Asean Economic Integration


Published on

(Nearly) Everything on Asian Economic Integration

Published in: News & Politics, Business

Asean Economic Integration

  1. 1. ASEAN and Economic Integration in the Wider Asia-Pacific Region Emmanuel Yujuico LSE IDEAS Southeast Asia International Affairs Programme
  2. 2. Does ASEAN Matter in Terms of Regional Economic Integration? <ul><li>I argue the answer is a resounding “yes”! </li></ul><ul><li>ASEAN is a mildly dysfunctional “family” whose attention is sought by regional powerhouses (US, Japan, China) </li></ul><ul><li>Not aspiring to regional hegemony itself, ASEAN is a non-threatening entity that is becoming an unlikely hub of regional activity—including in the economic realm </li></ul><ul><li>All the same, there are many challenges that ASEAN must address to consolidate its place in Asia-Pacific economic affairs </li></ul>
  3. 3. Presentation Roadmap <ul><li>An overview of regional integration in Southeast Asia as well as in the broader Asia-Pacific </li></ul><ul><ul><li>The ASEAN Economic Community (AEC) </li></ul></ul><ul><ul><li>ASEAN’s Free Trade Agreements </li></ul></ul><ul><ul><li>2010: An Important Year for FTAs </li></ul></ul><ul><li>Related ASEAN+3 initiatives </li></ul>
  4. 4. AEC Blueprint: The Four Stated Objectives <ul><li>A single market and production base with a free flow of goods, services, investment, capital, and skilled labour </li></ul><ul><ul><li>Note emphasis on “skilled” labour </li></ul></ul><ul><li>A highly competitive economic region </li></ul><ul><li>A region of equitable economic development </li></ul><ul><li>A region fully integrated into the global economy </li></ul><ul><li>------------------------- </li></ul><ul><li>As we shall see, ASEAN has a long way to go in fulfilling many of these objectives </li></ul>
  5. 5. <ul><li>NOTE: 13 January 2007 Cebu Declaration accelerated timetable to 2015 </li></ul><ul><li>We consider AFTA, AFAS, and AIA in turn </li></ul>SOURCE: ASEAN SECRETARIAT
  6. 6. ASEAN Free Trade Area for Free Flow of Goods <ul><li>Common Effective Preferential Tariff (CEPT-AFTA) for tariff-free intraregional market access </li></ul><ul><li>ASEAN-6 of Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand implemented CEPT on 1 January 2010 </li></ul><ul><ul><li>7,881 more tariff lines came down for a total of 54,457 tariff lines at zero </li></ul></ul><ul><ul><li>99.11% of tariff lines now at zero; the rest are on sensitive list, HSL, or General Exclusion List—mostly agricultural products </li></ul></ul><ul><li>Later accession states Cambodia, Laos, Myanmar, and Vietnam (CLMV) scheduled to reduce normal tariffs to zero in 2015 </li></ul>
  7. 7. ASEAN Framework Agreement on Services (AFAS) for Free Flow of Services <ul><li>AFAS aims to be consistent with WTO GATS; the four forms of services trade are </li></ul><ul><ul><li>Mode 1 Cross border trade (or outsourcing) </li></ul></ul><ul><ul><li>Mode 2 Consumption abroad (ex: travel, overseas education, medical tourism) </li></ul></ul><ul><ul><li>Mode 3 Commercial presence (ex: bank branch, foreign subsidiary) </li></ul></ul><ul><ul><li>Mode 4 Movement of natural persons (ex: an engineer or medical worker works abroad) </li></ul></ul><ul><li>Seven priority sectors are air transport, business services, construction, financial services, maritime services, telecommunication, and tourism </li></ul><ul><li>7 Mutual Recognition Agreements (MRAs) have been concluded designed to facilitate labour mobility for accountants, architects, dentists, doctors, engineers, nurses, surveyors </li></ul>
  8. 8. ASEAN Investment Agreement (AIA) for Free Flow of Investment <ul><li>Designed to facilitate foreign direct investment from other ASEAN member countries </li></ul><ul><ul><li>NOTE: Does not cover portfolio investment </li></ul></ul><ul><li>All industries will be open for investment except for those on the Temporary Exclusion List or Sensitive List </li></ul><ul><li>Alike for services, “national treatment” or non-discrimination against foreign investors means subjecting them to the same conditions which apply to nationals </li></ul>
  9. 9. Sounds Good…But Does ASEAN Reality Match with Rhetoric? <ul><li>Answer: “Not quite yet” </li></ul><ul><li>Shortcomings of ASEAN are in 4 areas: </li></ul><ul><ul><li>Speed of integration (2015 is approaching) </li></ul></ul><ul><ul><li>Quality of integration (ex: ASEAN members seldom invoke CEPT-AFTA since completing the required paperwork often exceeds potential tariff reductions) </li></ul></ul><ul><ul><li>Political will (how serious are ASEAN countries about devoting attention to the nitty-gritty details to facilitate regional integration?) </li></ul></ul><ul><ul><li>Institutional capacity (ex: EU has 21,000 Eurocrats in Brussels while the ASEAN Secretariat in Jakarta has 200 personnel) </li></ul></ul>
  10. 10. A Case in Point: The Seven Labour Mutual Recognition Agreements <ul><li>MRAs meant to facilitate skilled labour movement by extending mutual recognition of educational and professional qualifications require consideration of: </li></ul><ul><ul><li>comparability of licensing and qualification requirements </li></ul></ul><ul><ul><li>understanding a common language </li></ul></ul><ul><ul><li>domestic legislation granting qualified professionals of other member states reciprocal rights to practice </li></ul></ul><ul><ul><li>changes to immigration laws that accommodate mobile professionals’ entry, stay, and exit patterns </li></ul></ul><ul><ul><li>dispute handling for individuals, firms, and countries </li></ul></ul><ul><li>To date, these issues remain largely unresolved </li></ul><ul><li>Malaysia’s “fire foreigners first” policies, Singapore indicating a move to limit migration at a time when integration is supposed to speed up </li></ul>
  11. 11. From ASEAN to the Asia Pacific: The “Lord Mandelson” Effect <ul><li>Despite its never-ending internal conflicts, ASEAN has managed to make itself the most significant and lasting regional cooperation body </li></ul><ul><li>ASEAN’s comparatively limited economic and military clout facilitate rather than detract from improving its political clout </li></ul><ul><ul><li>Not aspiring to hegemony, almost all regional economic cooperation initiatives pass through it </li></ul></ul><ul><ul><li>It makes an attractive, “low-maintenance” partner via the principle of non-interference </li></ul></ul><ul><ul><li>Emerging as hub of a hub-and-spoke trading system </li></ul></ul><ul><ul><li>Suitors follow a general pattern: ASEAN Regional Forum -> Treaty of Amity and Cooperation -> FTA </li></ul></ul>
  12. 12. Noodle Bowl of Trade Deals: Trade Diversion or Trade Creation? <ul><li>Are these FTAs a stepping stone or stumbling block to multilateral deals alike WTO-Doha? </li></ul>SOURCE: Bhagwati (2009)
  13. 13. Why Do Economists Dislike “Trade Diversion”? <ul><li>Preferential trade agreements like CEPT-AFTA can divert trade from the most efficient producer or that which provides the lowest price </li></ul><ul><li>Determining rules of origin (ROO) can become an administrative nightmare for customs officials </li></ul>Example: A Singaporean firm determining where to buy a widget from before and after a PTA in Southeast Asia
  14. 14. A Lot of FTAs, But Few Increases in Regional Trade <ul><li>Many FTAs, yet little intra-regional trade created </li></ul><ul><li>With ASEAN alone, there is an alphabet soup of deals with regionally important trade partners: CAFTA, AANZFTA, IAFTA, AKFTA; perhaps JAFTA and USAFTA </li></ul><ul><li>These are gradually being phased in depending on particular ASEAN member </li></ul>SOURCE: ECONOMIST (2009)
  15. 15. China-ASEAN Free Trade Agreement (CAFTA) <ul><li>Also came into effect on 1 January 2010 </li></ul><ul><li>Largest trading bloc in terms of population at 1.9B persons; third largest in trading volume </li></ul><ul><li>ASEAN+6 now, CLMV in 2015 </li></ul><ul><li>ASEAN is China’s 3 rd largest partner at $231B for 2008 </li></ul><ul><li>Some Indonesian textile manufacturers have pushed for a “time out” on CAFTA, citing adjustment difficulties from Chinese competition </li></ul><ul><ul><li>However, CAFTA was concluded in 2004, leaving plenty of time for preparation </li></ul></ul><ul><li>Note how Taiwan is largely frozen out </li></ul>
  16. 16. Will CAFTA Harm ASEAN Economies? <ul><li>Contrary to conventional wisdom, China and ASEAN do not have high export similarities, and these are falling over time </li></ul>SOURCE: LOKE (2009) <ul><li>This measure ranges from 0 (entirely dissimilar) to 100% (entirely similar) exports </li></ul><ul><li>These are net ESI figures considering supply chains </li></ul>
  17. 17. ASEAN, Australia, New Zealand FTA (AANZFTA) <ul><li>Concluded on 27 February 2009, came into effect 1 January 2010 </li></ul><ul><li>Single undertaking in goods, services, and investment </li></ul><ul><li>600 million persons, $2.7 trillion total GDP </li></ul><ul><li>Together, ASEAN is Australia’s largest trading partner at 16% of volume </li></ul><ul><li>However, Southeast Asia only attracts 5% of Australian foreign direct investment </li></ul><ul><li>First time Australia and New Zealand have jointly negotiated an FTA with a third party </li></ul>
  18. 18. India ASEAN FTA (IAFTA) <ul><li>Signed 13 August 2009, came into effect on 1 January 2010 as well </li></ul><ul><li>Goal is to raise India-ASEAN trade from $40 to $100 billion in five years </li></ul><ul><li>India’s “Look East” policy seeks diversification from Western consumer markets </li></ul><ul><li>In particular, India looks forward to services provisions coming into effect: information technology, business process outsourcing (BPO), and space sciences </li></ul>
  19. 19. ASEAN Korea FTA <ul><li>Services agreement came into effect 1 May 2009; goods agreement 1 January 2010 </li></ul><ul><li>Goal of raising trade volume from $90 billion at present to $150B by 2015 </li></ul>
  20. 20. The United States Re-Engages <ul><li>US started Asia-Pacific Economic Cooperation in 1993 to preempt Mahathir’s 1991 East Asia Economic Community proposal, counter its exclusion, and limit Chinese influence (Baldwin 2007) </li></ul><ul><li>Bush-era wariness of Myanmar limited engagement with ASEAN, which insisted on the former’s presence </li></ul><ul><ul><li>Investment prohibited in 1997, imports prohibited in 2003 </li></ul></ul><ul><li>Current administration signed TAC on 23 July 2009 </li></ul><ul><li>Richard Lugar (R-Indiana), Ranking Member of Foreign Relations Committee and longtime Asia-Pacific hand, urges completion of an FTA to keep up with China and others who have signed deals with ASEAN </li></ul>
  21. 21. Asian Bond Market Initiative (ABMI) <ul><li>In the wake of Asian Financial Crisis, affected firms’ use of dollar-denominated loans posed severe repayment difficulties after local currencies devalued </li></ul><ul><li>ABMI’s goal is to deepen capital markets in the region and help avoid a Crisis rehash: </li></ul><ul><ul><li>Promoting the Issuance of Local Currency-Denominated Bonds </li></ul></ul><ul><ul><li>Facilitating the Demand for Local Currency-Denominated Bonds </li></ul></ul><ul><ul><li>Improving the Regulatory Framework </li></ul></ul><ul><ul><li>Improving the Related Infrastructure for the Bond Markets </li></ul></ul><ul><li>Implementation is still largely in progress </li></ul>
  22. 22. Chiang Mai Initiative (CMI) <ul><li>US strongly discouraged Japan’s initiative to establish an Asian Monetary Fund in 1998 so that it could retain regional influence </li></ul><ul><ul><li>First stated concern was moral hazard or that affected countries would delay adjustment </li></ul></ul><ul><ul><li>Second stated concern was duplication of efforts or superfluity of AMF in light of IMF </li></ul></ul><ul><li>Nevertheless, ASEAN+3 (China, Japan, and South Korea) established Chiang Mai Initiative of bilateral swaps in Thailand in May 2000 </li></ul>
  23. 23. Chiang Mai Initiative Multilateralization (CMIM) <ul><li>Agreed to on 3 May 2009 </li></ul><ul><li>Instead of a series of bilateral swaps, CMIM involves pooled funds totaling $120 billion </li></ul><ul><li>Countries view avoidance of harsh IMF conditionalities as an objective </li></ul><ul><li>However, countries availing of more than 20% of their allocation must reach an IMF agreement first </li></ul><ul><ul><li>Countries are unwilling to perform surveillance on each other and prefer to outsource these functions at the current time </li></ul></ul><ul><li>Demonstrating China’s recent contestation of regional influence, it vied with Japan to provide largest contribution to the pool ($38.4B each, South Korea $19.2B) </li></ul>
  24. 24. Conclusion: ASEAN Matters <ul><li>ASEAN is in demand: </li></ul><ul><ul><li>America has kept its objections to Myanmar in check while trying to establish better relations with ASEAN </li></ul></ul><ul><ul><li>Japan is trying to combine its bilateral Comprehensive Economic Partnership Agreements with various ASEAN states into another FTA </li></ul></ul><ul><ul><li>Trade settlement services in Chinese RMB are being offered by Bank of China, HSBC and may set stage for PRC currency becoming readily converted </li></ul></ul><ul><li>ASEAN is more than the sum of its parts as the emerging gatekeeper to the wider region </li></ul>
  25. 25. Some Suggested Resources <ul><li>LSE IDEAS Special Report on Economic Integration from a workshop held in Kuala Lumpur in April 2009 featuring, among others, ASEAN Secretary-General Surin Pitsuwan: </li></ul><ul><li> </li></ul><ul><li>ADB’s Asia Regional Integration Centre is the most comprehensive site for information: </li></ul><ul><li>I attribute differences between EU and ASEAN integration to cultural factors on Monday, 26 April 2009 (first day of Summer term) at 6:30 PM, venue TBA (please check IDEAS Events); presentation chaired by Sir Colin Budd </li></ul>