ASEAN Economic Community and its Challenges

The ASEAN Economic Community (AEC) was established in 2015 during the 27th ASEAN Summit in Kuala Lumpur, Malaysia

I. Introduction

The Association of Southeast Asian Nations (ASEAN) was established primarily as a political bloc and security pact in the aftermath of the Vietnam War. ASEAN’s key objective was to promote intergovernmental cooperation and to facilitate economic integration among its member states, with the particular aim to enhance economic growth and trade respectively. At present, South East Asia is known to be one of the most open economic regions globally. This view is derived from the fact that ASEAN merchandise exports accounts for nearly fifty four per centum (54%) of the total ASEAN gross domestic product (GDP) which totals to approximately seven per centum (7%) of global exports.[1]

To-date, ASEAN as an organisation has immensely helped its member states in achieving impressive economic growth as well as regional stability by working together harmoniously. Statistics show that between 2007 and 2015, the region has grown at an annual rate of 5.2 per centum and perhaps what is more astonishing is that the poverty rate in the region has declined for more than fifty per centum (50%), from thirty three per centum (33%) to fifteen per centum (15%) as early as 2000.[2]

Due to these significant results, the member states of ASEAN realised that much more could be achieved if they operated as a single economic entity. Therefore, with the mutual aim to create a single free trade area for the region, the member states agreed to consolidate, integrate and transform ASEAN into a community called the ASEAN Economic Community (AEC) in 2007 – the mission was inspired by the regional integration established in Europe. AEC is directly expected to increase competitiveness, narrow development gaps and improve resilience against external shocks.

In December 2015, the AEC was formally launched and established making the initiative the biggest single economic policy in Southeast Asia. Despite its establishment, there is a long journey ahead before the AEC can become fully functional. Acknowledging this, the ten member states have mutually agreed on a blueprint to complete the programme by 2025. The 2025 AEC blueprint consist of five pillars namely, single market and production base, competitive economic region, equitable economic region, integration into the global economy and enhanced connectivity and sectorial cooperation.

It is to be noted that although the milestone achieved by ASEAN member states so far have been modest, the region faces immense obstacles concerning the process of economic integration. In this article, obstacles that ASEAN needs to overcome in order to achieve a fully functional economic community shall be discussed.

II. Challenges in AEC

A significant milestone reached in terms of economic integration is the substantial progress in tariff reduction in the region. However, this has been impaired by the increase in non-tariff barriers. Non-tariff barriers are probably the most formidable impediment in achieving a single market and production base. Myrna S. Austria, Professor of Economics and Vice-Chancellor for Academics at De La Salle University in the Philippines concluded that there has been little progress on the reduction of non-tariff barriers between member states on intra ASEAN trade.[3]

Despite the existence of the ASEAN Trade in Goods Agreement (ATIGA) that was mutually agreed by all member states and signed in 2009, little progress has been made in the implementations of the initiatives to eliminate non-tariff barriers. The crucial reason for this is due to the lack of common definitions and approaches in identifying non-tariff barriers from non-tariff measures. Similarly, inadequate information on the justification of non-tariff measures and their enforcement makes it impossible to identify which of the non-tariff measures are in fact non-tariff barriers. Therefore, in the absence of this crucial information, the non-tariff measures can be easily manipulated to protect domestic industries or applied across discriminately; thus becoming non-tariff barriers.

Professor Austria stressed that non-tariff barriers could undermine the economic integration process and the realisation of the AEC by concluding that “ASEAN is far from being a single production base and that protectionism continues to prevail among the member economies in the ASEAN region”.[4]

This can be observed in recent years as there has been significant growth in nationalism in some ASEAN countries. For example, Indonesia, the biggest member state continues to actively impose non-tariff barriers to protect its domestic industry. The country has, in the past few years, impose a local content requirement for smartphones manufacturers in order to lower imports and directly nurture local design and manufacturing capacity. Prior to this move, Indonesia had also imposed regulatory requirements, i.e. registration with Ministry of Trade by batik-patterned fabric importers in order to safeguard the domestic batik industry.[5]

Further, the progress made in liberalising trade in services has not been impressive. Deunden Nikomborirak and Supunnavadee Jitdumrong of the Thailand Development Research Institute are of the view that the growing importance of services in the economies of most ASEAN member states as a share, is not only of GDP but also of employment. They discovered that the larger the share of services in a country’s GDP, the higher per-capita GDP of that country.[6]

As a result it is arguable that the liberalisation of intra-ASEAN trade in services is important to the economic integration of the region. It can be observed that the current AEC blueprint in itself is insufficient for this purpose and much lesser in the ASEAN Framework Agreement on Services (AFAS). Jenny Corbett of the Australian National University stated that, “AFAS is not particularly liberalising compared with General Agreement on Trade in Services (GATS) commitments.”[7] Many academicians are also of the view that the existing Mutual Recognition Arrangement (MRA) for specific professions are too riddled with loopholes; thus having little impact on regional movement of professionals in those fields.

I am of the view that the rather unambitious liberalisation goals and lack of implementation in trade services established under the AEC blueprint is the cause of ASEAN member states unwillingness to open up their service sector. Therefore, without political will, it seems rather difficult to foresee an integrated ASEAN service market in the near future.

It is also crucial for ASEAN to comply with modern standards of the rule of law as at this juncture there are no forms of legal remedy available to the citizens of its member states. ASEAN can only urge the member states to resolve disputes peacefully through dialogues, consultations and negotiations. Instead of forming a uniform ASEAN Court of Justice there are only dispute settlement mechanisms in place. Often this results to merely consultation.

However, after procedures for consultations, conciliation or mediation are terminated, member states are permitted to make a request to form a ‘panel’ which will be entrusted with a duty to submit findings and recommendations by way of a written report for an appellate review. Professor Dr. Thomas Schmitz opined that from the perspective of the rule of law, a spontaneously assembled ‘panel’ of a rather arbitrary composition cannot replace the access to an independent, legally-trained judge.[8] This is held on the basis that the said ‘panel’ will not be able to produce jurisprudence, which is in fact essential for the development of law.

​It is also apparent that when utilising the panel system, member states prefers to opt for the dispute settlement system of the World Trade Organisation. Further, matters that remain unresolved, it shall be referred to the ASEAN Summit for its determination and decision. During the summit, the head of respective member states and governments are to be given the role as the final arbiter and enforcer in resolving the matters and it absolutely denies any separation of power to exist and is therefore incompatible with the idea of a politically neutral dispute resolution. This is typical scenario surrounding the strictly intergovernmental character of ASEAN.

Therefore, I opine that ASEAN should form an ASEAN Court of Justice in order to properly regulate matters in an orderly manner.

As AEC is being integrated at a time when global economic growth is modest, member states are to be cautious in safeguarding their national interest primarily. Much uncertainty in the global economy due to the decline in oil prices, a general slowdown in the investment and trade markets, and Britain’s recent decision to exit the European Union has undoubtedly raised many concerns about the future of regional integration. Due to these apparent alarming uncertainties, ASEAN member states are more concern about economic stability in their own countries and would be less prone or aggressive in devoting resources towards a regional integration.

III. Conclusion

As a matter of fact, the process of ASEAN economic integration has evolve from AEC 2015 to AEC 2025, with many of the tasks listed in the earlier blueprint yet to be implemented. I opine that due to the global economic slowdown and the challenges ahead, the implementation period of any or all of the tasks in the AEC 2025 blueprint will be significantly slower. It is to be noted, however, that some AEC commitments laid down in the blueprint will be met but some will simply pave the way for future actions, and the remaining will be too sensitive to be adopted at any national level within the stipulated time frame.

In addition, ASEAN member states needs to strengthen their respective individual domestic industries by raising productivity. While the concept of protectionism and low productivity help a member state in generating revenue and saving jobs, it is merely a short term solution. By adopting such policies, member states are holding back potential improvements to their socio-economic standards.

In order to fully achieve a complete and functional AEC, member states need to allocate more resources to regional integration and put regional initiatives at par with their domestic agenda. This will automatically strengthen ASEAN in facing any other common external challenges.

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This article was written by Premjit Singh Kolwant Singh, a postgraduate student at the Faculty of Law, University of Malaya. (Edited by Adam Huang)

Disclaimer: The opinions expressed in this article are those of the author, and do not necessarily reflect the views of the University of Malaya Law Review and the institution is affiliated with.

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Footnotes:
[1] ASEAN 2030: Toward a Borderless Economic Community, July 2014, Asian Development Bank Institute, <https://www.adb.org/publications/asean-2030-toward-borderless-economic-community>.

[2] Rumki Majumdar, “ASEAN Economic Community: Playing a key role in Asian economic integration’’, Asia Pacific Economic Outlook, Q4 2016, 10 October 2016.

[3] Myrna S. Austria, Non-Tariff Barriers: A Challenge to Achieving the ASEAN Economic Community, 2013.

[4] See footnote 2 above.

[5] The Government Bans the Import of Fabrics with Batik Motif, Ed. Alfurkon Setiawan, 13 Jan 2015, Sekretariat Kabinet Republik Indonesia. < http://setkab.go.id/en/the-government-bans-the-import-of-fabrics-with-batik-motif/>. 

[6] Deunden Nikomborirak and Supunnavadee Jitdumrong, ASEAN Trade in Services, 2013.

[7] See footnote 4 above.

[8] Prof. Dr. Thomas Schmitz, The ASEAN Economic Community and the rule of law, BDHK Workshop, December 2014.