FOCUSED AND QUICK (FAQ) Issue 35
THE ASEAN ECONOMIC COMMUNITY IN 2015 Some Steps Forward But No Giant Leap
Pariwat Kanithasen and Kengjai Watjanapukka
In 2015, the ASEAN Economic Community (AEC) will be formed, aiming to be a single market and production base. Though this represents *opportunities for members, there is no big leap forward as anticipated, as much has already been achieved in trade in goods among the major member countries. Some further progress will be seen in the liberalization of goods in CLMV countries and in services for all ASEAN countries. However, markets of other production factors - investment, labor and finance/capital - have not been liberalized to the same extent and further liberalization will continue to depend on members' varied degree of development and domestic concerns. On the investment front, liberalization is still bound at levels from 1998, and only a few areas will be further liberalized in 2015. As for labor, there is only mutual recognition of some qualifications of some professionals, which does not at all imply free labor mobility. Despite progressive liberalization in most services sectors, financial services still depend on country-specific plans, which is also the case for capital account liberalization. Hence a post-2015 agenda would need to be designed to address these elements.
1. Real efforts on economic integration in ASEAN have only begun in the 1990s with the advent of the liberalization in trade in goods through the ASEAN Free Trade Area (AFTA). Intra-regional trade has more than doubled in the past decade, and has thus become a backbone of ASEAN integration. Liberalization in other strands-services, investment, labor and capital-has attempted to follow and support trade through various strands of agreements in the years that followed. However, these strands were separate, implementation was uneven, and there were a number of other obstacles, such as non-tariff barriers and backtracking of liberalization commitments by some members. The idea of creating ASEAN Economic Community (AEC) in 2007 was therefore realized to bundle these loose integration efforts and address remaining obstacles by agreeing on a clear-cut timetable with 2015 as a "goal to create a single production base and single market" and thus form one of the three pillars of the ASEAN Community, the other two being the political-security and socio-cultural pillars.
- Source: [Asia Bigger than G7 by 2030] n.d. [image online] Available at:
< http://www.livetradingnews.com/wp-content/uploads/asean2.jpg > [Accessed 22 April 2011].
2. While significant progress has been achieved in the past two decades, the pace of ASEAN economic integration envisaged by the AEC is more or less dictated by the significant differences that exist among the membership. The AEC has been compared to the European Economic Community (1955) as a precedent. While this may be valid on the surface, the obvious heterogeneity among ASEAN members points towards a slower and less comprehensive integration than in Europe, as reflected in the countries' relative size and income in the years prior to "integration". Of particular note is the dichotomy of development that exists among groups of ASEAN countries which has had a direct implication on the pace of integration, particularly in the institutional and infrastructure development, but also in human resources. This is why ASEAN agreements accord "special and differential" treatment to CLMV countries, which imply, for instance, more lenient liberalization schedules for these countries.
3. The AEC's primary goal is to create a single market and production base by 2015 which are to be realized through five core elements: free flows of (a) goods, (b) services, (c) investment, (e) skilled labor; and (d) freer flows of capital. These are to be complemented by other goals which aim to create a more competitive economic region, equitable development and integration into the global economy. The focus of this part is to take stock of achievements in the five core elements and to show that in fact goods and much of services are liberalized while investment, labor and finance/capital are still dependent on members' varied degree of development and domestic regulations.
4. Liberalization of trade in goods is the backbone of the AEC, and almost all items are now traded at zero tariffs ASEAN-wide. According to the ASEAN Free Trade Area (AFTA), ASEAN members agreed to gradually reduce tariffs since 1993, where the commitment is for the tariffs to be reduced to zero by 2010 for ASEAN-6 and 2015 for the remaining CLMV countries owing to the "special and differential treatment". Currently, average tariff rates on imports for ASEAN-6 countries are only at 0.05% and for CLMV countries 2.61%.
5. The key change we can expect in 2015 is the commitment of CLMV countries to reduce tariffs from 5% to 0%. This represents opportunities for exports from ASEAN countries to each of the CLMV countries, which have demands in household goods, machinery, construction equipment and vehicles. Hence first movers among ASEAN-5 members would benefit most in tapping these markets.
6. Exceptions to the liberalization commitments are goods in various sensitive/exclusion lists, which only amount to a handful of products. In the "Sensitive List", tariffs of some products need not be reduced to 0% but cannot be higher than 5%. A more stringent list is the "Highly Sensitive List", in which countries can cap tariffs as agreed to specific items. Items included in this list are those most protected by member authorities, usually at the request of domestic industries concerned, though any inclusions or changes in the list would need the consents of other ASEAN members as well.
7. The AEC also aims to tackle existing nontariff barriers (NTBs).These include custom surcharges, technical measures and product characteristics requirements, which have hitherto been an obstacle to creating a single goods market as they were not included in the original AFTA agreement. Members are committed to a reduction of current NTBs, and to eliminate them according to a set timeframe, at the latest by 2018 for CLMV. However, progress in this area is much more difficult to assess and quantify than the reduction of tariffs.
8. Unlike goods, liberalization of trade in services in ASEAN is targeted at specific sectors, at different paces, with most service sectors having already allowed for foreign (ASEAN) equity holdings of up to 51% even in 2010. The ASEAN Framework Agreement on Services (AFAS) has been the main vehicle for services liberalization since 1995. Through five rounds of negotiations, it aims to eliminate barriers to trade in services beyond those undertaken under the WTO-but with "pre-agreed flexibilities" to facilitate smooth and orderly liberalization which depends on members' readiness and economic development. These "flexibilities" specify which sectors-particularly financial services-are to be liberalized at what time and to what extent.
9. Certain priority sectors have been put on a fast-track towards liberalization, implying that foreign (ASEAN) ownership limits in these sectors (as mode 3 commercial presence) are to be raised from 49% to 51% (already representing majority holdings) and even further to 70%. These priority sectors cover air transport, ICT, healthcare and tourism by 2010 and logistics by 2013. For all other sectors (except financial services), foreign (ASEAN) ownership has already been increased to up to 51% in 2010 which will be further increased to 70% by 2015. In addition, restrictions for modes 1 (cross-border supply) and 2 (consumption abroad) are to be removed as well.
10. For financial services, liberalization strictly follows the "pre-agreed flexibilities" instead of binding commitments as in other sectors and includes several safeguard mechanisms. These reflect the differences in developmental stages of members as well as their domestic policies. There is a common understanding of members that more caution should be exercised in the liberalization of the financial sector than in other service sectors, as a result of the priority placed on financial stability and prudence in liberalization-consequences from the experiences during the Asian financial crisis. While there is no sector-wide liberalization commitments, members have identified selected sub-sectors within financial services to be member-specifically liberalized by 2015. A further list of sub-sectors slated for liberalization by 2020 will be developed in the coming years.
11. Liberalization of labor (mode 4) would facilitate the production of goods and provision of services, yet labor remains a sensitive issue and much more would need to be done, especially in light of labor shortages (both skilled and unskilled). Thus far, ASEAN has signed seven Mutual Recognition Arrangements (MRAs) for professionals among members in the past years, yet this does not explicitly translate to free mobility even among these recognized professionals. MRAs only help facilitate the movement of professional services providers in the region by allowing the qualification of professionals to be recognized by the relevant authorities of members (e.g. medical boards). But these professionals are still subject to domestic laws and regulations as well as market demands.
12. While ASEAN has recently upgraded its investment regime through the ASEAN Comprehensive Investment Agreement (ACIA), there has not been much progress on the extent of liberalization. The ACIA has essentially merged and improved on liberalization elements of the ASEAN Investment Area (AIA) of 1998 and protection under the Investment Guarantee Agreement (IGA) of 1987, both of which are still in force as the ACIA has yet to be fully ratified. The ACIA provides a broader investment regime-for instance, though benefits from existing or future agreements with non-ASEAN partners.
13. However, as far as liberalization is concerned, members have not made commitments in the ACIA which go beyond what has been agreed under the AIA in 1998.Reservations in the AIA are made in two negative lists and one negative list in the ACIA, i.e. any sub-sector not included in the list is liberalized: - The Temporary Exclusion List (TEL) in the AIA which is to be phased out based on agreed timelines: by 2010 for ASEAN-6, 2013 for Vietnam, by 2015 for Lao PDR and Myanmar as part of the "special and differential treatment" to CLMV. Thailand, for instance, is committed to allow majority ASEAN foreign ownership in sectors included in its TEL-plant breeding, marine animal culture.- The Sensitive List in the AIA (corresponding to the single reservation list in the ACIA). Members generally bind this list to their existing domestic laws. Additional liberalization has proven to be difficult due to a number of reasons, such as protectionism from local markets or social and environmental concerns.
14. Despite this, a key improvement in the ACIA is that it automatically extends the Most - Favored - Nation (MFN) Treatment to all ASEAN countries. That is, preferential treatment granted by any ASEAN countries under any existing or future agreement with other countries must be extended to all other ASEAN countries. A case in point here is that the rights of foreign ownership holdings of up to 60% in mining that Thailand extended to Australia under TAFTA will now be extended to other ASEAN countries, thus representing challenges to the sector.
15. The pace of capital account liberalization within ASEAN is subject to national agenda and readiness. While trade in goods and services have clear roles in the real economy, the role of capital is more ambivalent, especially in light of the liberalization experiences prior to the Asian financial crisis. Furthermore, there exist large gaps among members, which range from regional financial centers to those which have yet to liberalize their current account, which is why AEC's goal has been set for a "freer" instead of "free" flows of capital. Currently, for allowing greater capital mobility, members have relatively open FDI regimes, and members are assessing rules for liberalizing portfolio investments. To strengthen ASEAN capital market development and integration, areas of facilitating non-resident bond issuance and facilitating cross-border investment are identified as the two highest priorities to be addressed in the short-medium term. Plans are tailored specifically to each member, and are regularly monitored by the ASEAN Working Committee on Capital Account Liberalization(WC-CAL) and the ASEAN Working Committee on Capital Market Development (WC-CMD).
16. The AEC scorecards are a monitoring tool to assess the progress of each member towards the ASEAN's integration goal in 2015. The latest official report shows that overall progress for achieving a single market and production base stands at 82 percent of the target. In any case, gaps identified in this assessment would need to form part of the post-2015 agenda.
17. While ASEAN will make further strides in liberalizing its goods and most of its services markets by 2015, integration in the elements that form the production base facilitating the markets-investment, labor and finance/capital-have not been liberalized to the same extent:
- Trade in goods is already liberalized in ASEAN-6, and 2015 will mean that CLMV will commit to their final rounds of tariff eliminations. As the CLMV trade currently account of 8% of total intra-ASEAN trade, this will be a significant step in further integrating the CLMV into the ASEAN markets and thus narrow the current development divide.
- Trade in services has already seen liberalization in almost all sectors. Financial services, however, have their own liberalization plan which goes beyond 2015.
- Only skilled labor qualifications are recognized to facilitate-but not liberalize-mobility.
- Investment liberalization is still bound at 1998 levels.
- Capital account liberalization and capital market development will depend on members' readiness.
18. Integration within ASEAN has come a long way and will not end in 2015-hence, clear post-2015 agenda would need to be drawn The market-driven free flows of goods and services will, by their nature, ultimately press on the current liberalization frontiers in the factors of production of labor, investment and capital/finance. It is therefore the role of the public sector of ASEAN members to come up with a post-2015 agenda to ensure that these frontiers will be flexible enough so that they will not pose constraints to facilitating the single market, while also taking into account existing domestic considerations, whether they be financial stability or socio-environmental concerns.
ASEAN Secretariat: Consolidated 2010 CEPT Package
- : ASEAN Tariff Database
- : Non-Tariff
- :Mutual Recognition Arrangement
- (2008): ASEAN Economic Community Blueprint
- (2008): Temporary Exclusion List and Sensitive List for Manufacturing, Agriculture, Fishery, Forestry, Mining and Quarrying Sectors, and Services Incidental to these sectors
IMF: World Economic Outlook Database October 2010
Maddison, Angus: The World Economy: A Millennial Perspective (Paris: OECD, 2001)
Plummer, Michael and Chia Siow Yue (2009): Realizing the AEC: A Comprehensive Assessment
Pariwat Kanithasen
Head International Investment Agreement Bureau
Kengjai Watjanapukka
Senior Economist
International Investment Agreement Bureau
Source: Bank of Thailand