Obstacles on the Road to An ASEAN Single Market
Info: 9720 words (39 pages) Dissertation
Published: 9th Dec 2019
Obstacles on the Road to An ASEAN Single Market
Since the end of the WWII, countries around the world have tried to establish regional economic organizations to improve economic growth. The belief in forming these economic regions is that to remove trade barriers and to enhance the freedom of movement of goods, services, capital and labor will improve trade between countries and promote peace and stability. For this purpose, there have been a lot of regional economic groups such as European Single Market, ASEAN Economic Community (AEC), Central American Common Market(CACM), CARICOM Single Market and Economy(CSME), Eurasian Economic Space, Southern Common Market (Mercosur) and Gulf Cooperation Council (GCC). In trying to form economic blocs, policymakers have found that the lack of supranational institutions, borders between countries, standards on production, development gap, anti-competition and taxes are the most important barriers to remove (Katzenstein, 2005).
ASEAN, a regional intergovernmental organization, was originally established as the Association of Southeast Asia (ASA) on 31 July 1961 with the aim of striving for regional stability. The organization was originally composed of five countries–the Philippines, Indonesia, Singapore , Federation of Malaya, and Thailand. Although the name of the organization was changed from Association of Southeast Asia (ASA) to ASEAN on 8 August 1967, it carried the same political intention—maintaining regional stability through preventing the spread of communism in the region. When Vietnam invaded Cambodia in 1979, ASEAN managed to show solidarity in opposing the invasion (ASEAN Secretariat). With the end of the cold war between the West and the USSR, ASEAN had not only asserted its political strength but also given more attention to economic development in the region. The region’s economic growth since the end of the Vietnam war was maintained throughout the 1970s. Brunei became the sixth member of the organization in 1984, Vietnam in 1995 and Laos, Myanmar and Cambodia in 1997. Now the organization has ten member countries and two observers, with the aim of strengthening Southeast Asia’s economic, political, security, military, education and socio-cultural integration through intergovernmental cooperation as set out in the ASEAN Declaration.
With 640 million people living in the ten ASEAN member countries, it is also one of the biggest economic regions with potential effects on the whole world and a leading player on regional trade and security issues since the 1990s. With 8.8% of the total world population, ASEAN is bigger than the EU in terms of population. The group saw its combined GDP growth reached the mark of US$2.5 trillion in 2015, being the sixth largest economy in GDP in the world behind the United States, China, Japan, France and Germany(A Blueprint, 2015, p.1). ASEAN is one of the success stories of modern economic integration especially among the developing countries. According to the 2015 statistics issued by the ASEAN Secretariat, ASEAN, being the third-largest economy in Asia, is also higher than India in terms of per capita income. The total value of trade involving ASEAN countries between 2007 and 2014 increased by about $1 trillion. However, a little more than half of trade was within member countries and the rest was with non-member countries- China (14%), Europe (10%), Japan (9%) and the United States (8%). The region saw, during the same period, foreign direct investment (FDI) coming into the region rose from $85 billion to $136 billion and from 5% to 11% of world share (Lehmacher, 2016).
On 15 December 2008, ASEAN leaders met in Jakarta to implement a charter with the intention of building an economic community taking a step closer to realizing a single market. Because of the charter, the organization became legal entity representing a future single free-trade area for the region (ASEAN Economic Community). ASEAN would like to integrate the region’s economy through a single market by creating the ASEAN Economic Community. There will be many things to do to integrate the region as a single market. Trade among the member countries is low because they export their products to foreign markets in other continents rather than among member countries. With 640 million people, it is also the third largest market and the third largest labor force in the world. If the integration process moves forward as smoothly as planned over the next decade, the AEC could boost the region’s economies by 7.1% between now and 2025 – which is more than ASEAN’s annual growth rate of 5.4% between 2004 to 2014 (Lehmacher, 2016). The process could also generate 14 million additional jobs, according to a paper by the International Labor Organization and Asian Development Bank(ASEAN Community, 2015, p.9).
ASEAN Economic Community (AEC)
ASEAN set 2015 as the date for creating an ASEAN Economic Community (AEC) as well as a single market and production base. In other words, the organization had an aim of becoming an economically integrated region by 2015 when there would be free flow of investments, services, goods, capital and labor as well as development in economics, prosperity and socio-economic situation. However, there are many obstacles that will hinder ASEAN’s aim for a single market. Firstly, there is a gap in economic development between more developed countries and less developed ones within ASEAN. The difference is also true in terms of income per capita, poverty level, life expectancy, literacy, health and education level and infrastructure. For instance, while Myanmar’s per capita income level is US$419, Singapore people have a per capita income level of US$36,631–87 times higher than Myanmar’s (Sugiyarto,2014)
. For another example, there are also key disparities in the infrastructure sector. The physical infrastructure of new member countries (Cambodia, Laos, Myanmar and Vietnam) has chronic weakness in terms of “low responsiveness to users, organizational inefficiencies, insufficient budgetary funding, heavy dependence on Official Development Assistance (ODAs), lack of FDI, and lack of environmental awareness” (Salazar et al, 2007). The weakness is not only in hard physical infrastructures like highway and rail networks, power grids, and gas pipelines but also in soft ones like information and communication technology.
Member countries also have important differences in institutions and human resources, especially newer members (Cambodia, Laos, Myanmar and Vietnam). In addition to these differences, new members’ weakness in policies, legal frameworks make it challenging for them to raise their productivity and utilizing foreign aid to the highest level. Because of these obstacles and differences, new members will have to face huge social costs caused by structural adjustments of deeper economic integration in addition to the risk of a low-cost labor trap (Sugiyarto,2014). For this problem, ASEAN should think of allocating resources to new members so that there will be smooth participation in the single market. Resource allocation should include “financial and technical assistance, transfer of technology, education, training facilities, and other capacity-building activities”.
Trying to achieve the AEC, ASEAN has set some goals including the establishment of a single market and production base which help with the free flow of goods, services, capital, investment and skilled labor in the region. Unlike MERCOSUR which is a customs union, the goal of ASEAN is an economic region consistent with multilateral rules and commitments. Different from the EU, ASEAN also would like to establish a single market without transnational institutions (Understanding ,2014). To achieve this kind of single market, ASEAN will have to eliminate tariff and non-tariff barriers and other public barriers to trade. The organization also want to be a market-driven “highly competitive region” (ASEAN Secretariat). Competitiveness can mean both productivity and attractiveness of a single market comprising about half a billion consumers. That economic region will have the ability to compete with India and the PRC in terms of politics and economics. In this way, ASEAN can offer an attraction to foreign direct investment and a market for goods and services. Moreover, the AEC Blueprint includes political-security and social-cultural goals. It also wants to provide ample opportunities for small and medium-sized enterprises (SMEs), raise living standards and reduce income inequality in each state and between the states (Das et al,2013).
ASEAN And China
One of the other reasons ASEAN has tried to strengthen the regional economy through a single market is the emerging economy of China. Since the economic reforms in the late 1970s, China has grown as a market and production base with a single government rivaling ASEAN. In the 1990s, the organization saw its share of trade and investment diverted to China. The only way to reverse the trend, the leaders of the organization realized, was to deepen the economic integration among the member countries and improve its competitiveness on global level (Ramirez,2017). Moreover, the motivation to develop the AEC through a single market can be understood as preventing the expansion of other economic regions like the EU and the NAFTA. Through the AEC, ASEAN member countries will be able to pursue their national interests strategically. Operating under the single market, the member countries could reduce their economic and financial vulnerability and enhance their attractiveness to multinationals and foreign investment. As a result, the organization as a whole would have an advantage in bargaining in the WTO and negotiating over FTAs (Ramirez,2017).
The leaders of the member countries have tried to create an ASEAN single market and economic community adopting the ASEAN Vision 2020 in 1997. Three major pillars , Security Community, Economic Community and Socio-Cultural Community were to support the Vision(ASEAN Member States). The Economic Community wants to create a single market based upon the four freedoms of goods, services, labor and capital across the ten member countries through the economic integration initiatives. The characteristics of the community described in the blueprint are a single market and production base, a highly competitive economic region, a region of fair economic development, and a region fully integrated into the global economy. The single market and then the Economic Community will be achieved through the free movement of skilled labor, goods, services and capital investment. ASEAN should focus on three institutional choices of decision making, commitment devices and organizational structures to identify the strengths and weakness of each institution in the AEC given the current political realities in the region.
The institutional arrangement supporting ASEAN’s integration into a single market and economic community can also help with the region’s economic development. The organization has its own sets of norms, rules, procedures, and organizational structures established for the integration process. Depending on the arrangement and commitments, integration process may be easy or difficult. The institutions can also ensure that commitments are clearly defined and agreed on and monitored for compliance. Institutions can also impose costs (reputational effects or material costs) for not complying so that instances of non-compliance can be reduced. On the other hand, there will be incentives for a state to maintain its good reputation as a reliable cooperation partner and less propensity to renege on its commitments (Das et al, 2013). Moreover, if the institutions are convincing enough that the integration process will meet its goals, businesses are more likely to make corporate investment, production and marketing decisions toward the regional market.
In spite of this, the institutional arrangement set for an ASEAN single market and economic community is somehow limited. One of the most important weakness is that there has not been an entity empowered for making members comply with the commitments. Over the years, there have been suggestions that the organization should strengthen its institutions, but the leaders of the association gave domestic politics as an excuse for failing to do so. As a result, ASEAN has not delegated power to a third party or the ASEAN Secretariat for monitoring and enforcing the compliance. On the other hand, member states themselves are reluctant to accept any form of centralized authority to manage and complete the integration process. The preference for weak institutions also means either a real preference for weak or an unintended consequence of a slow integration among the members. Because of that ASEAN leaders should consider institutional designs that are pragmatic in terms of politics and convincing enough to be adopted by member countries. More importantly, the institutions aimed at integration should also have the ability to induce the leaders to show the willingness to implement the initiatives in a timely and effectively manner.
The Political Economy of ASEAN Integration
There are three different aspects, seen in the ASEAN Economic Community project, that can enable ASEAN’s approach to regional economic liberalization and integration to produce a single market. The first aspect is that member countries have the willingness to set ambitious plans and programs on economic cooperation and liberalization. Despite their willingness to set ambitious plans and commitments, members governments are weak in meeting the targets set according to the commitments (Das et al, 2013). Moreover, the member countries do not prefer strong institutions that can impose binding institutional structures, enforcing commitments, action plans and timelines that members have agreed. In short, ASEAN members just want non-intrusive, intergovernmental mechanisms for decision making and enforcement, although the AEC has adopted numerous institutional innovations aimed to help the integration process. Thus, it has become debatable that these flexible institutions are a catalyst or obstacle to the integration process.
ASEAN leaders do want to gain legitimacy in their rule through economic growth and employment raised to the highest level, whatever differences in their political systems and societies are. However, there are still hindrances limiting their realization of wishes like conflicting approaches to domestic distributive agendas, social safety nets and nationalist developmental goals. ASEAN leaders also seem to think that liberalization and regional integration are compatible with state intervention in the domestic economy. They want to intervene in economies to a certain degree because they think that economic liberalization and the market mechanism alone cannot meet those domestic distributive and non-economic goals. More importantly, the line between the business sector (whether it is state-owned enterprises or private businesses) and ruling elites is blurred (Sugiyarto,2014). The effects of these ambiguous relations between the business and government on the region’s integration process is also unclear. Moreover, civil society groups have had more say on the economic liberalization and regional integration through their expanded political space in the region. The dominant force that can shape the whole process is still ruling elites who will respond only to their interests in a domestic context and external competitive forces.
Member countries are very different in terms of domestic political cultures, state-society relations and level of economic development. Consequently, each has different national economic policies and interests on trade and investment liberalization with the result that some policies are in support and some opposing the integration as a single market. In other words, the interaction between competitive pressures coming from outside and national interests will determine whether the regional market integration will be successful or not.
The ASEAN free trade area and ASEAN economic community were started with the aim of achieving national economic growth through enhancing the whole ASEAN’s competitiveness as a production base and investment attraction in the global market. However, each government faces constraints of domestic political and economic situations because they have vested interests demanding exemptions from liberalization initiatives in the region and the governments are also not sure how far and how fast they could comply with integration process. When trying to strike a balance on outside pressure and domestic resistance, governments tend to look to powerful national businesses or important business elites which have very large stakes in the process. Though these business interests have had more benefits in the integration initiatives in recent years, governments’ decision on to what extent the integration will go will depend on domestic political interests.
Since the integration ideas were conceived, flexibility has also been deliberately given a lot of space so that national governments enjoy sufficient autonomy in deciding the sectors, speed and timeframe to liberalize. Consequently, AFTA the AEC, the main pillars of the integration process have unique institutional characteristics. Member states were supposed to make vertical compromises between states and various domestic interest groups, and horizontal compromises between the member states themselves (ASEAN Secretariat).
Flexibility has both advantages and disadvantages. Because of flexibility, the ASEAN Free Trade Area may have continued enabling members to adjust to their original initiatives and commitments. On the other hand, flexibility seemed to enable the members to develop and comply binding rules that will govern regional liberalization in future. Characteristics of flexibility can also be found in many institutions and procedures paving the way for exemptions and modified concessions. These flexible institutions and procedures seems to signal to businesses and investors that regional economic liberalization remained firm on the agenda. Since flexibility have both the positive and negative effects, ASEAN leaders should recognize them and take advantage of the negotiation process.
Institutions that encourage agreement among the members, called “commitment devices”, will be useful for the integration process. The ADB study says that one of such important devices, the mobilization of political leaders, will facilitate cooperation among the leaders making them commit “collective project deep within the political executive”(Das et al, 2013). The second commitment device may be legalization, which has three parts— precision of commitments, binding of commitments and enforcing of commitments (Das et al, 2013). Precise and binding commitments may be easy to implement because they have some reputational effects. Enforcing of commitments, including interpreting and monitoring, will be difficult because organization members are still reluctant to delegate authority to third parties. Because of these institutions and culture, the ASEAN Secretariat does not have real authority to punish non-compliance, although it has been assigned the task of monitoring members’ compliance with the commitments. It will still be nearly impossible for ASEAN members to agree to confer more authority to third-party institutions to enforce liberalization commitments. It is also true that the ASEAN Charter “does not provide for sanctions, suspension or expulsion in the event of non-compliance” but just protocols allowing negotiated compensation between those involved in disputes when original commitments are irrelevant or parties involved invoke the dispute settlement mechanism (Tangkitvanich et al, 2017).
The ASEAN Secretariat
Among the ASEAN institutions the most important one will be the ASEAN Secretariat
which is responsible for coordinating ASEAN’s all the important functions and activities (700 meetings held in ASEAN each year) including monitoring regional integration. However, ASEAN faces lack of coordination as a critical weakness in the organization threatening to the smoothness of the integration process. Not only the ASEAN Secretariat, but also also three community councils for each of the three community pillars (political-security, economic and
socio-cultural) to facilitate coordination within ASEAN. These councils are also seemingly ineffective for improved coordination, information sharing and decision making on ASEAN’s community building process. For the integration of the ASEAN Economic Community as a single market, 12 functional ministries are also responsible for coordination. The ASEAN Coordinating Council was established comprising ASEAN foreign ministers for the task of overarching coordinating among officials in each ministry, between officials of
different ministries, and among the three community pillars.
Although the importance of coordination among different institution is recognized by the ASEAN itself, they are just “events, not agencies, and periodic occasions, not permanent offices” (Das et al, 2013). Because of ASEAN members’ aversion to central authority, permanent offices or agencies only emerge with difficulty. Moreover, the limited financial resources of the organization are also an impediment to actions necessary for the integration. The financial resources for the Secretariat and for the Development Fund, about US$9 million and US$11 million annually respectively, come from member contributions. In light of the size of the region, the potential of development and a lot of programs for integration, these financial resources are apparently insufficient.
However, ASEAN can compensate these shortages by streamlining some of its structures, ending unnecessary programs and combining similar programs. These organizational restructuring and development could free up resources necessary for regional integration.
For example, some institutions for macroeconomic surveillance could be ended or minimized because the ASEAN Plus Three Macroeconomic Research Office (AMRO) is now established for financial and macroeconomic surveillance in support of the Chiang Mai Initiative. The ASEAN Integration Monitoring Office (AIMO), established in 2011 to support the ASEAN Economic Community, will continue its financial surveillance and monitoring of economic integration (ASEAN Member States).
Some institutions in ASEAN could be created and enhanced for the integration towards an economic community. With the members intent on guarding their domestic policy autonomy and aversion to centralized institutions, external or top-down agencies for imposing discipline on members may not likely to work. In light of this political economic reality, institutions for economic integration should be fashioned so that members come to see that regional economic integration as a single market is their best national interest (Das et al, 2013). These institutions should also address effective monitoring and feedback instruments to encourage member governments to make policy choices that support a single market. Thus, ASEAN needs to focus on four areas where the most needed reforms for integration could be made effectively: reducing ambiguities; maintaining flexibility; improving monitoring; streamlining the ASEAN organizational structure to effectively support regional integration. Governments are not always reliable for making choices that will facilitate the integration towards a single market because they have to take into consideration the political incentives like electoral results and feedback from their constituencies. A bottom-up approach or unilateral approach will also be necessary and more realistic because they are sustainable.
The group has gained a lot of significant achievements in the course of creating an integrated single market. Many analysts have pointed out that “the region has achieved 73.6% of the targets for the period 2008–09, and 91 out of 124 AEC legal instruments (73%) have entered into force, compared to only 50% in 2002 as of 31 December 2009”. The most important of these achievements was tariff removing. In 1992, the organization embraced the Common Effective Preferential Tariff (CEPT) scheme to phase out tariffs with the goal to increase the region’s advantage in competing with other export-led countries. The CEPT also paved the way for the ASEAN Free Trade Area, the agreement which was signed in 1992. Since the ASEAN Free Trade Area has been implemented, preferential tariffs among the six main members of the group (Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand) were lowered to almost zero. The result is that more than 70 percent of trade within ASEAN is no longer constrained by tariff and those subject to over 10 percent are just 5 percent of the regional trade. Although tariffs have been drastically reduced to almost zero, non-tariff barriers are still the main obstacle for the regional trade. Although the AEC Blueprint mentions non-tariff barriers as target action, voluntary approaches to reduce them were the ways ASEAN adopted. According to the system, member countries will have benefits from omitting the barriers they were using and there is no system to monitor effectivelly the barriers(ASEAN Member States).
The bloc has also got smaller achievements in trade facilitation and investment liberalization like the National Single Window designed to speed up customs clearance especially among the six main original members. Moreover, ASEAN has managed to make rules and regulations on investment transparent to a higher level. In spite of these achievement and success, the organization has many things left to do in liberalization of services because it has less experience in the sector. Although member countries have agreed on standard qualifications for some services, they will need to do more to add more services under the standard qualifications (ASEAN Member States).
On the other hand, the region has many obstacles to overcome to reach a fully integrated market. The 1997 Asian financial crisis revealed the bloc’s fundamental weakness in financial and governance institutions, lack of transparency and unfledged banking sector. Because of this weakness, the financial crisis worsened the region’s macroeconomic institutions subjecting it to stock market collapse, depreciated local currencies and reduced asset prices across the region (Lehmacher, 2016). Other problems nagging ASEAN may include lack of information, short-sighted government policies, and ineffective regulation. To remedy the havoc in financial systems caused by the financial crisis and negative effects on the economy, ASEAN used the ASEAN Economic Community to integrate regional economies further as a strategy to combat the crisis. The crisis also made the ASEAN leaders realize the importance of interdependent economic and financial institutions among the countries.
Most of the challenges facing the ASEAN are political ones like deeply-guarded national interests and protectionism. To make the problem of cooperation difficult and worse, member countries are diverse in cultures and natures of economies. Moreover, disputes over territories, historical legacies and the lack of common understanding often lead to cold relationships and tension among the members. On many occasions, there is intense rivalry rather than cooperation in the organization. The bad legacy of colonalism has also sowed the seeds of nationalism and non-interventionism (non-alignment) contributing to many obstacles to liberalization in markets, trade and investment(Katzenstein, 2005). As a result, there is an established bureaucracy that is always opposed to reforms in customs and migration, labor and capital among the members. In other words, the organization has many tasks left to finish, which will make it impossible to ensure that future integration goes as planned. In spite of this weakness, it can still be hopeful that initiatives taken by the regional level will encourage more integration and cooperation among the countries leading to a single market.
Thus, it is more realistic to think that it will take time for ASEAN to integrate towards a single market because of the political obstacles which are difficult to dissipate. The fact that member countries jealously guard their sovereignty rather than engaging in participatory decision making will not help with dissipating these political obstacles. The members also have different ideas and opinions about economic growth models and political systems and unresolved territories which will make it difficult to cede their autonomy to an extent necessary for a single market and economic community. Considering the above-mentioned facts, it will still be more likely that ASEAN members will make bilateral agreements instead of acting in unison in a single market.
The main source for all the problems and obstacles in creating a single market and economic community would be member countries’ protectionism originating from politics-especially domestic political conflicts in each country. Since living under weak governments and in a constant fear of domestic instability, the members do not have strong appetite for regional integration.Thus, each country’s foreign policy and economic policy is focused on looking inward rather than cooperation with other member countries. The only member that wants to integrate fully may be Singapore. Until now, members of the organization see each other as competitors rather than cooperators in achieving shares of the global export market and inviting foreign investment.
The most important requirement for ASEAN to integrate into a single market would be to pool their sovereignty in the EU style. As long as the member countries want to maintain their sovereignty as a whole, the dream of a single market will always be outside their reach. In other words, full national sovereignty and a single market will not always be in harmony. The European Union was successful in building a single market because members agreed to give up their national sovereignty to a significant extent and agreed to pool their sovereignty. The leaders of the EU did not see the idea of sovereignty pooling as a winner-takes-all game but realized that it had to start from a very low base–a common market only for coal and steel (Katzenstein, 2005). At first, there were not many European countries which believed that a single European market based on the idea of pooled sovereignty would take off.
Competition Policy and Laws
To achieve an ASEAN Economic community through a single market, ASEAN will need to have practices and policies that encourage competition across borders. In other words, the organization will need to reduce or eliminate anticompetitive practices and restriction. It has been universally accepted that consumers will be beneficial from market competition, which will then facilitate developing an effective economy. The problem is how to reduce or eliminate anticompetitive policies and practices among the ASEAN countries since member countries are reluctant to give up and pool their sovereignty to an extent. The first step for setting anticompetition policies should be harmonization of each country’s competition law. Then the standard anticompetition policies will be one of the driving force for the integrated single market. Moreover, the law and policies will help with solving disputes and conflicts potentially emerging from anti-competition practices applied by each member in a domestic context(ASEAN Member States).
If the ASEAN leaders can make the region free and fair in terms of market competition through the controlling of anti-market policies, they will be a step closer to a single market and ASEAN Economic Community. When it comes to competition, the organization lacks not only standard competition law but also lacks supranational institutions that govern market liberalization and integration. Thus, it would still be difficult to achieve whatever goals mentioned in the AEC Blueprint. On the other hand, the ASEAN Regional Guidelines on the Competition Policy does not require members to adhere to a uniform competition law but just to develop their own competition laws consistent with ASEAN competition policy. Consequently, disputes and conflicts of competition will be solved by each country’s anticompetition laws which will also be interpreted and applied in domestic contexts. Therefore, ASEAN policy makers will need to consider how anticompetition practices can be reduced or eliminated on regional level and conflicts can be resolved through a supranational body before and after the single market. In the long run, it will be beneficial for ASEAN economic community and single market to have a uniform anticompetition law and supranational body that will protect fair competition.
ASEAN has an aim of being an economic region that can compete internationally. For the aim to be realized, goods and services should be produced at the lowest possible cost in the region. In other words, the organization will have to try to reduce border restrictions and harmonize business laws to some degree so that resources go where they are best utilized within ASEAN. Some steps for harmonizing the business laws have already taken. The ASEAN Secretariat issued regional guidelines on competition policy in 2010 to provide “a general framework guide for the ASEAN Member States (ASEAN Secretariat). The TRIPS (Trade-Related Aspects of Intellectual Property Rights) agreement has provided minimum intellectual property standards and national treatment. ASEAN has hoped that National treatment will ensure competitive equality between nationals and foreigners to an extent. ASEAN has also introduced intellectual property “Action Plans” (Das,2015).
For competition in the region, it is hopeful that member countries will meet the goals set out in the AEC Economic Community Blueprint because regional competition guidelines
have already been published and most countries have a statute to meet them. There is still a major challenge left to overcome– to implement and apply their competition laws in a fair manner so that they do not distinguish between domestic and foreign firms. More importantly, the provisions of the competition laws still vary in each country because they are under the influence of domestic politics. Because of these domestic politics, trying to set the common standards for all the members will be unrealistic as a short-term goal. Thus, the realistic goal should be cooperation, given the different levels of economic development among the members.
One of the main reason ASEAN missed the deadline of 2015 for ASEAN Economic Community is its failure to remove the non-tariff barriers to trade. There are two kinds of non-tariff barriers which need to be addressed— at the border and beyond the border barriers. The list of at-the-border barriers may include import bans, import subsidies, non-automatic licensing, new procedures for importation, additional requirements for importation, and technical barriers to trade: beyond-the-border barriers are state aid measures, public procurement requirements, investment measures, and trade facilitation related measures, such as inadequate and poor quality of logistics infrastructure and cumbersome procedures and requirements. These non-tariff-barriers have put a huge amount of transaction costs on trade among the member countries. As long as there are trade costs caused by NTBs, ASEAN’s performance in trade will be lower than other regional competitors like China, South Korea or Japan (ASEAN Secretariat).
A number of factors can be identified for failure to implement the promise of the ASEAN Blueprint concerning the NTBs. The first one is that policymakers of the organization have difficulty with classifying NTBs because there are often new NTBs coming out of domestic political developments in each country. Differences in economic development among the members also delay getting a consensus on the characteristics of NTBs. The last cause may be constraints on supply-side capacity.
The AEC will drive the economic integration of ASEAN at a normal speed only among countries that can reduce or eliminate the NTBs, but it will still be very slow among countries that fail to find a solution. Thus, the first step that should be taken for addressing the problem is (i) common definition and approaches of identifying NTBs; (ii) a web-based facility for reporting, monitoring and eliminating NTBs; (iii) the harmonization of standards; (iv) strengthening of human and institutional capacities; and (v) strengthening of trade facilitation measures, particularly in the agriculture sector (ASEAN Member States).
The ASEAN Charter, signed in 2007, is one of the most significant legal milestones the organization has achieved 40 years after the establishment of the organization. Among the many elements that the Charter deals with, dispute settlement may be the most important one adding an integration tool to the legal system of the organization and deals with a variety of legal issues including dispute settlement mechanisms for resolving investment and trade disputes.
Investment and trade dispute settlement mechanisms are key mechanisms supporting the ASEAN economic integration objective for a single market. In the Charter, Articles 13 to 17 say how disputes will be solved by peaceful means. Concerning a significant dispute settlement body, the High Council established under the Articles is the most important one which comprised ministerial level representatives of members involved. The High Council would like to recommend an appropriate means for dispute settling, using its mechanisms like mediation, inquiry or conciliation rather than dispute settling by litigations. The dispute settlement mechanism was not supposed to be used by 2015 but it would be in place as an “operationally ready, structurally comprehensive and easily navigable system”. When it is fully operational any dispute over trade that arises between member countries may be resolved efficiently using the transparent, fairness and confidence of the court(ASEAN Secretariat).
ASEAN leaders should encourage rules-based settlement through the dispute settlement mechanism’s institutional features and support rather than “ASEAN Way” of full consensus which is not realistic in all areas. In other words, the leaders should make a change in their mindset over dispute settlement. On the other hand, for some dispute settlements, consultations will be a key component of the dispute settlement process without going to formal and adversarial hearing processes. Although the dispute settlement mechanisms still is not perfect, its current deficiencies should not be a barrier to members who want to utilize it for their trade disputes. The dispute settlement mechanism is also a legal tool to ensure that legal commitments made by ASEAN members are both complied with and implemented. Thus, trade dispute settlement should be recognized as an important secondary tool forintegration and liberalization efforts so that ASEAN members may rely upon it with confidence and trust.
Though the aim of the organization is to build a single market and economic community of 640 million people, it is ,in reality, still a group of separate markets. Unlike the European Union, which has an intra-regional trade of more than 70%, more than 75% of ASEAN trade is with non-member countries rather than among member themselves (Das et al, 2013). One important thing to note is that the economic development gap between the old six members (Malaysia, Indonesia, Singapore, Thailand, Brunei Darussalam and the Philippines) and new ones (Cambodia, Lao PDR, Myanmar, and Viet Nam) is significantly wide, which is also one of the most important obstacles to a single market. To solve the problem of the different level of economic development, the organization has tried infrastructure projects both on the regional and sub-regional levels. One of them is the Initiative for ASEAN Integration (IAI), which aims to bridge the gap among the members and the organization’s competitiveness in the region. The Master Plan on ASEAN Connectivity was also started in 2010 aiming to implement actions for more integrated regional actions in three areas (physical connectivity, institutional connectivity and people-to-people connectivity). In other words, these actions are also intended for free flow of capital, services, labor and goods in the region. On the other hand, there are sub-regional projects (the Greater Mekong Sub-region, the Indonesia-Malaysia-Thailand Growth Triangle and the Brunei Darussalam–Indonesia–Malaysia–The Philippines East ASEAN Growth Area) aiming to strengthen relations in the organization (ASEAN Economic Community). These projects also serve many initiatives like promoting the regional economic integration, assisting in the construction of physical infrastructures among countries and effective use of limited resources in the region.
The ASEAN leaders should also recognize that the fulfillment of its long-term deadlines would depend on how the development gap is bridged effectively. Since the member countries have only limited financial resources for the purpose of narrowing the gap, they need to consider innovative ways to make best use of these limited resources. These innovative ways should also be fashioned so that less developed member countries, especially new members, can participate and get benefits from the economic integration process.
Although ASEAN has started sub-regional and regional programs for economic development, emphasis on narrowing the economic development divide in the region is still necessary. Only after the development divide is seriously addressed to a large extent by the ASEAN leaders, economic integration can be imagined. If the leaders fail to do so, the economic region will be like a community with two-tier or three-tier of development dragging the integration process (Lehmacher, 2016). One of the formidable economic challenges facing ASEAN is the development gap between its more developed (ASEAN–6) and newer members — Cambodia, Laos , Myanmar and Vietnam (CLMV). In other words, member countries of ASEAN are different in terms of economic development like income per capita, poverty rate, life expectancy, literacy, public expenditure on health and education and infrastructure. For example, the richest country in the region, Singapore, has a per capita income on developed world level (US$36,631) but the least developed country, Myanmar, has the lowest level of per capita income. Institutions that will help build mutual confidence and understanding are essential to the cross-border initiatives, but they take time to build. However, sub-regional economic zones (like Singapore-Johor-Riau, the Greater Mekong Subregion, the Indonesia-Malaysia-Thailand Growth Triangle and the Brunei Darussalam-Indonesia-MalaysiaThe Philippines-East ASEAN Growth Area)—help narrow development gaps and improve connectivity across national boundaries. These initiatives in the sub-regional frameworks could also facilitate the economic elements of the integration process and narrow the development gap (Tangkitvanich et al, 2017).
It is not disputable that foreign direct investment (FDI) can bring considerable benefits
especially to manufacturing industry: capital, management know-how, product knowledge in a package of benefits. Moreover, it can also bring skills useful in production and manufacturing processes, distribution networks, brands and marketing skills. The package of technologies and capital that FDI bring will save ASEAN countries valuable resources like time, labor and capital necessary for export competitiveness.
In addition to that, foreign investment can also diversify the economies of recipient countries from their traditional business. It will also upgrade the host countries’ primary production, promoting the existing manufacturing, raising productivity and increasing efficiency through exposure to greater competition. Although ASEAN has taken many steps to speed up investment liberalization and produced a ream of investment agreements, it has failed to achieve its stated aims(Lehmacher, 2016). There have been increased cases of cross-border mergers and acquisitions, and joint ventures in the region encouraged by the top-down initiatives, the level of foreign investment has not been as high as in the 1990s.
For the problem of less foreign investment, there have been numerous recommendations like improving infrastructure or raising the savings rate or promoting ASEAN’s investment plans. More importantly, ASEAN should project opportunities and the promise of high returns that the old members of the association made in the 1980s and 1990s. In other words, ASEAN needs to recapture investors’ attention making them believe that the region can offer both economies of scale and unique opportunities, which China and India cannot do. In terms of investment, ASEAN needs to have a more realistic approach to economic integration towards a single market—starting from sub-regional integration within the region. For example, the Iskandar and Greater Mekong Subregion including other sub-region projects should be studied for further integration(Das et al, 2013).
Free Trade Agreements (FTA)
In addition to the ASEAN Free Trade Area (AFTA) between ASEAN member states, ASEAN has signed several free trade agreements with some of the major economies in the Asia-Pacific region– the ASEAN-Australia-New Zealand FTA (AANZFTA), the ASEAN-China FTA (ACFTA), the ASEAN-India FTA (AIFTA), the ASEAN-Korea FTA (AKFTA), and the ASEAN-Japan Comprehensive Economic Partnership (AJCEP). The aim of these FTAs is to enhance the ASEAN region economy through promoting businesses of all sizes in ASEAN and to encourage trade regionally as well as internationally without tariff barriers. In other words, businesses in ASEAN can make use of the FTAs to have easy access to new export markets for their products at low costs, and benefit from simplified export and import procedures.
Free Trade Agreements (FTAs) have taken the central role of Southeast Asia’s trade policy over the last decades for both the organization and member countries. In other words, ASEAN has taken the path of preferential (discriminatory) liberalization through FTAs rather than non-discriminatory unilateral liberalization, backed up by (nondiscriminatory) GATT/WTO commitments. The ASEAN region has many different things in terms of protectionism, guarded interests, a history of intra-regional conflicts, lack of common understanding and geopolitical disputes. These differences block the emergence of strong intra-regional institutions, precluding the emergence of strong region-wide FTAs. ASEAN has negotiated many FTAs with other countries like the PRC, Japan, the Republic of Korea, India, Australia and New Zealand as well as numerous bilateral FTAs between members and other countries.
On the other hand, it is debatable whether FTAs are helpful with ASEAN’s goals of integration into a single market by 2015 and to the global market. It is widely accepted that ASEAN FTAs hardly promote ASEAN’s regional and global economic integration. They also barely help ASEAN achieve the AEC’s commitments by the 2015 deadline, not to mention ASEAN’s economic integration with the global market. FTAs also reflect the organization’s weakness or inability to reduce non-tariff and regulatory barriers effectively. Although they are not beneficial for ASEAN’s efficient integration, FTAs will not go away in the near future. What the organization should do is to make FTAs compatible with the AEC’s initiatives for regional and global integration. What ASEAN needs will be modest and incremental reforms that work with the initiatives rather than grand designs or wishful thinking (ASEAN Economic Community).
It is in ASEAN’s best interest to maintain economic integration effectively and efficiently but a significant proportion of cross-border trade in the region is still uncovered by institutions and agencies that guard against protectionism and anti-competition. In the Asia Pacific region, ASEAN appears to have signed more free trade agreements than other countries and groups. The ASEAN Free Trade Area was implemented in 1993 and the ASEAN Economic Community (AEC) was launched in late 2015. The AEC is the association’s latest project for regional economic integration towards a single market and production base comprising 10 member countries.
ASEAN celebrated its 50th anniversary in 2017. While ASEAN has made some significant political achievements during the past five decades, its economic integration project will have many things left to do. The ASEAN Secretariat claimed that the launch of the ASEAN Economic Community Blueprint 2015 was successful in many aspects. However, different members have seen different levels of integration. The one thing that ASEAN can call a real achievement may be the reduction of tariffs—nearly to zero among member countries.
The free flow of goods among ASEAN member countries seems to be hindered by non-tariff barriers (NTBs). Because of these NTBs, firms and business may have made decisions that are not beneficial to the region’s economy. While reducing non-tariff barriers is a priority in the AEC Blueprint, ASEAN has relied on flexibility and voluntary approaches to reduce them. Under the voluntary approach, member countries could choose not to report the actual number of barriers that exist. On the other hand, there is no effective monitoring system to keep track of the changes of NTBs among member countries.
ASEAN has also been negotiating services liberalization since1996. Although the AEC Blueprint has established targets to remove all trade-barriers of services by 2015, the deadline was missed because some ASEAN countries, including Thailand, the Philippines and Indonesia could not meet their targets. Thus, ASEAN could not achieve a single market through service liberalization in the near future.
Free Movement of Labor
Regarding cross-border movement of labor, ASEAN also has achieved very little. It would be a good policy option to open up unskilled labor markets through free trade agreements because the region has lots of unskilled labor. However, the AEC Blueprint seeks to lift restrictions on cross-border travel only for skilled workers. From a critical perspective, economic integration in ASEAN has so far produced only a few significant results. The Economist commented in a September 2016 issue that ‘[w]hen it comes to elevating form over substance, and confusing a proliferation of meetings and acronyms for a deepening of ties, ASEAN is the Zen master’( Agreeing to agree,2016).
The main reasons for the slow process of integration may be most member countries’ protectionist stances, anti-competition and reluctance to pool their sovereignty. Moreover, member countries still view one another as rivals, rather than as partners, in their pursuit of the global market share for exports or attracting foreign direct investment. Domestic political pressures, in addition to a lack of strong and stable regimes, make policy makers in many ASEAN countries look inward and avoid regional integration.
ASEAN needs to tackle the core problems of its integration project squarely and urgently so that it will fulfill the potentials of the AEC Blueprint for a single market and single production base. ASEAN has signed a lot of bilateral FTAs in East Asia emphasizing its role in facilitating economic integration in the region. Now, its members should focus on creating stronger deals among member economies as well as with other countries and multinationals (Understanding ,2014).
ASEAN needs to be much more focused than it is now because the AEC Blueprint has established a lot of core elements and many priority actions. In light of its limited resources, its current agenda is too ambitious. ASEAN should aim only for tangible results allowing member countries to make full use of their limited resources. In other words, the tangible results should be reducing barriers to trade, facilitating cross-border trade and allowing the movement of labor and capital across borders. Last but not least is the challenge of ASEAN politics. For economic integration, ASEAN leaders should be ready to pool their sovereignty and autonomy to some extent because these two concepts are not helpful for globalized economies. As the story of European Union’s economic integration has shown, pooled sovereignty is the key to success in regional economic integration. If ASEAN fails to achieve it, the integration project will always be in progress, not completed.
- Katzenstein, P. J. (2005). A world of regions: Asia and Europe in the American imperium. Ithaca, NY: Cornell University Press.
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A Blueprint for GrowthASEAN Economic Community 2015:Progress and Key Achievements
Achievements by The ASEAN Secretariat
Jakarta November 2015, ASEAN Website: www.asean.org
ASEAN Community 2015:Managing integration for better jobs and shared prosperity © 2014 International Labour Organization and Asian Development Bank
First published 2014
Reprinted with corrections 2014. www.ilo.org/publns, www.ilo.org/asia, www.adb.org/publications, and www.adb.org / ISBN 978-92-2-128869-5 (Print), 978-92-2-128870-1 (PDF)
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