The ASEAN Economic Community

Opportunities and Challenges

Dr Patrick Ziegenhain
Visiting Professor
Dept of Business Adminstration
Atma Jaya Catholic University
Jakarta 26 January 2016
ASEAN
ASEAN Economic Community
The Way to AEC
 ASEAN
COMMUNITY 2015

ASEAN Economic ASEAN Socio-

ASEAN Security Cultural
Community (AEC)
Community Community
(ASC) (ASCC)

The peaceful, prosperous and people-centric

ASEAN

Regional production Single regional

base market
The 4 Pillars of the AEC
The 4 Pillars of the AEC
Free Flow of Goods
ASEAN-6 had eliminated their customs duties for
99.65% of the total tariff lines since 2010 through
ATIGA (ASEAN Trade in Goods Agreement)
The new ASEAN member states (ASEAN-4,
CMLV) had reduced their customs duties to a
maximum of 5%. They are committed to abolish
their import duties by 2015, with some flexibility
until 2018.
ASEAN also envisages the elimination of non-
tariff barriers (NTBs)
ASEAN Single Window, which is a single point of
decision for release of cargo, and harmonizing
standards of goods traded in ASEAN
Free Flow of Services
Less restriction to ASEAN services suppliers in
providing services and in establishing companies
across national borders within the region.
ASEAN Framework Agreement on Services
(AFAS) and ASEAN Agreement on Movement of
Natural Persons (MNP),
However, still domestic regulations like national
labour laws in ASEAN member states.
Greater mobility of qualified service
professionals in the region by accepting
common standards of some professionals
Free Flow of Services
Free Flow of Investment
Harmonizing investment rules
Progressively reducing investment restrictions
ASEAN Comprehensive Investment Agreement
(ACIA) entered into force in 2012
ACIA covers the 4 pillars of investment:
liberalisation, protection, facilitation and
promotion
Further liberalisation will be made to improve the
investment regime or eliminating the investment
impediments
Facilitation measures are undertaken to improve
the investment environment in terms of ease
and cost of doing business.
Free Flow of Capital
ASEAN Capital Market Development and
Integration

The ASEAN Economic Community (AEC) Blueprint

envisioned a region with interlinked capital markets
that facilitate greater trade and investment flows.
Greater harmonisation in capital market standards in
the areas of offering rules for debt securities,
disclosure requirements and distribution rules
Broadening of the investor base in ASEAN for debt
issuance
Facilitate market driven efforts to establish exchange
and debt market linkages, including cross border
capital raising activities
Progress?
ASEAN Economic Co-Operation
Comparison AEC - EU
Comparison AEC - EU
Opportunities for Companies
Expanded Market Access Opportunities for companies
Lower transaction costs through elimination of tariffs and
NTBs on goods and improved regulatory environment
on services
Increased economic integration will strengthen business
networks across ASEAN. Greater trade, service, and
investment links within the region
Larger economies of scale for businesses and industries,
thereby increasing productivity while reducing
production costs, leading to more competitive pricing of
goods
Increased trade and investment will promote greater
entrepreneurship and innovation in products and services
Improved competitiveness in the world market
Trade within ASEAN
Trade
 Opportunities for the ASEAN
member states
Increased attractiveness to foreign direct investment (FDI) from
outside the region
Greater demand for goods and services will create jobs in
industries such as manufacturing, transport, logistics and
communications
A higher level of employment in ASEAN would contribute
towards building a larger middle class, thereby reducing the gap
between the rich and the poor, which will promote social
stability
Less developed ASEAN member states will get better access to
ASEAN capital, investment, technology, technical assistance,
development experience and best practices
Greater participation possibilities in global production
networks and value chains
Greater leverage in regional and international negotiations
Opportunities for Consumers
ASEAN Consumers benefit from access to
cheaper and wider range of imported goods
and services, a more competitive domestic
market environment and consumer
protection
Greater choice of goods and services for
consumers through increases in intra-
regional trade
Lowering of production costs can be passed
onto consumers who can benefit from lower
prices of goods and services
Opportunities Labor
Free regional mobility of skilled labor will
benefit countries having skills shortages
Professionals and skilled workers are able to
find better employment opportunities and
improve their earnings
Labor in expanding industries, services and
firms will benefit from increased employment
and higher wages
AEC Perspectives
Challenges
The ASEAN member nations are at different
stages of development
Diversity of the member states and the
economic status of the ASEAN population.
Gap between rich and poor member states
remains very large
Development gaps in terms of infrastructure,
income levels, and human capital
Disparities in the enforcement of the rule of
law, transparency, competitiveness and good
governance
GDP of ASEAN member states
GDP per capita of ASEAN member
states
Export Orientation

Source: http://www.establishmentpost.com/wp-content/uploads/2015/04/Southeast-Asia-Exports-as-Share-of-
GDP.jpg
ADB Data
Challenges for ASEAN

Non-Tariff Barriers (NTBs) still exist and present

obstacles to free trade
Reduction of NTBs will take a long time to make
changes, even when the intention and willingness
are there, because of the lack of firm and
consistent controlling mechanisms in many
ASEAN countries
Domestic industry protection pressure
Countries, such as Indonesia, have not reduced
their NTBs but have actually set up more
regulations to protect their domestic economies.
Challenges for ASEAN
ASEAN has no enforcement mechanism.
Progress is based on consensus and
national own compliance
The ASEAN Secretariats ability to
implement agreed upon reforms at the
national level remains weak. Progress and
decision making on reforms is slowed by
the need for full consensus among
member nations
Challenges for ASEAN

Lack of awareness/preparation outside

government sector
Low public awareness. More than 50% of
ASEAN SMEs do not know what the AEC is,
according to a survey by the Institute of
South-East Asian Studies(ISEAS) in 2013.
The AEC development process is largely
seen as government-led, and is hindered by a
lack of understanding of private sector
stakeholders
Challenges for ASEAN

Lack of harmonized policies to manage

labor mobility
The increased movement of skilled
workers across borders is likely to meet
resistance.
Language barrier presents practical
problems to free flow of labour
Challenges for ASEAN

Infrastructure deficiencies, which raise the

transport costs of doing business, will take
years to address.
Political instability combined with a high
incidence of corruption in many countries
Lack of uniformity, enforceability, and
transparency in investment regulations
Competition policy (i.e. anti-monopoly law)
far from being standardised
Who will the AEC benefit most?
Companies that already have a regional or
global network
Singapore, Thailand and Malaysia will benefit
the most, already acting as springboards to
international value chains
Financial sector companies will gain from the
increase in trade and investment flows
Logistics companies should see greater
opportunities with the freer flow of goods
Educated workers
What kind of companies will be
affected the most by the AEC?
Losers?
Local SMEs might suffer from increased
competitiveness of competitors outside
their traditional markets.
More competition could lead to lower
prices and tighter profit margins for some
companies
Unskilled workers in higher wage
countries
Opportunities for Indonesia
Indonesia might have the benefits of increasing foreign
investment as well as increased exports noted as an
important driver of growth for the economy
The World Bank estimates that the enforcement of AEC
will attract Foreign Direct Investment (FDI) in the range
of 28 to 63 percent to Indonesia
Opportunity for economic growth and
modernization because the removal of barriers and
encouragement of investment from the ASEAN region
Challenges for Indonesia
Tougher competition demands better human
resources. Quality of education remains low for
Labour: 64 percent of the total 118 million
workers have only junior high school or lower
education
Rising Wages Stagnating Productivity
Ability to speak foreign languages, especially
English is quite low for Indonesians
Challenges for Indonesia
Challenges for Indonesia

Source: English Proficiency Index 2015

Challenges for Indonesia
The industrial sector is fragile due to its
dependence on imported raw materials and
semi-finished products
Diversification of exports needed
(decreasing commodity prices)
Limited supply of energy to be supplied to
industry. This is a common issue in
Indonesia in the form of targeted blackouts
Availability and quality of infrastructure is
still lacking thus affecting the smooth flow of
goods and services. Logistics cost are very
high in Indonesia
Challenges for Indonesia

Source:World Bank Report Indonesia, Sept. 2013

Conclusion
Net positive impacts for trade & investment and
GDP growth for the ASEAN region
Businesses that can take advantage of regional
network will profit the most
No drastic changes, but rather incremental
change over the next years
FTAs with China, Japan, India etc. already in place
Indonesia will rather profit (more FDI and more
exports) from the AEC
Possibility to change inward-looking mentality of
Indonesias economy (low export-orientation)