ASEAN Economic Community (AEC): Preparing for Disappointment?

The ASEAN Economic Community (AEC) is set to take off at the end of this year.  Companies around Asia are increasingly paying attention to the creation of this trade arrangement.  But most are likely to be disappointed on January 1, 2016. 

In 2007, ASEAN leaders announced a highly ambitious plan to unite the 10 member countries of ASEAN:  Brunei, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, and Vietnam. 

The original plan called for the creation of an ASEAN Economic Community in 2020.  The plan has multiple elements, including the creation of a single market and production base, a highly competitive economic region, equitable economic development, and a region fully integrated in the global community.  These economic components are joined by a broader agenda of political and security integration.

However, for business, the most important part of the AEC has been the commitment to create "a free market for goods, services, investment, skilled labor and the freer movement of capital."  

Such a goal would have been difficult for nearly any grouping to reach.  For ASEAN, the gaps in economic development in 2007 were significant.  To bring together nations ranging in GDP from Myanmar at just over USD$215 per year to Singapore at more than USD$35,000 would have been challenging under any timeline.

But ASEAN leaders made the task more difficult by moving the deadline forward by five years.  Instead of 2020, the ASEAN Economic Community would take effect in 2015.  (Although this originally meant January 1, 2015, the deadline was then shifted backwards to the end of the year giving members an additional 365 days to succeed.)  Thus member states with an ambitious deadline suddenly faced the conclusion five years sooner than anticipated.

Fortunately, ASEAN has had a mechanism for releasing the pressure.  Members could reach any goal by using pilot projects.  In addition, ASEAN works on the ASEAN Minus X system where somewhere between 10 and 0 members actually move forward with any commitment. 

No one actually checks for implementation.  The ASEAN Secretariat is very small and has no capacity to ensure that members follow through on their various commitments.  Although there is a dispute settlement mechanism in ASEAN, it is not used.

Despite these challenges, ASEAN countries mostly managed to drop all tariffs to zero by 2010.  The “newer” members of ASEAN (Cambodia, Laos, and Myanmar) have until 2015 to finish the job. 

However, tariffs are not the only way that countries can keep out foreign products.  Other kinds of non-tariff barriers are also supposed to be removed from ASEAN countries.  Most of these discussions have moved forward slowly.

Services are supposed to be opened as well on the way towards the AEC.  By 2014, members had agreed on eight “packages” of market opening.  Each package is designed to open up a set of subsectors for other ASEAN firms.  For example, each member might decide to open up hotels, clinics or accounting firms.   Of the 160 subsectors, ASEAN members have already agreed to open up roughly 65.  Not all commitments are likely to be equally meaningful for companies.

The AEC also includes free movement of investment.  ASEAN members have made limited progress towards meeting this goal.

Finally, the AEC also promises the free movement of skilled labor.  This is a highly sensitive topic for most members.  As a result, little progress has been made.  Although members have drafted a few mutual recognition agreements (MRAs) for specific sectors like engineering and architecture, none (or, at best, very few) have been able to take advantage of the provisions.  This is because an MRA does not negate the need for immigration or visa rules.

The deadline for the freer movement of capital was not moved forward to 2015, but remains at 2020.

By the end of 2015, then, what is likely to change in ASEAN?  The opening of goods markets beyond existing tariff reductions has slowed to a crawl.  Efforts to address non-tariff barriers have not moved ahead by much. 

For services, ASEAN members are supposed to complete two more “packages” of services liberalization this year.  While these are meant to result in the free movement of services, it is still likely that ASEAN firms will find challenges in operating around the region.  This is partly because the levels of commitment (unless something drastic happens) are likely to be limited.

Labor and investment are not likely to be significantly opened for the rest of this year. 

As a result, at the end of 2015, the primary difference between now and then is likely to be two additional rounds of services opening and very little else.  For many ASEAN member firms, January 1 is likely to be very disappointing.  While companies are increasingly starting to expect ASEAN to deliver on the sweeping goals promised for the past few years, the free movement of goods (other than tariffs), services, investment, skilled labor and freer movement of capital are likely to prove elusive.