As well as laying out the ASEAN Economic Community’s goals, Azman Jaafar of RHTLaw Taylor Wessing notes why he expects to see major improvements to the entire ASEAN region, not just to the richer jurisdictions, but to all 10 involved. He points out ASEAN’s strengths, such as its diversity, and notes the many factors that could make the AEC dominant. As he states, “The myriad of opportunities that will present themselves in the region is endless”.
In the Bali Summit of October 2003, the ASEAN leadership declared the ASEAN Economic Community (AEC) as the “realisation of the end-goal of economic integration”. This simple declaration has led many to believe that the AEC’s single objective is to amalgamate the ASEAN economies into one homogenous union. Too often, the AEC has been the subject of unfair comparison to the European Union. We know that our motives are different and at the time of the AEC’s inception, the leadership certainly appreciated the diversity and inequality that already existed within ASEAN. The AEC is a journey that has only just begun.
ASEAN is situated in an economically vibrant part of Asia. The establishment of the AEC reflects the importance placed on ASEAN’s continued relevance in the global economy. ASEAN is not homogenous in terms of its people and economies, but the AEC’s diversity is its strength. Economic integration is the endgame, but this is not a hop and a skip away in the near future. With 600 million people and a growing middle class, the AEC is not only intended to develop into a serious regional trading hub that can rival the larger global economies, but it also has a burgeoning growth market from within. The four pillars that define the AEC play a very important role in accelerating economic integration and alleviating the inequality between member states.
There are new opportunities which arise from the creation of the AEC:
- the attraction of external investors into the AEC;
- the ease of regionalisation within the AEC and the growth of intra-ASEAN trade; and
- the need for increased connectivity within ASEAN to facilitate trade activities within AEC.
Increased connectivity arising from the creation of the AEC will propel ASEAN to attain higher competitive growth by bringing about economies of amalgamation and synergised production chains and networks. We can expect major improvements in physical infrastructure such as transportation routes that will ease shipping costs, enhanced communications networks that will help businesses and consumers communicate more freely and new power plants that will narrow the gap between energy demand and supply. There will be extensive institutional changes across ASEAN to open up trade and investment opportunities to one another. These are the steps being taken for the AEC to build ASEAN countries into a synergised entity whereby we will operate as a single market and production base as set out in the AEC Blueprint. Not only will each country benefit economically, but also the distribution of growth and rapid increase in infrastructure will reduce the development divide amongst the ASEAN countries.
In the wake of the 2008-2009 global economic crisis, the investments that will spur infrastructural growth within ASEAN will become a kick-starter for economic recovery and future sustained growth in the region. This is especially so as the AEC will nurture and grow the middle class consumer market in the region, which will increase domestic consumption and intra-ASEAN trade, becoming a vital engine for trade and investments in the region. The middle class is expected to grow to more than double what it is now in the next 10 years, along with their income per capita. This means a surge of demand for a broad spectrum of consumer goods and services from vehicles to financial services. The myriad of opportunities that will present themselves in the region is endless.
With increased connectivity, there will be a growth of intra-ASEAN trade. Increased trade will mean an increase in freight in the region. According to the ASEAN Logistics Study in 2008, as we achieve the objectives of infrastructural development in the region, it is estimated that logistical costs will be reduced by four percent and time spent on logistics by nine percent. That translates to millions of dollars in substantial savings.
Increased connectivity will also impact ASEAN trade with countries outside the region. Investors will want to increase their presence in our production networks and supply chains. This will increase foreign direct investment into the region. We are already witnessing the growing interest of non-ASEAN countries in our region. Spain will look to better its trade relations with Philippines as it views the Philippines as an investment hub for Spanish entities to take up investment projects in the AEC. Japan has already announced that it would extend 750 billion yen in bilateral development aid to the Mekong region. The Chinese are also preparing to place their stake on some Indochinese industries such as mining and hydroelectric power. As the tariffs and non-tariff barriers rapidly diminish, not only are ASEAN companies gaining a stronger foothold in the global economy, multinational companies from all over the world are looking into building production bases in the AEC in order to proliferate trade in the Asia-Pacific region. The non-discrimination principle that the AEC advocates facilitates cross border investments and encourages cross border transactions. The AEC increases the attractiveness of ASEAN as a single investment destination.
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According to a recent survey, less than one-fifth of ASEAN businesses are actually prepared to meet the challenges and opportunities presented by the AEC. With closer economic integration, we can expect greater competition from our ASEAN neighbours.
With the AEC, ASEAN will become a more important marketplace for Singaporean SMEs. The integration will bring about new threats and increased competitiveness. This would be a good time for Singaporean SMEs to review their capabilities and evaluate their competitive advantage. To stay competitive in the larger global economy, Singaporean SMEs must move their businesses up the value chain. With the AEC, there is the promise of increased intra-ASEAN trade in the midst of a growing consumer market. This will, without a doubt, attract new foreign investments into the AEC and there will also be new opportunities for Singaporean SMEs to plug themselves into a more integrated global marketplace. New investments can help them move up the value chain. Organic growth can be a slow and painful process and in today’s world, this may not be an option for many domestic businesses. Overcoming these challenges will ensure the long-term survival and sustainability of their businesses.
The lowering of trade barriers will facilitate the regionalisation of Singaporean SMEs. In the long run, with smoother customs processes and freer movement of human capital, services and finances within ASEAN, Singaporean SMEs can expect greater predictability and transparency when exporting goods and services within the AEC. With the rising cost of doing business in Singapore, it would be timely for Singaporean SMEs to look into relocating parts of their operations to lower cost jurisdictions. Singaporean SMEs also need to be increasingly wary of the rapidly improving competition from the region which will only improve faster as the AEC comes to fruition, hence the goods and services of Singaporean SMEs need to improve as well to retain their unique competitive advantage. They can improve by trying to attain globally competitive supply chain qualities by imputting knowledge from best practices in their industries. Otherwise, they will have to move their businesses up the value chain to ensure future sustainability of their endeavours. The increased connectivity between member states also makes regional expansion an easier task. Singaporean SMEs must gear up to meet these challenges, as regional expansion requires resources and thoughtful planning.
There are sceptics who doubt that the AEC will ever get off the ground. Advocates of the AEC say that diversity is its strength. In a typical scenario, a Singaporean SME can choose a country like Vietnam as its manufacturing and production base due to the lower operating cost. It can then take full advantage of the AEC by importing components manufactured in Thailand and Indonesia; and employing its engineers and skilled technicians from the Philippines. It can outsource certain services to a company in Malaysia and borrow working capital in Singapore. A regional play will require a Singaporean SME to examine its internal processes to ensure that it is sufficiently robust to meet the demands of its regional operations. The naysayers will then bring up the differing administrative and regulatory standards across the countries. In response, the ASEAN nations have already put in place a trade facilitation framework to reduce such irregularities across the board.
The expected increased connectivity within the AEC also contemplates increased investments in infrastructure beyond just transport and logistical services. Connectivity within the AEC is all encompassing and refers to the underlying connectivity in infrastructure and people. This level of connectivity will also encompass technology and communications, as well as energy. As we become more interdependent with each other within the AEC, we can also expect an increase in projects that facilitate and promote intra-AEC connectivity.
More efficient cross-border transport is a challenge given ASEAN’s geography. It has been reported that the capital cost for transportation connectivity can be expected to exceed US$500 billion. Whether it is the ASEAN Single Window project, Jakarta Monorail project, the Singapore-Malaysia High-Speed Rail Link project or the hydroelectric power projects in Laos, all such projects will contribute towards increased connectivity within the AEC.
The AEC is a diverse ecosystem which is in the process of being integrated into a single market. While the diversity of the AEC as a single market and production base is probably its greatest advantage to investors, the key to its success lies in its ability to enhance connectivity within ASEAN. The AEC ecosystem will not only bring out the best companies in our region, but also the best companies around the world. Singaporean SMEs should embrace the diversity in the AEC and play a more pivotal role in intra-ASEAN trade under the AEC.
Email: azman.jaafar@rhtlawtaylorwessing.com
Website: www.rhtlawtaylorwessing.com/