be competitive in manufacturing or agriculture if we are backward in services. Efficient services, such as in logistics, banking and telecommunications, allow for efficient manufacturing processes. In the next phase of our economic integration, we must make a major push in services liberalization.

The services industries in ASEAN are at different stages of development. Some ASEAN economies understandably, therefore, have concerns and reservations on rapid liberalisation. We must have pioneers to find new paths towards liberalisation.

In this regard, ASEAN has agreed to adopt the ASEAN-X approach. We signed a protocol last month in Phnom Penh to this effect. Economies that are ready and willing to liberalise their services markets earlier can do so. Other members can join in when they are ready to make commensurate commitments. This will inject momentum towards the development of a single services market.

In addition, to catalyze integration within ASEAN, Prime Minister Thaksin and I have agreed that Singapore and Thailand will work on a range of projects under the Singapore-Thailand Enhanced Economic Relationship, or STEER for short. For instance, we intend to extend to each other the services commitments we separately have or are going to make to major FTA partners such as the US and Japan. Our aim is to showcase these bilateral projects and their results, to encourage other members of ASEAN to join in. Both countries will take first to the dance floor to “tango”. When other ASEAN members join in later, we will have a livelier party.

The other area that ASEAN is pioneering is the “vertical approach” of economic integration. Today, our agreements in goods, services and investments take a horizontal approach to cover all sector. But the sheer breath of such an approach is overwhelming. Inevitably, results are slow to come by.

To achieve high-impact benefits, we need a vertical, fast-track integration approach in priority sectors. It is ineffective to liberalise one part of the system such as tariffs, when bottlenecks continue to exist elsewhere such as in product standards. To achieve significant breakthroughs, we can, instead, focus on specific sectors. By coordinating all the necessary measures for integration within those priority sectors, such as zero tariffs, rapid customs clearance, and harmonization of products standards and technical regulations, we will achieve more visible progress. Such progress helps build the appetite and confidence for integration in other sectors.

Teamwork

Finally, we must strengthen teamwork and make special efforts to help the newer members of ASEAN. The ASEAN Economic Community is not just about liberalization. It is also about development through sustainable growth. Focusing on targeted areas of capacity building will help the newer ASEAN members to take off economically. The Initiative for ASEAN Integration (IAI), launched in 2000, focuses on infrastructure development, human resource development, ICT and capacity-building for regional integration.

Since the IAI workplan was endorsed in 2002, 73, projects have been identified. Of these, 39 projects have secured funding and are at various stages of implementation. We should move faster. To inject momentum, Singapore and Thailand are working out an assistance package for Cambodia, Laos and Myanmar. This package comprises courses to build up the human resources of the CLM countries in areas like English language, IT, trade liberalization, public administration and possible agriculture. Viet Nam is relatively more developed and will be help bilaterally.

Conclusion

Let me conclude.

The question for investors is: can ASEAN achieve its vision of an ASEAN Economic Community? If the answer is “yes”, they will put their money here. Otherwise, they will gravitate to other economic regions.

I believe we can produce a “yes’ answer. ASEAN has shown its ability to respond to its challenges. Nearly a year ago, ASEAN  reeled from the shock of the Bali bombing. Today, Bali is on the road to recovery. And we have scored some successes against terrorism with the arrest of key members of the Jemaah Islamiyah network.

Earlier this year too, the region reacted swiftly and decisively in tackling SARAS. ASEAN leaders met in Bangkok in April and quickly agreed to keep our borders open, while coordinating our “isolate and contain” measures.

I am therefore confident that ASEAN can respond successfully to the economic challenges. The logic of closer economic integration, which is for us all to enjoy a higher standard of living, is clear and undeniable. In fact, with the slowdown in multilateral trade liberalization, the imperative for regional economic integration is greater than ever before. ASEAN should get our act together. We must make it easy for investors to take advantage of each other’s competitive strengths, if we want sustained economic growth and to regain our dynamism. A recent study by McKinsey estimated that an economically integrated ASEAN could increase the region’s GDP by at least 10% and reduce the operational cost by up to 20%. This translates into additional GDP of US$50 billion for the whole of ASEAN.

Our major partners too, all see promise in ASEAN. They are keen to engage us. Beijing wants an ASEAN-China FTA by 2010. Tokyo wants to implement the ASEAN-Japan Comprehensive Economic Partnership by 2012. Delhi wants an FTA with ASEAN by 2011. And the US is engaging ASEAN through the Enterprise for ASEAN Initiative.

Just as the formation of the European Coal and Steel Community 50 years ago helped revitalize the war-torn European economies, I believe the ASEAN Economic Community will revitalize ASEAN economies. It will provide the foundation for our long-term prosperity.

As business leaders, I urge you to provide feedback, and press for change, to help governments in ASEAN make the stride forwards towards the ASEAN Economic Community.